# 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,	2017

# 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:	None

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

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

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

Indicate	by	check	mark	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.		þ Indicate	by	checkmark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	a	non-accelerated	filer,	a	smaller	reporting	company,	or	an	emerging growth	company.	See	the	definitions	of	"large	accelerated	filer,"	"accelerated	filer"	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		¨

Emerging	growth	company		¨

If	an	emerging	growth	company,	indicate	by	check	mark	if	the	registrant	has	elected	not	to	use	the	extended	transition	period	for	complying	with	any	new	or revised	financial	accounting	standards	pursuant	to	Section	13(a)	of	the	Exchange	Act.		¨

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

The	number	of	shares	outstanding	of	the	Registrant's	Common	Stock	as	of	January	31,	2018	was	137,684,326.

# 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	on	April	19,	2018.

# INDEX	TO	ANNUAL	REPORT	ON	FORM	10-K

|  | Part	I |  |
| :--- | :--- | :--- |
| Item\t1. | Business | 3 |
| Item\t1A. | Risk\tFactors | 17 |
| Item\t1B. | Unresolved\tStaff\tComments | 31 |
| Item\t2. | Properties | 32 |
| Item\t3. | Legal\tProceedings | 33 |
| Item\t4. | Mine\tSafety\tDisclosures | 33 |
|  | Part\tII |  |
| Item\t5. | Market\tfor\tthe\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 34 |
| Item\t6. | Selected\tFinancial\tData | 37 |
| Item\t7. | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 39 |
| Item\t7A. | Quantitative\tand\tQualitative\tDisclosures\tabout\tMarket\tRisk | 78 |
| Item\t8. | Financial\tStatements\tand\tSupplementary\tData | 80 |
| Item\t9. | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 141 |
| Item\t9A. | Controls\tand\tProcedures | 141 |
| Item\t9B. | Other\tInformation | 142 |
|  | Part\tIII |  |
| Item\t10. | Directors,\tExecutive\tOfficers\tand\tCorporate\tGovernance | 143 |
| Item\t11. | Executive\tCompensation | 146 |
| Item\t12. | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters | 146 |
| Item\t13. | Certain\tRelationships\tand\tRelated\tTransactions,\tand\tDirector\tIndependence | 147 |
| Item\t14. | Principal\tAccounting\tFees\tand\tServices | 147 |
|  | Part\tIV |  |
| Item\t15. | Exhibits,\tFinancial\tStatement\tSchedules | 148 |
|  | Signatures\tand\tCertifications | 160 |

# 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	a	leading	health	and	well-being	company	committed	to	helping	our	millions	of	medical	and	specialty	members	achieve	their	best	health.	Our	successful	history	in	care delivery	and	health	plan	administration	is	helping	us	create	a	new	kind	of	integrated	care	with	the	power	to	improve	health	and	well-being	and	lower	costs.	Our	efforts are	leading	to	a	better	quality	of	life	for	people	with	Medicare,	families,	individuals,	military	service	personnel,	and	communities	at	large.	To	accomplish	that,	we support	physicians	and	other	health	care	professionals	as	they	work	to	deliver	the	right	care	in	the	right	place	for	their	patients,	our	members.	Our	range	of	clinical capabilities,	resources	and	tools,	such	as	in-home	care,	behavioral	health,	pharmacy	services,	data	analytics	and	wellness	solutions,	combine	to	produce	a	simplified experience	that	makes	health	care	easier	to	navigate	and	more	effective.

As	of	December	31,	2017,	we	had	approximately	14	million	members	in	our	medical	benefit	plans,	as	well	as	approximately	7	million	members	in	our	specialty products.	 During	2017,	79%	of	our	total	premiums	and	services	revenue	were	derived	from	contracts	with	the	federal	government,	including	15%	derived	from	our individual	Medicare	Advantage	contracts	in	Florida	with	the	Centers	for	Medicare	and	Medicaid	Services,	or	CMS,	under	which	we	provide	health	insurance	coverage	to approximately	609,600	members	as	of	December	31,	2017.

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,	or	2017	Form	10-K,	contains	both	historical	and	forward-looking	information.	See	Item	1A.	–	Risk	Factors	in	this	2017	Form 10-K	for	a	description	of	a	number	of	factors	that	may	adversely	affect	our	results	or	business.

# Aetna	Merger

On	July	2,	2015,	we	entered	into	an	Agreement	and	Plan	of	Merger,	which	we	refer	to	in	this	report	as	the	Merger	Agreement,	with	Aetna	Inc.	and	certain	wholly owned	subsidiaries	of	Aetna	Inc.,	which	we	refer	to	collectively	as

Aetna,	which	sets	forth	the	terms	and	conditions	under	which	we	agreed	to	merge	with,	and	become	a	wholly	owned	subsidiary	of	Aetna,	a	transaction	we	refer	to	in	this report	as	the	Merger.	On	February	14,	2017,	we	and	Aetna	agreed	to	mutually	terminate	the	July	2,	2015	Agreement	and	Plan	of	Merger	as	more	fully	discussed	in	Note 2	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.

# Health	Care	Reform

The	Patient	Protection	and	Affordable	Care	Act	and	The	Health	Care	and	Education	Reconciliation	Act	of	2010,	which	we	collectively	refer	to	as	the	Health	Care Reform	Law,	enacted	significant	reforms	to	various	aspects	of	the	U.S.	health	insurance	industry.	Certain	significant	provisions	of	the	Health	Care	Reform	Law	include, among	others,	mandated	coverage	requirements,	mandated	benefits	and	guarantee	issuance	associated	with	commercial	medical	insurance,	rebates	to	policyholders	based on	minimum	benefit	ratios,	adjustments	to	Medicare	Advantage	premiums,	the	establishment	of	federally-facilitated	or	state-based	exchanges	coupled	with	programs designed	to	spread	risk	among	insurers,	and	the	introduction	of	plan	designs	based	on	set	actuarial	values.	In	addition,	the	Health	Care	Reform	Law	established insurance	industry	assessments,	including	an	annual	health	insurance	industry	fee	and	a	three-year	industry	wide	commercial	reinsurance	fee.	The	Health	Care	Reform Law	is	discussed	more	fully	in	Item	7.	–	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	under	the	section	titled	"Health	Care Reform"	in	this	2017	Form	10-K.

If	we	fail	to	effectively	implement	our	operational	and	strategic	initiatives	with	respect	to	the	implementation	of	the	Health	Care	Reform	Law,	our	business	may	be materially	adversely	affected.	Additionally,	potential	legislative	changes,	including	activities	to	repeal	or	replace	the	Health	Care	Reform	Law,	creates	uncertainty	for our	business,	and	we	cannot	predict	when,	or	in	what	form,	such	legislative	changes	may	occur.	We	may	be	unable	to	adjust	our	product	offerings,	geographic	footprint, or	pricing	during	any	given	year	such	legislative	changes	occur	in	sufficient	time	to	mitigate	any	adverse	effects.

# Business	Segments

During	the	first	quarter	of	2017,	we	realigned	certain	of	our	businesses	among	our	reportable	segments	to	correspond	with	internal	management	reporting	changes corresponding	to	those	used	by	our	chief	operating	decision	maker	to	evaluate	results	of	operations	and	our	previously	announced	planned	exit	from	the	Individual Commercial	medical	business	on	January	1,	2018.	Additionally,	we	renamed	our	Group	segment	 to	 the	Group	and	Specialty	segment,	and	began	presenting	 the Individual	Commercial	business	results	as	a	separate	segment	rather	than	as	part	of	the	Retail	segment.	Specialty	health	insurance	benefits,	including	dental,	vision,	other supplemental	health,	and	financial	protection	products,	marketed	to	individuals	are	now	included	in	the	Group	and	Specialty	segment.	Specialty	health	insurance	benefits marketed	to	employer	groups	continue	to	be	included	in	the	Group	and	Specialty	segment.	As	a	result	of	this	realignment,	our	reportable	segments	now	include	Retail, Group	and	Specialty,	Healthcare	Services,	and	Individual	Commercial.	Prior	period	segment	financial	information	has	been	recast	to	conform	to	the	2017	presentation. See	Note	17	to	the	consolidated	financial	statements	included	in	Item	8.	-	Financial	Statements	and	Supplementary	Data	for	segment	financial	information.

We	manage	our	business	with	four	reportable	segments:	Retail,	Group	and	Specialty,	Healthcare	Services,	and	Individual	Commercial.	In	addition,	the	Other Businesses	category	 includes	businesses	 that	are	not	 individually	reportable	because	 they	do	not	meet	 the	quantitative	 thresholds	required	by	generally	accepted accounting	principles.	These	segments	are	based	on	a	combination	of	the	type	of	health	plan	customer	and	adjacent	businesses	centered	on	well-being	solutions	for	our health	 plans	 and	 other	 customers,	 as	 described	 below.	These	 segment	 groupings	 are	 consistent	 with	 information	 used	 by	 our	 Chief	 Executive	 Officer	 to	 assess performance	and	allocate	resources.

# Our	Products

Our	medical	and	specialty	insurance	products	allow	members	to	access	health	care	services	primarily	through	our	networks	of	health	care	providers	with	whom	we have	contracted.	These	products	may	vary	in	the	degree	to	which	members	have	coverage.	Health	maintenance	organizations,	or	HMOs,	generally	require	a	referral from	the	member's	primary	care	provider	before	seeing	certain	specialty	physicians.	Preferred	provider	organizations,	or	PPOs,	provide	members	the	freedom	to	choose a	health	care	provider	without	requiring	a	referral.	However	PPOs	generally	require

the	member	to	pay	a	greater	portion	of	the	provider's	fee	in	the	event	the	member	chooses	not	to	use	a	provider	participating	in	the	PPO's	network.	Point	of	Service,	or POS,	plans	combine	the	advantages	of	HMO	plans	with	the	flexibility	of	PPO	plans.	In	general,	POS	plans	allow	members	to	choose,	at	the	time	medical	services	are needed,	to	seek	care	from	a	provider	within	the	plan's	network	or	outside	the	network.	In	addition,	we	offer	services	to	our	health	plan	members	as	well	as	to	third parties	that	promote	health	and	wellness,	including	pharmacy	solutions,	provider,	and	clinical	programs,	as	well	as	services	and	capabilities	to	advance	population health.	At	the	core	of	our	strategy	is	our	integrated	care	delivery	model,	which	unites	quality	care,	high	member	engagement,	and	sophisticated	data	analytics.	Three core	elements	of	the	model	are	to	improve	the	consumer	experience	by	simplifying	the	interaction	with	us,	engaging	members	in	clinical	programs,	and	offering assistance	to	providers	in	transitioning	from	a	fee-for-service	to	a	value-based	arrangement.	Our	approach	to	primary,	physician-directed	care	for	our	members	aims	to provide	 quality	 care	 that	 is	 consistent,	 integrated,	 cost-effective,	 and	 member-focused.	The	 model	 is	 designed	 to	 improve	 health	 outcomes	 and	 affordability	 for individuals	and	for	the	health	system	as	a	whole,	while	offering	our	members	a	simple,	seamless	healthcare	experience.	The	discussion	that	follows	describes	the products	offered	by	each	of	our	segments.

# Our	Retail	Segment	Products

This	segment	is	comprised	of	products	sold	on	a	retail	basis	to	individuals	including	medical	and	supplemental	benefit	plans	described	in	the	discussion	that	follows. The	following	table	presents	our	premiums	and	services	revenue	for	the	Retail	segment	by	product	for	the	year	ended	December	31,	2017:

| Individual	Medicare	Advantage | $32,720 | 61.3% |
| :--- | :--- | :--- |
| Group\tMedicare\tAdvantage | 5,155 | 9.7% |
| Medicare\tstand-alone\tPDP | 3,702 | 6.9% |
| Total\tRetail\tMedicare | 41,577 | 77.9% |
| State-based\tMedicaid | 2,571 | 4.8% |
| Medicare\tSupplement | 478 | 0.9% |
| Total\tpremiums | 44,626 | 83.6% |
| Services | 10 | —% |
| Total\tpremiums\tand\tservices\trevenue | $44,636 | 83.6% |

# Medicare

We	have	participated	in	the	Medicare	program	for	private	health	plans	for	over	30	years	and	have	established	a	national	presence,	offering	at	least	one	type	of Medicare	plan	in	all	50	states.	We	have	a	geographically	diverse	membership	base	that	we	believe	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.	We	believe	these	strategies	result	in	cost	savings	that	occur	from	making	positive behavior	changes.

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. CMS,	an	agency	of	the	United	States	Department	of	Health	and	Human	Services,	administers	the	Medicare	program.	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	fee-for-service	Medicare	are	still	required	to	pay	out-of-pocket	deductibles	and	coinsurance.	Throughout	this	document	this	program	is referred	to	as	Medicare	FFS.	As	an	alternative	to	Medicare	FFS,	in	geographic	areas	where	a	managed	care	organization	has	contracted	with	CMS	pursuant	to	the Medicare	Advantage	program,	Medicare	beneficiaries	may

choose	to	receive	benefits	from	a	Medicare	Advantage	organization	under	Medicare	Part	C.	Pursuant	to	Medicare	Part	C,	Medicare	Advantage	organizations	contract with	CMS	to	offer	Medicare	Advantage	plans	to	provide	benefits	at	least	comparable	to	those	offered	under	Medicare	FFS.	Our	Medicare	Advantage,	or	MA,	plans	are discussed	more	fully	below.	Prescription	drug	benefits	are	provided	under	Part	D.

# Individual	Medicare	Advantage	Products

We	contract	with	CMS	under	the	Medicare	Advantage	program	to	provide	a	comprehensive	array	of	health	insurance	benefits,	including	wellness	programs,	chronic care	management,	and	care	coordination,	to	Medicare	eligible	persons	under	HMO,	PPO,	and	Private	Fee-For-Service,	or	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	Medicare	FFS, 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,	care	management	programs,	wellness	and	prevention	programs	and,	in	some	instances,	a	reduced monthly	Part	B	premium.	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.	Generally,	Medicare-eligible	individuals	enroll	in	one	of	our	plan	choices	between	October	15	and	December	7 for	coverage	that	begins	on	the	following	January	1.

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	or	as specified	by	the	plan,	most	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 some	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.

Most	of	our	Medicare	PFFS	plans	are	network-based	products	with	in	and	out	of	network	benefits	due	to	a	requirement	that	Medicare	Advantage	organizations establish	adequate	provider	networks,	except	in	geographic	areas	that	CMS	determines	have	fewer	than	two	network-based	Medicare	Advantage	plans.	In	these	areas, we	offer	Medicare	PFFS	plans	that	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	Medicare	FFS	payment	rates.

CMS	uses	monthly	rates	per	person	for	each	county	to	determine	the	fixed	monthly	payments	per	member	to	pay	to	health	benefit	plans.	These	rates	are	adjusted under	CMS's	risk-adjustment	model	which	uses	health	status	indicators,	or	risk	scores,	to	improve	the	accuracy	of	payment.	The	risk-adjustment	model,	which	CMS implemented	pursuant	to	the	Balanced	Budget	Act	of	1997	(BBA)	and	the	Benefits	Improvement	and	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)	to	establish	the	risk-adjustment	payments.	Under	the	risk-adjustment	methodology,	all	health	benefit	organizations	must	collect	from	providers	and submit	the	necessary	diagnosis	code	information	to	CMS	within	prescribed	deadlines.	CMS	is	phasing-in	the	process	of	calculating	risk	scores	using	diagnoses	data	from the	Risk	Adjustment	Processing	System,	or	RAPS,	to	diagnoses	data	from	the	Encounter	Data	System,	or	EDS.	The	RAPS	process	requires	MA	plans	to	apply	a	filter logic	based	on	CMS	guidelines	and	only	submit	claims	that	satisfy	those	guidelines.	For	submissions	through	EDS,	CMS	requires	MA	plans	to	submit	all	the	encounter data	and	CMS	will	apply	the	risk	adjustment	filtering	logic	to	determine	the	risk	scores.	For	2016,	10%	of	the	risk	score	was	calculated	from	claims	data	submitted through	EDS,	increasing	to	25%	of	the	risk	score	calculated	from	claims	data	through	EDS	for	2017.	In	April	2017,	CMS	revised	the	pace	of	the	phase-in.	For	2018, 15%	of	the	risk	score	will	be	calculated	from	claims	data	submitted	through	EDS.

At	 December	 31,	2017,	 we	 provided	 health	 insurance	 coverage	 under	 CMS	 contracts	 to	 approximately	2,860,800	 individual	 Medicare	Advantage	 members, including	 approximately	609,600	 members	 in	 Florida.	These	 Florida	 contracts	 accounted	 for	 premiums	 revenue	 of	 approximately	$7.8	billion,	 which	 represented approximately	23.8%	of

our	individual	Medicare	Advantage	premiums	revenue,	or	14.6%	of	our	consolidated	premiums	and	services	revenue	for	the	year	ended	December	31,	2017.

Our	HMO,	PPO,	and	PFFS	products	covered	under	Medicare	Advantage	contracts	with	CMS	are	renewed	generally	for	a	calendar	year	term	unless	CMS	notifies	us of	its	decision	not	to	renew	by	May	1	of	the	calendar	year	in	which	the	contract	would	end,	or	we	notify	CMS	of	our	decision	not	to	renew	by	the	first	Monday	in	June of	the	calendar	year	in	which	the	contract	would	end.	All	material	contracts	between	Humana	and	CMS	relating	to	our	Medicare	Advantage	products	have	been	renewed for	2018,	and	all	of	our	product	offerings	filed	with	CMS	for	2018	have	been	approved.

# Individual	Medicare	Stand-Alone	Prescription	Drug	Products

We	offer	stand-alone	prescription	drug	plans,	or	PDPs,	under	Medicare	Part	D,	including	a	PDP	offering	co-branded	with	Wal-Mart	Stores,	Inc.,	or	the	Humana- Walmart	plan.	Generally,	Medicare-eligible	individuals	enroll	in	one	of	our	plan	choices	between	October	15	and	December	7	for	coverage	that	begins	on	the	following 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	PDP bids	submitted	annually	to	CMS.	These	revenues	also	reflect	the	health	status	of	the	beneficiary	and	risk	sharing	provisions	as	more	fully	described	in	Note	2	to	the consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data,	titled	"Medicare	Part	D."	Our	stand-alone	PDP	contracts	with CMS	are	renewed	generally	for	a	calendar	year	term	unless	CMS	notifies	us	of	its	decision	not	to	renew	by	May	1	of	the	calendar	year	in	which	the	contract	would	end, or	we	notify	CMS	of	our	decision	not	to	renew	by	the	first	Monday	in	June	of	the	calendar	year	in	which	the	contract	would	end.	All	material	contracts	between	Humana and	CMS	relating	to	our	Medicare	stand-alone	PDP	products	have	been	renewed	for	2018,	and	all	of	our	product	offerings	filed	with	CMS	for	2018	have	been	approved.

We	have	administered	CMS's	Limited	Income	Newly	Eligible	Transition,	or	LI-NET,	prescription	drug	plan	program	since	2010.	This	program	allows	individuals who	receive	Medicare's	low-income	subsidy	to	also	receive	immediate	prescription	drug	coverage	at	the	point	of	sale	if	they	are	not	already	enrolled	in	a	Medicare	Part D	plan.	CMS	temporarily	enrolls	newly	identified	individuals	with	both	Medicare	and	Medicaid	into	the	LI-NET	prescription	drug	plan	program,	and	subsequently transitions	each	member	into	a	Medicare	Part	D	plan	that	may	or	may	not	be	a	Humana	Medicare	plan.

# Group	Medicare	Advantage	and	Medicare	stand-alone	PDP

We	offer	products	that	enable	employers	that	provide	post-retirement	health	care	benefits	to	replace	Medicare	wrap	or	Medicare	supplement	products	with	Medicare Advantage	or	stand-alone	PDPs	from	Humana.	These	products	offer	the	same	types	of	benefits	and	services	available	to	members	in	our	individual	Medicare	plans discussed	previously	and	can	be	tailored	to	closely	match	an	employer's	post-retirement	benefit	structure.

# State-based	Medicaid	Contracts

Our	state-based	contracts	allow	us	to	serve	members	enrolled	in	state-based	Medicaid	programs	including	Temporary	Assistance	to	Needy	Families,	or	TANF, Long-Term	Support	Services,	or	LTSS,	and	dual	eligible	demonstration	programs.	TANF	is	a	state	and	federally	funded	program	that	provides	cash	assistance	and supportive	services	to	assist	families	with	children	under	age	18,	helping	them	achieve	economic	self-sufficiency.	LTSS	is	a	state	and	federally	funded	program	that offers	states	a	broad	and	flexible	set	of	program	design	options	and	refers	to	the	delivery	of	long-term	support	services	for	our	members	who	receive	home	and community	or	institution-based	services	for	long-term	care.	Our	contracts	are	generally	for	three	to	five	year	terms.

We	have	contracts	to	serve	Medicaid	eligible	members	in	Florida	and	Kentucky	under	the	TANF	program,	as	well	as	contracts	in	Florida	under	the	LTSS	program. Our	Kentucky	Medicaid	contract	is	subject	to	a	100%	coinsurance	contract	with	CareSource	Management	Group	Company,	ceding	all	the	risk	to	CareSource.

Medicare	beneficiaries	who	also	qualify	for	Medicaid	due	to	low	income	or	special	needs	are	known	as	dual	eligible	beneficiaries,	or	dual	eligibles.	The	dual eligible	population	represents	a	disproportionate	share	of	Medicaid	and

Medicare	costs.	There	were	approximately	10.7	million	dual	eligible	individuals	in	the	United	States	in	2017,	trending	upward	due	to	Medicaid	eligibility	expansions	and individuals	aging	into	the	Medicare	program.	Since	the	enactment	of	the	Health	Care	Reform	Law,	states	are	pursuing	stand-alone	dual	eligible	CMS	demonstration programs	in	which	Medicare,	Medicaid,	and	LTSS	benefits	are	more	tightly	integrated.	Eligibility	for	participation	in	these	stand-alone	dual	eligible	demonstration programs	may	require	state-based	contractual	relationships	in	existing	Medicaid	programs.

We	previously	had	an	Integrated	Care	Program,	or	ICP,	Medicaid	contract	in	Illinois	and	a	stand-alone	dual	eligible	demonstration	program	in	Virginia,	both	of which	terminated	on	December	31,	2017.	We	continue	to	serve	other	dual	eligible	members	enrolled	in	our	Medicare	Advantage	and	stand-alone	prescription	drug plans.

# Our	Group	and	Specialty	Segment	Products

The	Group	and	Specialty	segment	consists	of	employer	group	commercial	fully-insured	medical	and	specialty	health	insurance	benefits	marketed	to	individuals	and employer	groups,	including	dental,	vision,	and	other	supplemental	health	and	voluntary	insurance	benefits,	as	well	as	administrative	services	only,	or	ASO	products	as described	in	the	discussion	that	follows.	The	following	table	presents	our	premiums	and	services	revenue	for	the	Group	and	Specialty	segment	by	product	for	the	year ended	December	31,	2017:

# n/a	–	not	applicable

# Group	Commercial	Coverage

Our	commercial	products	sold	to	employer	groups	include	a	broad	spectrum	of	major	medical	benefits	with	multiple	in-network	coinsurance	levels	and	annual deductible	choices	that	employers	of	all	sizes	can	offer	to	their	employees	on	either	a	fully-insured,	through	HMO,	PPO,	or	POS	plans,	or	self-funded	basis.	Our	plans integrate	clinical	programs,	plan	designs,	communication	tools,	and	spending	accounts.	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.

Our	administrative	services	only,	or	ASO,	products	are	offered	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	HMO,	PPO,	or	POS products	described	previously.	Under	ASO	contracts,	self-funded	employers	generally	retain	 the	risk	of	financing	substantially	all	of	 the	cost	of	health	benefits. However,	more	than	half	of	our	ASO	customers	purchase	stop	loss	insurance	coverage	from	us	to	cover	catastrophic	claims	or	to	limit	aggregate	annual	costs.

Employers	can	customize	their	offerings	with	optional	benefits	such	as	dental,	vision,	life,	and	a	portfolio	of	voluntary	benefit	products.	We	also	offer	optional benefits	such	as	dental,	vision	life,	and	a	portfolio	of	financial	protection	products	to	individuals.

# Military	Services

Under	our	TRICARE	contracts	with	the	United	States	Department	of	Defense,	or	DoD,	we	provide	administrative	services	to	arrange	health	care	services	for	the dependents	of	active	duty	military	personnel	and	for	retired	military	personnel	and	their	dependents.	We	have	participated	in	the	TRICARE	program	since	1996	under contracts	with	the	DoD.	Under	our	contracts,	we	provide	administrative	services	while	the	federal	government	retains	all	of	the	risk	of	the	cost	of	health	benefits. Accordingly,	we	account	for	revenues	under	the	current	contract	net	of	estimated	health	care	costs	similar	to	an	administrative	services	fee	only	agreement.	During	2017, we	delivered	services	under	the	5-year	T3	South	Region	contract,	which	expired	on	December	31,	2017.	On	July	21,	2016,	we	were	notified	by	the	Defense	Health Agency,	or	DHA,	that	we	were	awarded	the	contract	for	the	new	TRICARE	T2017	East	Region.	The	T2017	East	Region	contract	is	a	consolidation	of	the	former	T3 North	and	South	Regions,	comprising	thirty-two	states	and	approximately	six	million	TRICARE	beneficiaries,	with	delivery	of	health	care	services	commencing	on January	1,	2018.	The	T2017	East	contract	is	a	5-year	contract	set	to	expire	on	December	31,	2022	and	is	subject	to	renewals	on	January	1	of	each	year	during	its	term	at the	government's	option.

# Our	Healthcare	Services	Segment	Products

The	products	offered	by	our	Healthcare	Services	segment	are	key	to	our	integrated	care	delivery	model.	This	segment	is	comprised	of	stand-alone	businesses	that offer	services	including	pharmacy	solutions,	provider	services,	clinical	care	services,	and	predictive	modeling	and	informatics	services	to	other	Humana	businesses,	as well	as	external	health	plan	members,	external	health	plans,	and	other	employers	or	individuals	and	are	described	in	the	discussion	that	follows.	Our	intersegment revenue	is	described	in	Note	17	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.	The	following	table presents	our	services	revenue	for	the	Healthcare	Services	segment	by	line	of	business	for	the	year	ended	December	31,	2017:

# Pharmacy	solutions

Humana	Pharmacy	Solutions®,	or	HPS,	manages	traditional	prescription	drug	coverage	for	both	individuals	and	employer	groups	in	addition	to	providing	a	broad array	of	pharmacy	solutions.	HPS	also	operates	prescription	mail	order	services	for	brand,	generic,	and	specialty	drugs	and	diabetic	supplies	through	Humana	Pharmacy, Inc.,	as	well	as	research	services.

# Provider	services

We	operate	full-service,	multi-specialty	medical	centers,	primarily	in	Florida,	staffed	by	primary	care	providers	and	medical	specialists	practicing	cardiology, endocrinology,	geriatric	medicine,	internal	medicine,	ophthalmology,	neurology,	and	podiatry.

We	also	operate	Transcend,	a	Medical	Services	Organization,	or	MSO,	that	coordinates	medical	care	for	Medicare	Advantage	beneficiaries	primarily	in	four	states. Transcend	provides	resources	in	care	coordination,	financial	risk	management,	clinical	integration	and	patient	engagement	that	help	physicians	improve	the	patient experience	as	well	as	care	outcomes.	Transcend	collaborates	with	physicians,	medical	groups	and	integrated	delivery	systems	to	successfully	transition	to	value-based care	by	engaging,	partnering	and	offering	practical	services	and	solutions.	Transcend	represents	a	key	component	of	our	integrated	care	delivery	model	which	we	believe is	scalable	to	new	markets.	In	addition,	we	own	a	noncontrolling	equity	interest	in	MCCI	Holdings,	LLC,	a	privately	held	MSO	headquartered	in	Miami,	Florida,	that primarily	coordinates	medical	care	for	Medicare	Advantage	beneficiaries	in	Florida	and	Texas.

Programs	to	enhance	the	quality	of	care	for	members	are	key	elements	of	our	integrated	care	delivery	model.	We	believe	that	technology	represents	a	significant opportunity	in	health	care	that	positively	impacts	our	members.	Our	Transcend	Insights	business	focuses	on	population	health	and	wellness	capabilities	across	the	sector and	serves	health	care	systems,	physicians	and	care	teams	by	leveraging	actionable	data	to	help	improve	patient	care.	We	help	care	teams	and	patients	transition	from	a reactive	approach	to	care	to	one	that	proactively	promotes	health	and	long-term	wellness.	We	have	enhanced	our	health	information	technology	capabilities	enabling	us to	create	a	more	complete	view	of	an	individual's	health,	designed	to	connect,	coordinate	and	simplify	health	care	while	reducing	costs.	These	capabilities	include	our health	care	analytics	engine,	which	reviews	billions	of	clinical	data	points	on	millions	of	patients	each	day	to	provide	members,	providers,	and	payers	real-time	clinical insights	to	identify	evidence-based	gaps-in-care,	drug	safety	alerts	and	other	critical	health	concerns	to	improve	outcomes.	Additionally,	our	technology	connects Humana	and	disparate	electronic	health	record	systems	to	enable	the	exchange	of	essential	health	information	in	real-time	to	provide	physicians	and	care	teams	with	a single,	comprehensive	patient	view.

On	June	1,	2015,	we	completed	the	sale	of	our	wholly	owned	subsidiary,	Concentra	Inc.,	or	Concentra,	that	delivered	occupational	medicine,	urgent	care,	physical therapy,	 and	 wellness	 services	 to	 employees	 and	 the	 general	 public	 through	 its	 operation	 of	 medical	 centers	 and	 worksite	 medical	 facilities.	 See	 Note	 3	 to	 the consolidated	financial	statements	included	in	Item	8.	-	Financial	Statements	and	Supplementary	Data.

# Clinical	care	services

Via	in-home	care,	telephonic	health	counseling/coaching,	and	remote	monitoring,	we	are	actively	involved	in	the	care	management	of	our	customers	with	the greatest	needs.	Clinical	care	services	include	the	operations	of	Humana	At	Home,	Inc.,	or	Humana	At	Home®.	As	a	chronic-care	provider	of	in-home	care	for	seniors,	we provide	innovative	and	holistic	care	coordination	services	for	individuals	living	with	multiple	chronic	conditions,	individuals	with	disabilities,	fragile	and	aging-in-place members	and	their	care	givers.	We	focus	our	deployment	of	these	services	in	geographies,	such	as	Florida,	with	a	high	concentration	of	members	living	with	multiple chronic	conditions.	The	clinical	support	and	care	provided	by	Humana	At	Home	is	designed	to	improve	health	outcomes	and	result	in	a	higher	number	of	days	members can	spend	at	their	homes	instead	of	in	an	acute	care	facility.	At	December	31,	2017,	we	have	enrolled	approximately	794,900	members	with	complex	chronic	conditions in	a	Humana	Chronic	Care	Program,	reflecting	enhanced	predictive	modeling	capabilities	and	focus	on	proactive	clinical	outreach	and	member	engagement,	particularly for	our	Medicare	Advantage	membership.	We	believe	these	initiatives	lead	to	better	health	outcomes	for	our	members	and	lower	health	care	costs.

We	have	committed	additional	investments	in	our	home	care	capabilities.	On	December	19,	2017,	we	announced	that	we	had	entered	into	a	definitive	agreement	to acquire	a	40%	minority	interest	in	the	Kindred	at	Home	Division	of	Kindred	Healthcare	Inc.,	the	nation's	largest	home	health	provider	and	second	largest	hospice operator.

We	are	committed	to	the	integrated	physical	and	mental	health	of	our	members.	Accordingly,	we	take	a	holistic	approach	to	healthcare,	offering	care	management and	wellness	programs.

Our	care	management	programs	take	full	advantage	of	the	population	health,	wellness	and	clinical	applications	offered	by	Transcend	Insights	and	CareHub,	our clinical	management	tool	used	by	providers	and	care	managers	across	the	company	to	help	our	members	achieve	their	best	health,	to	offer	various	levels	of	support, matching	the	intensity	of	the	support	to	the	needs	of	members	with	ongoing	health	challenges	through	telephonic	and	onsite	programs.	These	programs	include	Personal Nurse,	chronic	condition	management,	and	case	management	as	well	as	programs	supporting	maternity,	cancer,	neonatal	intensive	care	unit,	and	transplant	services.

# Wellness

We	offer	wellness	solutions	including	our	Go365	wellness	and	loyalty	rewards	program,	health	coaching,	employee	assistance	program,	and	clinical	programs. These	programs,	when	offered	collectively	to	employer	customers	as	our	Total	Health	product,	turn	any	standard	plan	of	the	employer's	choosing	into	an	integrated health	and	well-being	solution	that	encourages	participation	in	these	programs.

Our	Go365	program	provides	our	members	with	access	to	a	science-based,	actuarially	driven	wellness	and	loyalty	program	that	features	a	wide	range	of	well-being tools	and	rewards	that	are	customized	to	an	individual's	needs	and	wants.	A	key	element	of	the	program	includes	a	sophisticated	health-behavior-change	model supported	by	an	incentive	program.

# Our	Individual	Commercial	Segment	Products

Our	individual	health	plans	were	marketed	under	the	HumanaOne	brand.	We	offered	products	both	on	and	off	of	the	public	exchange.	We	offered	products	on exchanges	where	we	could	achieve	an	affordable	cost	of	care,	including	HMO	offerings	and	select	networks	in	most	markets.	Our	off-exchange	products	were	primarily PPO	and	POS	offerings,	including	plans	issued	prior	to	2014	that	were	previously	underwritten.	Policies	issued	prior	to	the	enactment	of	the	Health	Care	Reform	Law	on March	23,	2010	were	grandfathered	policies.	Grandfathered	policies	are	exempt	from	most	of	the	requirements	of	the	Health	Care	Reform	Law,	including	mandated benefits.	However,	our	grandfathered	plans	included	provisions	that	guaranteed	renewal	of	coverage	for	as	long	as	the	plan	is	continued	and	the	individual	chooses	to renew.	Policies	issued	between	March	23,	2010	and	December	31,	2013	were	required	to	conform	to	the	Health	Care	Reform	Law,	including	mandated	benefits,	upon renewal	at	various	transition	dates	between	2016	and	2017	depending	on	the	state.

We	discontinued	substantially	all	Health	Care	Reform	Law	compliant	off-exchange	individual	commercial	medical	plans	effective	January	1,	2017.	We	exited	our remaining	individual	commercial	medical	business	effective	January	1,	2018	as	more	fully	described	in	Note	7	to	the	consolidated	financial	statements	included	in Item	8.	–	Financial	Statements	and	Supplementary	Data.

# Other	Businesses

Other	Businesses	primarily	includes	our	closed	block	of	long-term	care	insurance	policies	described	below.	Total	premiums	and	services	revenue	for	our	Other Businesses	was	$43	million,	or	0.1%	of	consolidated	premiums	and	services	revenue	for	the	year	ended	December	31,	2017.

We	have	a	non-strategic	closed	block	of	approximately	29,800	long-term	care	insurance	policies	associated	with	our	acquisition	of	KMG	America	Corporation	in 2007.	Long-term	care	insurance	policies	are	intended	to	protect	the	insured	from	the	cost	of	long-term	care	services	including	those	provided	by	nursing	homes,	assisted living	facilities,	and	adult	day	care	as	well	as	home	health	care	services.	No	new	policies	have	been	written	since	2005	under	this	closed	block.

On	November	6,	2017,	 we	 entered	 into	 a	 definitive	 agreement	 to	 sell	 the	 stock	 of	 our	 wholly-owned	 subsidiary,	 KMG	America	 Corporation,	 or	 KMG,	 to Continental	General	Insurance	Company,	or	CGIC,	a	Texas-based	insurance	company	wholly	owned	by	HC2	Holdings,	Inc.,	a	diversified	holding	company.	KMG's subsidiary,	Kanawha	Insurance	Company,	or	KIC,	includes	our	closed	block	of	non-strategic	commercial	long-term	care	insurance	policies.	For	a	detailed	discussion	of the	definitive	agreement	refer	to	Note	2	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.

# Membership

The	following	table	summarizes	our	total	medical	membership	at	December	31,	2017,	by	market	and	product:

|  | Individual<br>Medicare<br>Advantage | Group<br>Medicare<br>Advantage | Medicare<br>stand-<br>alone	PDP | Medicare<br>Supplement | State-<br>based<br>contracts | insured<br>commercial<br>Group | ASO | Military<br>services | Individual<br>Commercial | Other<br>Businesses | Total | Percent<br>of	Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Florida | 609.6 | 16.0 | 388.7 | 7.2 | 339.7 | 124.6 | 34.0 | — | 13.9 | — | 1,533.7 | 11.0% |
| Texas | 225.0 | 189.6 | 331.9 | 8.7 | — | 201.3 | 23.8 | — | 5.2 | — | 985.5 | 7.0% |
| Kentucky | 79.7 | 58.9 | 221.6 | 5.6 | — | 109.6 | 144.4 | — | 1.5 | — | 621.3 | 4.4% |
| California | 64.8 | 0.4 | 490.5 | 19.5 | — | — | — | — | — | — | 575.2 | 4.1% |
| Ohio | 119.3 | 20.3 | 194.9 | 47.7 | — | 50.6 | 51.2 | — | 1.2 | — | 485.2 | 3.5% |
| Illinois | 95.1 | 22.0 | 190.9 | 4.5 | 12.8 | 59.9 | 76.0 | — | 6.4 | — | 467.6 | 3.3% |
| Georgia | 113.9 | 1.8 | 135.9 | 10.5 | — | 163.7 | 27.6 | — | 1.7 | — | 455.1 | 3.3% |
| Missouri/Kansas | 81.7 | 5.0 | 228.0 | 8.5 | — | 51.3 | 10.3 | — | 14.0 | — | 398.8 | 2.9% |
| Tennessee | 146.1 | 3.9 | 119.2 | 4.4 | — | 42.3 | 10.1 | — | 57.6 | — | 383.6 | 2.7% |
| Louisiana | 158.5 | 11.6 | 61.3 | 1.9 | — | 69.0 | 9.8 | — | 19.8 | — | 331.9 | 2.4% |
| North\tCarolina | 142.4 | 0.4 | 184.5 | 0.7 | — | — | — | — | — | — | 328.0 | 2.3% |
| Wisconsin | 59.9 | 10.9 | 121.7 | 5.7 | — | 84.2 | 30.1 | — | — | — | 312.5 | 2.2% |
| Virginia | 116.6 | 2.6 | 158.3 | 8.6 | 7.6 | — | — | — | — | — | 293.7 | 2.1% |
| Indiana | 93.0 | 7.0 | 146.6 | 8.2 | — | 20.1 | 12.3 | — | — | — | 287.2 | 2.1% |
| Michigan | 49.1 | 12.5 | 150.3 | 3.0 | — | 3.7 | 0.4 | — | 4.9 | — | 223.9 | 1.6% |
| Pennsylvania | 42.8 | 0.6 | 166.1 | 4.6 | — | — | — | — | — | — | 214.1 | 1.5% |
| Arizona | 59.2 | 0.2 | 100.1 | 4.1 | — | 29.0 | 2.8 | — | — | — | 195.4 | 1.4% |
| South\tCarolina | 88.5 | 0.4 | 89.0 | 5.0 | — | — | — | — | — | — | 182.9 | 1.3% |
| Military\tservices | — | — | — | — | — | — | — | 3,081.8 | — | — | 3,081.8 | 22.0% |
| Others | 515.6 | 77.3 | 1,828.6 | 77.5 | — | 88.4 | 25.9 | — | 2.6 | 29.8 | 2,645.7 | 18.9% |
| Totals | 2,860.8 | 441.4 | 5,308.1 | 235.9 | 360.1 | 1,097.7 | 458.7 | 3,081.8 | 128.8 | 29.8 | 14,003.1 | 100.0% |

# Provider	Arrangements

We	provide	our	members	with	access	to	health	care	services	through	our	networks	of	health	care	providers	whom	we	employ	or	with	whom	we	have	contracted, including	hospitals	and	other	independent	facilities	such	as	outpatient	surgery	centers,	primary	care	providers,	specialist	physicians,	dentists,	and	providers	of	ancillary health	care	services	and	facilities.	These	ancillary	services	and	facilities	include	laboratories,	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,	the	use	of	sophisticated	analytics,	and	enrolling	members	into	various	care management	programs.	The	focal	point	for	health	care	services	in	many	of	our	HMO	networks	is	the	primary	care	provider	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.	We	have available	care	management	programs	related	to	complex	chronic	conditions	such	as	congestive	heart	failure	and	coronary	artery	disease.	We	also	have	programs	for 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	for	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,	other	nationally	recognized	inflation	indexes,	or	specific	negotiations	with	the	provider.	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.

The	terms	of	our	contracts	with	hospitals	and	physicians	may	also	vary	between	Medicare	and	commercial	business.	A	significant	portion	of	our	Medicare	network contracts,	including	those	with	both	hospitals	and	physicians,	are	tied	to	Medicare	reimbursement	levels	and	methodologies.

# Capitation

We	offer	providers	a	continuum	of	opportunities	to	increase	the	integration	of	care	and	offer	assistance	to	providers	in	transitioning	from	a	fee-for-service	to	a value-based	arrangement.	These	include	performance	bonuses,	shared	savings	and	shared	risk	relationships.	For	some	of	our	medical	membership,	we	share	risk	with providers	under	capitation	contracts	where	physicians	and	hospitals	accept	varying	levels	of	financial	risk	for	a	defined	set	of	membership,	primarily	HMO	membership. Under	the	typical	capitation	arrangement,	we	prepay	these	providers	a	monthly	fixed-fee	per	member,	known	as	a	capitation	(per	capita)	payment,	to	cover	all	or	a defined	portion	of	the	benefits	provided	to	the	capitated	member.

We	believe	these	risk-based	models	represent	a	key	element	of	our	integrated	care	delivery	model	at	the	core	of	our	strategy.	Our	health	plan	subsidiaries	may	enter into	these	risk-based	contracts	with	third	party	providers	or	our	owned	provider	subsidiaries.

At	 December	 31,	2017,	 approximately	1,102,100	 members,	 or	7.9%	 of	 our	 medical	 membership,	 were	 covered	 under	 risk-based	 contracts, including	903,500 individual	Medicare	Advantage	members,	or	31.6%	of	our	total	individual	Medicare	Advantage	membership.

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	typically	process	all	claims	and	monitor	the	financial	performance	and	solvency	of	our	capitated	providers.	However,	we	delegated	claim processing	functions	under	capitation	arrangements	covering	approximately	170,700	HMO	members,	including	155,500	individual	Medicare	Advantage	members,	or 17.2%	of	the	903,500	individual	Medicare	Advantage	members	covered	under	risk-based	contracts	at	December	31,	2017,	with	the	provider	assuming	substantially	all the	risk	of	coordinating	the	members'	health	care	benefits.	Capitation	expense	under	delegated	arrangements	for	which	we	have	a	limited	view	of	the	underlying	claims experience	was	approximately	$1.4	billion,	or	3.2%	of	total	benefits	expense,	for	the	year	ended	December	31,	2017.	We	remain	financially	responsible	for	health	care services	to	our	members	in	the	event	our	providers	fail	to	provide	such	services.

# 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.

Providers	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	providers	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.	A	committee,	composed	of	a	peer	group	of	providers,	reviews	the	applications	of	providers	being	considered	for	credentialing	and	recredentialing.

We	request	accreditation	for	certain	of	our	health	plans	and/or	departments	from	NCQA,	the	Accreditation	Association	for	Ambulatory	Health	Care,	and	URAC. Accreditation	or	external	review	by	an	approved	organization	is	mandatory	in	the	states	of	Florida	and	Kansas	for	licensure	as	an	HMO.	Additionally,	all	products	sold on	the	federal	and	state	marketplaces	are	required	to	be	accredited.	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	reviews	our	compliance	based	on	standards	for	quality	improvement,	credentialing,	utilization	management,	member	connections,	and	member	rights	and responsibilities.	We	have	achieved	and	maintained	NCQA	accreditation	in	most	of	our	commercial,	Medicare	and	Medicaid	HMO/POS	markets	with	enough	history	and membership,	and	for	many	of	our	PPO	markets.

# Sales	and	Marketing

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

At	December	31,	2017,	we	employed	approximately	1,600	sales	representatives,	as	well	as	approximately	1,300	telemarketing	representatives	who	assisted	in	the marketing	of	Medicare	in	our	Retail	segment,	individual	commercial	health	insurance	in	our	Individual	Commercial	segment,	and	specialty	products	in	our	Group	and Specialty	segment,	including	making	appointments	for	sales	representatives	with	prospective	members.	We	have	a	marketing	arrangement	with	Wal-Mart	Stores,	Inc.,	or Wal-Mart,	for	our	individual	Medicare	stand-alone	PDP	offering.	We	also	sell	group	Medicare	Advantage	products	through	large	employers.	 In	addition,	we	market	our Medicare	and	individual	commercial	health	insurance	and	specialty	products	through	licensed	independent	brokers	and	agents.	For	our	Medicare	products,	commissions paid	to	employed	sales	representatives	and	independent	brokers	and	agents	are	based	on	a	per	unit	commission	structure,	regulated	in	structure	and	amount	by	CMS.	For our	individual	commercial	health	insurance	and	specialty	products,	we	generally	pay	brokers	a	commission	based	on	premiums,	with	commissions	varying	by	market and	premium	volume.	In	addition	to	a	commission	based	directly	on	premium	volume	for	sales	to	particular	customers,	we	also	have	programs	that	pay	brokers	and agents	based	on	other	metrics.	These	include	commission	bonuses	based	on	sales	that	attain	certain	levels	or	involve	particular	products.	We	also	pay	additional commissions	based	on	aggregate	volumes	of	sales	involving	multiple	customers.

In	our	Group	and	Specialty	segment,	individuals	may	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.	In	addition,	we	offer	plans	to	employer	groups	through	private	exchanges.	Employers	can	give	their	employees	a	set amount	of	money	and	then	direct	them	to	a	private	exchange	where	employees	can	shop	for	a	health	plan	and	other	benefits	based	on	what	the	employer	has	selected	as options.	We	use	licensed	independent	brokers,	independent	agents,	and	employees	to	sell	our	group	products.	Many	of	our	larger	employer	group	customers	are represented	by	insurance	brokers	and	consultants	who	assist	these	groups	in	the	design	and	purchase	of	health	care	products.	We	pay	brokers	and	agents	using	the	same commission	structure	described	above	for	our	individual	commercial	health	insurance	and	specialty	products.

# Underwriting

Since	2014,	the	Health	Care	Reform	Law	requires	all	individual	and	certain	group	health	plans	to	guarantee	issuance	and	renew	coverage	without	pre-existing condition	exclusions	or	health-status	rating	adjustments.	Accordingly,	newly	issued	individual	and	certain	group	health	plans	are	not	subject	to	underwriting.	Further, 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.	Many	of	our	competitors	have	a	larger	membership	base	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	Item	1A.	–	Risk	Factors	in	this	2017	Form	10-

# 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	certain	material	current	activities	in	the	federal	and	state	legislative	areas,	see	Item	1A.	–	Risk	Factors	in	this	2017	Form	10-K.

# Certain	Other	Services

# 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	to	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,	 billing/enrollment,	 and	 customer	 service.	 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.

# Employees

As	 of	 December	 31,	2017,	 we	 had	 approximately	45,900	 employees	 and	 approximately	2,000	 additional	 medical	 professionals	 working	 under	 management agreements	primarily	between	us	and	affiliated	physician-owned	associations.	We	believe	we	have	good	relations	with	our	employees	and	have	not	experienced	any work	stoppages.

# ITEM	1A.	RISK	FACTORS

# Risks	Relating	to	Certain	Proposed	Transactions

Certain	proposed	transactions,	including	the	divestiture	of	our	subsidiary,	KMG,	and	the	acquisition	of	a	minority	interest	in	Kindred	Healthcare,	Inc.'s Kindred	at	Home	division,	are	subject	to	various	closing	conditions,	including	various	regulatory	approvals	and	customary	closing	conditions,	as	well	as	other uncertainties,	and	there	can	be	no	assurances	as	to	whether	and	when	it	may	be	completed.

On	November	6,	2017,	we	entered	into	a	definitive	agreement	to	sell	the	stock	of	our	wholly-owned	subsidiary,	KMG	to	CGIC,	a	Texas-based	insurance	company wholly	owned	by	HC2	Holdings,	Inc.,	a	diversified	holding	company.	KMG's	subsidiary,	KIC,	includes	our	closed	block	of	non-strategic	commercial	long-term	care insurance	policies	that	serves	approximately	29,800	policyholders.	On	December	19,	2017,	we	announced	that	we	had	entered	into	a	definitive	agreement	to	acquire	a 40%	minority	interest	in	the	Kindred	at	Home	division	of	Kindred	Healthcare,	Inc.	Consummation	of	each	of	these	transactions	involves	certain	risks,	including,	among other	things,	the	timing	to	consummate	the	transaction,	the	risk	that	a	condition	to	closing	of	the	transaction	may	not	be	satisfied,	the	risk	that	required	regulatory approvals	for	the	transaction	are	not	obtained,	are	delayed	or	are	subject	to	conditions	that	are	not	anticipated,	the	risk	that	we	may	not	recognize	all	or	a	portion	of	the expected	benefits	from	either	or	both	 transactions,	 including	 tax	benefits	and	expected	synergies,	and	 the	risk	of	 indemnification	exposure	under	 the	contractual agreements	to	effect	the	transactions.

# Risks	Relating	to	Our	Business

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,	if	we	are	unable	to	implement	clinical	initiatives	to	provide	a	better	health	care	experience	for	our	members,	lower	costs	and	appropriately document	the	risk	profile	of	our	members,	or	if	our	estimates	of	benefits	expense	are	inadequate,	our	profitability	may	be	materially	adversely	affected.	We	estimate the	costs	of	our	benefits	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.	 We continually	review	these	estimates,	however	these	estimates	involve	extensive	judgment,	and	have	considerable	inherent	variability	because	they	are	extremely sensitive	to	changes	in	claim	payment	patterns	and	medical	cost	trends.	Any	reserve,	including	a	premium	deficiency	reserve,	may	be	insufficient.

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,	including	premium	deficiency	reserves	where	appropriate.	However,	these	estimates	involve	extensive	judgment,	and	have	considerable inherent	variability	that	is	sensitive	to	claim	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;

•increased cost of such services;

•increased	 use	 or	 cost	 of	 prescription	 drugs, including specialty	 prescription drugs;

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

•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;

•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);

•medical	cost	inflation;	and

•government	mandated	benefits	or	other	regulatory	changes,	including	any	that	result	from	the	Health	Care	Reform

Key	to	our	operational	strategy	is	the	implementation	of	clinical	initiatives	that	we	believe	provide	a	better	health	care	experience	for	our	members,	lower	the	cost of	healthcare	services	delivered	to	our	members,	and	appropriately	document	the	risk	profile	of	our	members.	Our	profitability	and	competitiveness	depend	in	large	part on	our	ability	to	appropriately	manage	health	care	costs	through,	among	other	things,	the	application	of	medical	management	programs	such	as	our	chronic	care management	program.

In	addition,	we	also	estimate	costs	associated	with	long-duration	insurance	policies	including	long-term	care,	life	insurance,	annuities,	and	certain	health	and	other supplemental	insurance	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.	At	policy	issuance,	these	future	policy	benefit	reserves	are	recognized	on	a	net	level	premium	method	based	on	interest	rates,	mortality,	morbidity,	and maintenance	expense	assumptions.	Because	these	policies	have	long-term	claim	payout	periods,	there	is	a	greater	risk	of	significant	variability	in	claims	costs,	either positive	or	negative.	Our	actual	claims	experience	will	emerge	many	years	after	assumptions	have	been	established.	The	risk	of	a	deviation	of	the	actual	interest, morbidity,	mortality,	and	maintenance	expense	assumptions	from	those	assumed	in	our	reserves	are	particularly	significant	to	our	closed	block	of	long-term	care insurance	policies.	We	monitor	 the	 loss	experience	of	 these	 long-term	care	 insurance	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.	However,	to	the	extent	premium	rate	increases	or	loss	experience	vary	from the	assumptions	we	have	locked	in,	additional	future	adjustments	to	reserves	could	be	required.

While	we	proactively	attempt	to	effectively	manage	our	operating	expenses,	increases	or	decreases	in	staff-related	expenses,	any	costs	associated	with	exiting products,	 additional	 investment	 in	 new	 products	 (including	 our	 opportunities	 in	 the	 Medicare	 programs,	 state-based	 contracts,	 participation	 in	 health	 insurance exchanges,	and	expansion	of	clinical	capabilities	as	part	of	our	integrated	care	delivery	model),	investments	in	health	and	well-being	product	offerings,	acquisitions,	new taxes	and	assessments	(including	the	non-deductible	health	insurance	industry	fee),	and	implementation	of	regulatory	requirements	may	increase	our	operating	expenses.

Failure	to	adequately	price	our	products	or	estimate	sufficient	benefits	payable	or	future	policy	benefits	payable,	or	effectively	manage	our	operating	expenses,	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	or	competitors	in	the	delivery	of	health	care	services.	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.

The	policies	and	decisions	of	the	federal	and	state	governments	regarding	the	Medicare,	military	and	Medicaid	programs	in	which	we	participate	have	a	substantial impact	on	our	profitability.	These	governmental	policies	and	decisions,	which	we	cannot	predict	with	certainty,	directly	shape	the	premiums	or	other	revenues	to	us under	the	programs,	the	eligibility	and	enrollment	of	our	members,	the	services	we	provide	to	our	members,	and	our	administrative,	health	care	services,	and	other	costs associated	with	 these	programs.	Legislative	or	regulatory	actions,	such	as	 those	resulting	 in	a	reduction	 in	premium	payments	 to	us,	an	 increase	 in	our	cost	of administrative	and	health	care	services,	or	additional	fees,	taxes	or	assessments,	may	have	a	material	adverse	effect	on	our	results	of	operations,	financial	position,	and cash	flows.

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.

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	membership	with	favorable	medical	cost	experience	while	retaining	or	increasing membership	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	and	our	state-based	contracts	strategy,	our business	may	be	materially	adversely	affected,	which	is	of	particular	importance	given	the	concentration	of	our	revenues	in	these	products.	In	addition,	there	can be	no	assurances	that	we	will	be	successful	in	maintaining	or	improving	our	Star	ratings	in	future	years.

Our	future	performance	depends	in	large	part	upon	our	ability	to	execute	our	strategy,	including	opportunities	created	by	the	expansion	of	our	Medicare	programs, the	successful	implementation	of	our	integrated	care	delivery	model	and	our	strategy	with	respect	to	state-based	contracts,	including	those	covering	members	dually eligible	for	the	Medicare	and	Medicaid	programs.

We	have	made	substantial	investments	in	the	Medicare	program	to	enhance	our	ability	to	participate	in	these	programs.	We	have	increased	the	size	of	our	Medicare geographic	reach	through	expanded	Medicare	product	offerings.	We	offer	both	stand-alone	Medicare	prescription	drug	coverage	and	Medicare	Advantage	health	plans with	prescription	drug	coverage	in	addition	to	our	other	product	offerings.	We	offer	a	Medicare	prescription	drug	plan	in	50	states	as	well	as	Puerto	Rico	and	the	District of	Columbia.	The	growth	of	our	Medicare	products	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	products	in	relation	to	our	other	businesses	may	intensify	the risks	to	us	inherent	in	Medicare	products.	There	is	significant	concentration	of	our	revenues	in	Medicare	products,	with	approximately	78%	of	our	total	premiums	and services	revenue	for	 the	 year	 ended	 December	 31,	2017	 generated	 from	 our	 Medicare	 products,	 including	15%	derived	from	our	 individual	Medicare	Advantage contracts	with	CMS	in	Florida.	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.

The	Health	Care	Reform	Law	created	a	federal	Medicare-Medicaid	Coordination	Office	to	serve	dual	eligibles.	This	Medicare-Medicaid	Coordination	Office	has initiated	a	series	of	state	demonstration	projects	to	experiment	with	better	coordination	of	care	between	Medicare	and	Medicaid.	Depending	upon	the	results	of	those demonstration	projects,	CMS	may	change	the	way	in	which	dual	eligibles	are	serviced.	If	we	are	unable	to	implement	our	strategic	initiatives	to	address	the	dual eligibles	opportunity,	including	our	participation	in	state-based	contracts,	or	if	our	initiatives	are	not	successful	at	attracting	or	retaining	dual	eligible	members,	our business	may	be	materially	adversely	affected.

Additionally,	our	strategy	includes	the	growth	of	our	commercial	products,	introduction	of	new	products	and	benefit	designs,	including	Go365	and	other	wellness products,	 growth	 of	 our	 specialty	 products	 such	 as	 dental,	 vision	 and	 other	 supplemental	 products,	 the	 adoption	 of	 new	 technologies,	 development	 of	 adjacent businesses,	and	the	integration	of	acquired	businesses	and	contracts.

The	achievement	of	Star	ratings	of	4-Star	or	higher	qualifies	Medicare	Advantage	plans	for	premium	bonuses.	Our	Medicare	Advantage	plans'	operating	results	may be	significantly	affected	by	their	star	ratings.	Despite	our	operational	efforts	to	improve	our	star	ratings,	there	can	be	no	assurances	that	we	will	be	successful	in maintaining	or	improving	our	star	ratings	in	future	years.	In	addition,	audits	of	our	performance	for	past	or	future	periods	may	result	in	downgrades	to	our	Star	ratings. Accordingly,	our	plans	may	not	be	eligible	for	full	level	quality	bonuses,	which	could	adversely	affect	the	benefits	such	plans	can	offer,	reduce	membership	and/or reduce	profit	margins.

# 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	reduced	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.

There	can	be	no	assurance	 that	our	 information	 technology,	or	IT,	process	will	successfully	 improve	existing	systems,	develop	new	systems	 to	support	our expanding	operations,	integrate	new	systems,	protect	our	proprietary	information,	defend	against	cybersecurity	attacks,	or	improve	service	levels.	In	addition,	there	can be	no	assurance	that	additional	systems	issues	will	not	arise	in	the	future.	Failure	to	adequately	protect	and	maintain	the	integrity	of	our	information	systems	and	data,	or to	defend	against	cybersecurity	attacks,	may	result	in	a	material	adverse	effect	on	our	results	of	operations,	financial	position,	and	cash	flows.

If	we	are	unable	to	defend	our	information	technology	security	systems	against	cybersecurity	attacks	or	prevent	other	privacy	or	data	security	incidents	that result	 in	 security	 breaches	 that	 disrupt	 our	 operations	 or	 in	 the	 unintended	 dissemination	 of	 sensitive	 personal	 information	 or	 proprietary	 or	 confidential information,	we	could	be	exposed	to	significant	regulatory	fines	or	penalties,	liability	or	reputational	damage,	or	experience	a	material	adverse	effect	on	our	results of	operations,	financial	position,	and	cash	flows.

In	the	ordinary	course	of	our	business,	we	process,	store	and	transmit	large	amounts	of	data,	including	sensitive	personal	information	as	well	as	proprietary	or confidential	information	relating	to	our	business	or	a	third-party.	A	cybersecurity	attack	may	penetrate	our	layered	security	controls	and	misappropriate	or	compromise sensitive	personal	information	or	proprietary	or	confidential	information	or	that	of	third-parties,	create	system	disruptions,	cause

shutdowns,	or	deploy	viruses,	worms,	and	other	malicious	software	programs	that	attack	our	systems.	A	cybersecurity	attack	that	bypasses	our	IT	security	systems successfully	could	materially	affect	us	due	to	the	theft,	destruction,	loss,	misappropriation	or	release	of	confidential	data	or	intellectual	property,	operational	or	business delays	resulting	from	the	disruption	of	our	IT	systems,	or	negative	publicity	resulting	in	reputation	or	brand	damage	with	our	members,	customers,	providers,	and	other stakeholders.

The	costs	to	eliminate	or	address	cybersecurity	threats	and	vulnerabilities	before	or	after	an	incident	could	be	substantial.	Our	remediation	efforts	may	not	be successful	and	could	result	in	interruptions,	delays,	or	cessation	of	service,	and	loss	of	existing	or	potential	members.	In	addition,	breaches	of	our	security	measures	and the	unauthorized	dissemination	of	sensitive	personal	information	or	proprietary	or	confidential	information	about	us	or	our	members	or	other	third-parties,	could	expose our	associates'	or	members'	private	information	and	result	in	the	risk	of	financial	or	medical	identity	theft,	or	expose	us	or	other	third-parties	to	a	risk	of	loss	or	misuse	of this	information,	result	in	significant	regulatory	fines	or	penalties,	litigation	and	potential	liability	for	us,	damage	our	brand	and	reputation,	or	otherwise	harm	our business.

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

We	 are	 or	 may	 become	 a	 party	 to	 a	 variety	 of	 legal	 actions	 that	 affect	 our	 business,	 including	 breach	 of	 contract	 actions,	 employment	 and	 employment discrimination-related	suits,	employee	benefit	claims,	stockholder	suits	and	other	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;

•claims	arising	from	any	adverse	medical	consequences	resulting	from	our	recommendations	about the	appropriateness	of	providers'	proposed	medical treatment	plans	for	patients;

•allegations	of	anti-competitive	and	unfair	business	activities;

•provider	disputes	over	compensation	or	non-acceptance	or	 termination	of	provider	contracts	or	provider	contract	disputes	relating to	rate	adjustments resulting	from	the	Balance	Budget	and	Emergency	Deficit	Control	Act	of	1985,	as	amended	(commonly	referred	to	as	"sequestration");

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

•qui	tam	litigation	brought	by	individuals	who	seek	to	sue	on	behalf	of	the	government,	alleging	that	we,	as	a	government	contractor,	submitted	false	claims to	the	government	including,	among	other	allegations,	resulting	from	coding	and	review	practices	under	the	Medicare	risk-adjustment	model;

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

•claims relating to customer audits and contract performance;

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

•professional liability	claims	arising	out	of the	 delivery	 of	 healthcare	 and	 related	 services to the public.

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.	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	materially	adversely	affect	our	ability	to	market	our	products	or	services,	may	require	us	to	change	our	products	or	services	or	otherwise	change	our	business practices,	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	and	Certain	Regulatory	Matters"	 in	Note	16	 to the	consolidated	financial	statements included in	Item	8.	-	Financial	Statements	and Supplementary	Data.	We	cannot	predict	the	outcome	of	these	matters	with	certainty.

# As	a	government	contractor,	we	are	exposed	to	risks	that	may	materially	adversely	affect	our	business	or	our	willingness	or	ability	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.	These	programs	accounted	for	approximately	84%	of	our	total	premiums	and	services	revenue	for	the	year	ended	December	31,	2017.	These	programs	involve various	risks,	as	described	further	below.

•At	December	31,	2017,	under	our	contracts	with	CMS	we	provided	health	insurance	coverage	to	approximately	609,600	individual	Medicare	Advantage members	in	Florida.	These	contracts	accounted	for	approximately	15%	of	our	total	premiums	and	services	revenue	for	the	year	ended	December	31,	2017. 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.

•Our	military	services	business,	which	accounted	for	approximately	1%	of	our	total	premiums	and	services	revenue	for	the	year	ended	December	31,	2017, primarily	consisted	of	the	T3	TRICARE	South	Region	contract.	The	5-year	T3	South	Region	contract	expired	on	December	31,	2017.	On	July	21,	2016,	we were	notified	by	the	Defense	Health	Agency,	or	DHA,	that	we	were	awarded	the	contract	for	the	new	TRICARE	T2017	East	Region.	The	T2017	East	Region contract	is	a	consolidation	of	the	former	T3	North	and	South	Regions,	comprising	thirty-two	states	and	approximately	six	million	TRICARE	beneficiaries, with	delivery	of	health	care	services	commencing	on	January	1,	2018.	The	loss	of	the	TRICARE	T2017	East	Region	contract	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.	As	a	government	contractor,	we	may	be	subject	to	qui	tam	litigation	brought	by	individuals	who	seek	to	sue	on	behalf	of	the	government, alleging	that	the	government	contractor	submitted	false	claims	to	the	government.	Litigation	of	this	nature	is	filed	under	seal	to	allow	the	government	an opportunity	to	investigate	and	to	decide	if	it	wishes	to	intervene	and	assume	control	of	the	litigation.	If	the	government

does	not	intervene,	the	lawsuit	is	unsealed,	and	the	individual	may	continue	to	prosecute	the	action	on	his	or	her	own.

•CMS	uses	a	risk-adjustment	model	which	adjusts	premiums	paid	to	Medicare	Advantage,	or	MA,	plans	according	to	health	status	of	covered	members.	The risk-adjustment	model,	which	CMS	implemented	pursuant	to	the	Balanced	Budget	Act	of	1997	(BBA)	and	the	Benefits	Improvement	and	Protection	Act	of 2000	(BIPA),	generally	pays	more	where	a	plan's	membership	has	higher	expected	costs.	Under	this	model,	rates	paid	to	MA	plans	are	based	on	actuarially determined	bids,	which	include	a	process	whereby	our	prospective	payments	are	based	on	our	estimated	cost	of	providing	standard	Medicare-covered benefits	 to	 an	 enrollee	 with	 a	 "national	 average	 risk	 profile."	 That	 baseline	 payment	 amount	 is	 adjusted	 to	 reflect	 the	 health	 status	 of	 our	 enrolled membership.	 Under	 the	 risk-adjustment	 methodology,	 all	 MA	 plans	 must	 collect	 and	 submit	 the	 necessary	 diagnosis	 code	 information	 from	 hospital inpatient,	hospital	outpatient,	and	physician	providers	to	CMS	within	prescribed	deadlines.	The	CMS	risk-adjustment	model	uses	the	diagnosis	data	to calculate	the	risk-adjusted	premium	payment	to	MA	plans,	which	CMS	adjusts	for	coding	pattern	differences	between	the	health	plans	and	the	government fee-for-service	program.	We	generally	rely	on	providers,	including	certain	providers	in	our	network	who	are	our	employees,	to	code	their	claim	submissions with	appropriate	diagnoses,	which	we	send	to	CMS	as	the	basis	for	our	payment	received	from	CMS	under	the	actuarial	risk-adjustment	model.	We	also	rely on	these	providers	to	document	appropriately	all	medical	data,	including	the	diagnosis	data	submitted	with	claims.	In	addition,	we	conduct	medical	record reviews	as	part	of	our	data	and	payment	accuracy	compliance	efforts,	to	more	accurately	reflect	diagnosis	conditions	under	the	risk	adjustment	model.	These compliance	efforts	include	the	internal	contract	level	audits	described	in	more	detail	below,	as	well	as	ordinary	course	reviews	of	our	internal	business processes.

CMS	is	phasing-in	the	process	of	calculating	risk	scores	using	diagnoses	data	from	the	Risk	Adjustment	Processing	System,	or	RAPS,	to	diagnoses	data	from the	Encounter	Data	System,	or	EDS.	The	RAPS	process	requires	MA	plans	to	apply	a	filter	logic	based	on	CMS	guidelines	and	only	submit	claims	that satisfy	those	guidelines.	For	submissions	through	EDS,	CMS	requires	MA	plans	to	submit	all	the	encounter	data	and	CMS	will	apply	the	risk	adjustment filtering	logic	to	determine	the	risk	scores.	For	2016,	10%	of	the	risk	score	was	calculated	from	claims	data	submitted	through	EDS,	increasing	to	25%	of	the risk	score	calculated	from	claims	data	through	EDS	for	2017.	In	April	2017,	CMS	revised	the	pace	of	the	phase-in.	For	2018,	15%	of	the	risk	score	will	be calculated	from	claims	data	submitted	through	EDS.	The	phase-in	from	RAPS	to	EDS	could	result	in	different	risk	scores	from	each	dataset	as	a	result	of plan	processing	issues,	CMS	processing	issues,	or	filtering	logic	differences	between	RAPS	and	EDS,	and	could	have	a	material	adverse	effect	on	our	results of	operations,	financial	position,	or	cash	flows.

CMS	is	continuing	to	perform	audits	of	various	companies'	selected	MA	contracts	related	to	this	risk	adjustment	diagnosis	data.	We	refer	to	these	audits	as Risk-Adjustment	 Data	 Validation	Audits,	 or	 RADV	 audits.	 RADV	 audits	 review	 medical	 records	 in	 an	 attempt	 to	 validate	 provider	 medical	 record documentation	and	coding	practices	which	influence	the	calculation	of	premium	payments	to	MA	plans.

In	2012,	CMS	released	a	"Notice	of	Final	Payment	Error	Calculation	Methodology	for	Part	C	Medicare	Advantage	Risk	Adjustment	Data	Validation (RADV)	Contract-Level	Audits."	The	payment	error	calculation	methodology	provides	that,	in	calculating	the	economic	impact	of	audit	results	for	an	MA contract,	if	any,	the	results	of	the	RADV	audit	sample	will	be	extrapolated	to	the	entire	MA	contract	after	a	comparison	of	the	audit	results	to	a	similar	audit of	Medicare	FFS	(we	refer	to	the	process	of	accounting	for	errors	in	FFS	claims	as	the	"FFS	Adjuster").	This	comparison	of	RADV	audit	results	to	the	FFS error	rate	is	necessary	to	determine	the	economic	impact,	if	any,	of	RADV	audit	results	because	the	government	used	the	Medicare	FFS	program	data	set, including	any	attendant	errors	that	are	present	in	that	data	set,	to	estimate	the	costs	of	various	health	status	conditions	and	to	set	the	resulting	adjustments	to MA	plans'	payment	rates.	CMS	already	makes	other	adjustments	to	payment	rates	based	on	a	comparison	of	coding	pattern	differences	between	MA	plans and	Medicare	FFS	data	(such	as	for	frequency	of	coding	for	certain	diagnoses	in	MA	plan	data	versus	the	Medicare	FFS	program	dataset).

The	final	RADV	extrapolation	methodology,	including	the	first	application	of	extrapolated	audit	results	to	determine	audit	settlements,	is	expected	to	be applied	to	RADV	contract	level	audits	conducted	for	contract

year	2011	and	subsequent	years.	CMS	is	currently	conducting	RADV	contract	level	audits	for	contract	years	2011,	2012,	and	2013	in	which	two,	five	and five	of	our	Medicare	Advantage	plans	are	being	audited,	respectively.	Per	CMS	guidance,	selected	MA	contracts	will	be	notified	of	an	audit	at	some	point after	the	close	of	the	final	reconciliation	for	the	payment	year	being	audited.

Estimated	audit	settlements	are	recorded	as	a	reduction	of	premiums	revenue	in	our	consolidated	statements	of	income,	based	upon	available	information.	We perform	internal	contract	level	audits	based	on	the	RADV	audit	methodology	prescribed	by	CMS.	Included	in	these	internal	contract	level	audits	is	an	audit of	our	Private	Fee-For	Service	business	which	we	used	to	represent	a	proxy	of	the	FFS	Adjuster	which	has	not	yet	been	released.	We	based	our	accrual	of estimated	audit	settlements	for	each	contract	year	on	the	results	of	these	internal	contract	level	audits	and	update	our	estimates	as	each	audit	is	completed. Estimates	derived	from	these	results	were	not	material	to	our	results	of	operations,	financial	position,	or	cash	flows.	We	report	the	results	of	these	internal contract	level	audits	to	CMS,	including	identified	overpayments,	if	any.	However,	as	indicated,	we	are	awaiting	additional	guidance	from	CMS	regarding	the FFS	Adjuster.	Accordingly,	we	cannot	determine	whether	such	RADV	audits	will	have	a	material	adverse	effect	on	our	results	of	operations,	financial position,	or	cash	flows.

In	addition,	as	part	of	our	internal	compliance	efforts,	we	routinely	perform	ordinary	course	reviews	of	our	internal	business	processes	related	to,	among other	things,	our	risk	coding	and	data	submissions	in	connection	with	the	risk-adjustment	model.	These	reviews	may	also	result	in	the	identification	of	errors and	the	submission	of	corrections	to	CMS,	that	may,	either	individually	or	in	the	aggregate,	be	material.	As	such,	these	ordinary	course	reviews	may	have	a material	adverse	effect	on	our	results	of	operations,	financial	position,	or	cash	flows.

In	addition,	CMS'	comments	 in	formalized	guidance	regarding	"overpayments"	 to	MA	plans	appear	 to	be	 inconsistent	with	CMS'	prior	RADV	audit guidance.	These	statements,	contained	in	the	preamble	to	CMS'	final	rule	release	regarding	Medicare	Advantage	and	Part	D	prescription	drug	benefit program	 regulations	 for	 Contract	Year	 2015,	 appear	 to	 equate	 each	 Medicare	Advantage	 risk	 adjustment	 data	 error	 with	 an	 "overpayment"	 without reconciliation	to	the	principles	underlying	the	FFS	Adjuster	referenced	above.	We	will	continue	to	work	with	CMS	to	ensure	that	MA	plans	are	paid accurately	and	that	payment	model	principles	are	in	accordance	with	the	requirements	of	the	Social	Security	Act,	which,	if	not	implemented	correctly	could have	a	material	adverse	effect	on	our	results	of	operations,	financial	position,	or	cash	flows.

•Our	 CMS	 contracts	 which	 cover	 members'	 prescription	 drugs	 under	 Medicare	 Part	 D	 contain	 provisions	 for	 risk	 sharing	 and	 certain	 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	premiums	revenue	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.	Our	estimate	of	the	settlement	associated	with	the	Medicare	Part	D	risk	corridor	provisions	was	a	net	payable	of	$279	million	and	$150	million	at December	31,	2017	and	2016,	respectively.

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	applicable	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	which	we	would	have	otherwise	received	as	a	low-income	subsidy	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.

•We	are	also	subject	to	various	other	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.	The	outcome	of	any	current	or	future	governmental	or	internal investigations	cannot	be	accurately	predicted,	nor	can	we	predict	any	resulting	penalties,	fines	or	other	sanctions	that	may	be	imposed	at	the	discretion	of federal	or	state	regulatory	authorities.	Nevertheless,	it	is	reasonably	possible	that	any	such	outcome	of	litigation,	penalties,	fines	or	other	sanctions	could	be substantial,	and	the	outcome	of	these	matters	may	have	a	material	adverse	effect	on	our	results	of	operations,	financial	position,	and	cash	flows.	Certain	of these	matters	could	also	affect	our	reputation.	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.

The	Patient	Protection	and	Affordable	Care	Act	and	The	Health	Care	and	Education	Reconciliation	Act	of	2010	could	have	a	material	adverse	effect	on	our results	of	operations	(including	restricting	revenue,	enrollment	and	premium	growth	in	certain	products	and	market	segments,	restricting	our	ability	to	expand	into new	markets,	increasing	our	medical	and	operating	costs	by,	among	other	things,	requiring	a	minimum	benefit	ratio	on	insured	products,	lowering	our	Medicare payment	rates	and	increasing	our	expenses	associated	with	a	non-deductible	health	insurance	industry	fee	and	other	assessments);	our	financial	position	(including our	ability	to	maintain	the	value	of	our	goodwill);	and	our	cash	flows.

The	Patient	Protection	and	Affordable	Care	Act	and	The	Health	Care	and	Education	Reconciliation	Act	of	2010	(which	we	collectively	refer	to	as	the	Health	Care Reform	Law)	enacted	significant	reforms	to	various	aspects	of	the	U.S.	health	insurance	industry.	The	provisions	of	the	Health	Care	Reform	Law	include,	among	others, imposing	 a	 significant	 new	 non-deductible	 health	 insurance	 industry	 fee	 and	 other	 assessments	 on	 health	 insurers,	 limiting	 Medicare	Advantage	 payment	 rates, stipulating	a	prescribed	minimum	ratio	for	the	amount	of	premiums	revenue	to	be	expended	on	medical	costs	for	insured	products,	additional	mandated	benefits	and guarantee	 issuance	associated	with	commercial	medical	 insurance,	requirements	 that	 limit	 the	ability	of	health	plans	 to	vary	premiums	based	on	assessments	of underlying	risk,	and	heightened	scrutiny	by	state	and	federal	regulators	of	our	business	practices,	including	our	Medicare	bid	and	pricing	practices.	The	Health	Care Reform	Law	also	specifies	benefit	design	guidelines,	limits	rating	and	pricing	practices,	encourages	additional	competition	(including	potential	incentives	for	new market	entrants),	establishes	federally-facilitated	or	state-based	exchanges	for	individuals	and	small	employers	(with	up	to	100	employees)	coupled	with	programs designed	to	spread	risk	among	insurers	(subject	to	federal	administrative	action),	and	expands	eligibility	for	Medicaid	programs	(subject	to	state-by-state	implementation of	this	expansion).	Financing	for	these	reforms	come,	in	part,	from	material	additional	fees	and	taxes	on	us	and	other	health	plans	and	individuals	which	began	in	2014, as	well	as	reductions	in	certain	levels	of	payments	to	us	and	other	health	plans	under	Medicare.	If	we	fail	to	effectively	implement	our	operational	and	strategic initiatives	with	respect	to	the	implementation	of	the	Health	Care	Reform	Law,	our	business	may	be	materially	adversely	affected.	Additionally,	potential	legislative changes,	including	activities	to

repeal	or	replace	the	Health	Care	Reform	Law,	creates	uncertainty	for	our	business,	and	we	cannot	predict	when,	or	in	what	form,	such	legislative	changes	may	occur.

For	additional	information,	please	refer	to	the	section	entitled,	"Health	Care	Reform"	in	"Item	7	-	Management's	Discussion	and	Analysis	of	Financial	Condition and	Results	of	Operations"	appearing	in	this	annual	report.

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,	 including	 reductions	 in	 Medicare	Advantage	 payment	 rates,	 could	 increase	 our	 cost	 of	 doing	 business	 and	 may	 adversely	 affect	 our	 business, profitability,	financial	condition,	and	cash	flows.

In	addition	to	the	Health	Care	Reform	Law,	the	health	care	industry	in	general	and	health	insurance	are	subject	to	substantial	federal	and	state	government regulation:

Health	Insurance	Portability	and	Accountability	Act	(HIPAA)	and	the	Health	Information	Technology	for	Economic	and	Clinical	Health	Act	(HITECH	Act)

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	and	providers).

The	HITECH	Act,	one	part	of	the	American	Recovery	and	Reinvestment	Act	of	2009,	significantly	broadened	the	scope	of	the	privacy	and	security	regulations	of HIPAA.	Among	other	requirements,	the	HITECH	Act	and	HIPAA	mandate	individual	notification	in	the	event	of	a	breach	of	unsecured,	individually	identifiable	health information,	provides	enhanced	penalties	for	HIPAA	violations,	requires	business	associates	to	comply	with	certain	provisions	of	the	HIPAA	privacy	and	security	rule, and	grants	enforcement	authority	to	state	attorneys	general	in	addition	to	the	HHS	Office	of	Civil	Rights.

In	addition,	there	are	numerous	federal	and	state	laws	and	regulations	addressing	patient	and	consumer	privacy	concerns,	including	unauthorized	access	or	theft	of personal	information.	State	statutes	and	regulations	vary	from	state	to	state	and	could	impose	additional	penalties.	Violations	of	HIPAA	or	applicable	federal	or	state laws	or	regulations	could	subject	us	to	significant	criminal	or	civil	penalties,	including	significant	monetary	penalties.	Compliance	with	HIPAA	and	other	privacy regulations	requires	significant	systems	enhancements,	training	and	administrative	effort.

# American	Recovery	and	Reinvestment	Act	of	2009	(ARRA)

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,	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	HHS	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	HHS	to	issue	regulations	implementing	its	privacy	and	security	enhancements.

# Corporate	Practice	of	Medicine	and	Other	Laws

As	a	corporate	entity,	Humana	Inc.	is	not	licensed	to	practice	medicine.	Many	states	in	which	we	operate	through	our	subsidiaries	limit	the	practice	of	medicine	to licensed	individuals	or	professional	organizations	comprised	of	licensed	individuals,	and	business	corporations	generally	may	not	exercise	control	over	the	medical decisions	of	physicians.	Statutes	and	regulations	relating	to	the	practice	of	medicine,	fee-splitting	between	physicians	and	referral	sources,	and	similar	issues	vary	widely from	state	to	state.	Under	management	agreements	between	certain	of	our	subsidiaries	and	affiliated	physician-owned	professional	groups,	these	groups	retain	sole responsibility	for	all	medical	decisions,	as	well	as	for	hiring	and	managing	physicians	and	other	licensed	healthcare	providers,	developing	operating	policies	and procedures,	implementing	professional	standards	and	controls,	and	maintaining	malpractice	insurance.	We	believe	that	our	health	services	operations	comply	with applicable	state	statutes	regarding	corporate	practice	of	medicine,	fee-splitting,	and	similar	issues.	However,	any	enforcement	actions	by	governmental	officials	alleging non-compliance	with	these	statutes,	which	could	subject	us	to	penalties	or	restructuring	or	reorganization	of	our	business,	may	result	in	a	material	adverse	effect	on	our results	of	operations,	financial	position,	or	cash	flows.

# Anti-Kickback,	Physician	Self-Referral,	and	Other	Fraud	and	Abuse	Laws

A	federal	law	commonly	referred	to	as	the	"Anti-Kickback	Statute"	prohibits	the	offer,	payment,	solicitation,	or	receipt	of	any	form	of	remuneration	to	induce,	or	in return	for,	the	referral	of	Medicare	or	other	governmental	health	program	patients	or	patient	care	opportunities,	or	in	return	for	the	purchase,	lease,	or	order	of	items	or services	that	are	covered	by	Medicare	or	other	federal	governmental	health	programs.	Because	the	prohibitions	contained	in	the	Anti-Kickback	Statute	apply	to	the furnishing	of	items	or	services	for	which	payment	is	made	in	"whole	or	in	part,"	the	Anti-Kickback	Statute	could	be	implicated	if	any	portion	of	an	item	or	service	we provide	is	covered	by	any	of	the	state	or	federal	health	benefit	programs	described	above.	Violation	of	these	provisions	constitutes	a	felony	criminal	offense	and applicable	sanctions	could	include	exclusion	from	the	Medicare	and	Medicaid	programs.

Section	1877	of	the	Social	Security	Act,	commonly	known	as	the	"Stark	Law,"	prohibits	physicians,	subject	to	certain	exceptions	described	below,	from	referring Medicare	or	Medicaid	patients	to	an	entity	providing	"designated	health	services"	in	which	the	physician,	or	an	immediate	family	member,	has	an	ownership	or investment	interest	or	with	which	the	physician,	or	an	immediate	family	member,	has	entered	into	a	compensation	arrangement.	These	prohibitions,	contained	in	the Omnibus	Budget	Reconciliation	Act	of	1993,	commonly	known	as	"Stark	II,"	amended	prior	federal	physician	self-referral	legislation	known	as	"Stark	I"	by	expanding the	list	of	designated	health	services	to	a	total	of	11	categories	of	health	services.	The	professional	groups	with	which	we	are	affiliated	provide	one	or	more	of	these designated	health	services.	Persons	or	entities	found	to	be	in	violation	of	the	Stark	Law	are	subject	to	denial	of	payment	for	services	furnished	pursuant	to	an	improper referral,	civil	monetary	penalties,	and	exclusion	from	the	Medicare	and	Medicaid	programs.

Many	states	also	have	enacted	laws	similar	in	scope	and	purpose	to	the	Anti-Kickback	Statute	and,	in	more	limited	instances,	the	Stark	Law,	that	are	not	limited	to services	for	which	Medicare	or	Medicaid	payment	is	made.	In	addition,	most	states	have	statutes,	regulations,	or	professional	codes	that	restrict	a	physician	from accepting	various	kinds	of	remuneration	in	exchange	for	making	referrals.	These	laws	vary	from	state	to	state	and	have	seldom	been	interpreted	by	the	courts	or regulatory	agencies.	In	states	that	have	enacted	these	statutes,	we	believe	that	regulatory	authorities	and	state	courts	interpreting	these	statutes	may	regard	federal	law under	the	Anti-Kickback	Statute	and	the	Stark	Law	as	persuasive.

We	believe	that	our	operations	comply	with	the	Anti-Kickback	Statute,	the	Stark	Law,	and	similar	federal	or	state	laws	addressing	fraud	and	abuse.	These	laws	are subject	to	modification	and	changes	in	interpretation,	and	are	enforced	by	authorities	vested	with	broad	discretion.	We	continually	monitor	developments	in	this	area.	If these	laws	are	interpreted	in	a	manner	contrary	to	our	interpretation	or	are	reinterpreted	or	amended,	or	if	new	legislation	is	enacted	with	respect	to	healthcare	fraud	and abuse,	illegal	remuneration,	or	similar	issues,	we	may	be	required	to	restructure

our	affected	operations	to	maintain	compliance	with	applicable	law.	There	can	be	no	assurances	that	any	such	restructuring	will	be	possible	or,	if	possible,	would	not have	a	material	adverse	effect	on	our	results	of	operations,	financial	position,	or	cash	flows.

# Environmental

We	are	subject	to	various	federal,	state,	and	local	laws	and	regulations	relating	to	the	protection	of	human	health	and	the	environment.	If	an	environmental regulatory	agency	finds	any	of	our	facilities	to	be	in	violation	of	environmental	laws,	penalties	and	fines	may	be	imposed	for	each	day	of	violation	and	the	affected facility	could	be	forced	to	cease	operations.	We	could	also	incur	other	significant	costs,	such	as	cleanup	costs	or	claims	by	third	parties,	as	a	result	of	violations	of,	or liabilities	under,	environmental	laws.	Although	we	believe	that	our	environmental	practices,	including	waste	handling	and	disposal	practices,	are	in	material	compliance with	applicable	laws,	future	claims	or	violations,	or	changes	in	environmental	laws,	could	have	a	material	adverse	effect	on	our	results	of	operations,	financial	position or	cash	flows.

# State	Regulation	of	Insurance-Related	Products

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: capital	adequacy	and	other	licensing	requirements,	policy	language	describing	benefits,	mandated	benefits	and	processes,	entry,	withdrawal	or	re-entry	into	a	state	or market,	rate	increases,	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	insurance	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.

# Any	failure	by	us	to	manage	acquisitions,	divestitures	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,	divestitures,	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 our	acquisition	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,	transactions	outside	of	our	core	business	space,	or	if	multiple	transactions	are	pursued	simultaneously.	The	failure	to	successfully	integrate acquired	entities	and	businesses	or	failure	to	produce	results	consistent	with	the	financial	model	used	in	the	analysis	of	our	acquisitions	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.	In	addition,	from	time	to	time,	we	evaluate	alternatives	for	our	businesses	that	do	not meet	our	strategic,	growth	or	profitability	objectives.	The	divestiture	of	certain	businesses	could	result,	individually	or	in	the	aggregate,	in	the	recognition	of	material losses	and	a	material	adverse	effect	on	our	results	of	operations.	There	can	be	no	assurance	that	we	will	be	able	to	complete	any	such	divestitures	on	terms	favorable	to us.

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

We	employ	or	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.	A	key	component	of	our	integrated	care	delivery	strategy	is	to	increase	the	number	of	providers	who	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	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	unfavorable	contracts	with	us	or	place	us	at	a	competitive disadvantage,	or	do	not	enter	into	contracts	with	us	that	encourage	the	delivery	of	quality	medical	services	in	a	cost-effective	manner,	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	providers	for	an	actuarially	determined,	fixed	fee	per	month	to	provide	a	basket	of 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	mail	order	business	competes	with	locally	owned	drugstores,	retail	drugstore	chains,	supermarkets,	discount	retailers,	membership	clubs,	internet companies	and	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.	Federal	agencies	further	regulate	our	pharmacy operations,	requiring	registration	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	U.S.	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-order	pharmacies.	The	failure	to	adhere	to	these	laws	and	regulations	may	expose	us	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.	It	is	uncertain	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.	Regulators	have	conducted	investigations	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	certain	of	our	licensed	subsidiaries	is	restricted	by	state	insurance	regulations.

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.	Certain	of	our	insurance	subsidiaries	operate	in	states	that	regulate	the	payment	of	dividends,	loans,	administrative expense	reimbursements	or	other	cash	transfers	to	Humana	Inc.,	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	insurance	subsidiaries,	without	prior	approval	by	state	regulatory	authorities,	or	ordinary	dividends,	is	limited	based on	the	entity's	level	of	statutory	income	and	statutory	capital	and	surplus.	In	most	states,	prior	notification	is	provided	before	paying	a	dividend	even	if	approval	is	not required.	Actual	dividends	paid	may	vary	due	to	consideration	of	excess	statutory	capital	and	surplus	and	expected	future	surplus	requirements	related	to,	for	example, premium	 volume	 and	 product	 mix.	 Dividends	 from	 our	 non-insurance	 companies	 such	 as	 in	 our	 Healthcare	 Services	 segment	 are	 generally	 not	 restricted	 by Departments	of	Insurance.	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.	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	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.

# 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	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,	acquisitions,	future	expansion	opportunities,	and	capital expenditures	for	at	least	the	next	twelve	months,	as	well	as	to	refinance	or	repay	debt,	and	repurchase	shares.	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.

# ITEM	1B.	UNRESOLVED	STAFF	COMMENTS

None.

# ITEM	2.	PROPERTIES

The	following	table	lists,	by	state,	the	number	of	medical	centers	and	administrative	offices	we	owned	or	leased	at	December	31,	2017:

|  | Medical<br>Centers | Medical<br>Centers | Administrative<br>Offices | Administrative<br>Offices |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Owned | Leased | Owned | Leased | Total |
| Florida | 11 | 147 | — | 68 | 226 |
| Texas | — | 19 | 2 | 15 | 36 |
| Kentucky | 2 | 1 | 11 | 10 | 24 |
| Arizona | — | 12 | — | 6 | 18 |
| Louisiana | — | 5 | — | 11 | 16 |
| Virginia | — | 9 | — | 7 | 16 |
| California | — | — | 2 | 13 | 15 |
| South\tCarolina | — | 6 | 4 | 5 | 15 |
| Illinois | — | 5 | — | 8 | 13 |
| New\tYork | — | — | — | 13 | 13 |
| Ohio | — | 1 | — | 11 | 12 |
| Indiana | — | 4 | — | 7 | 11 |
| Nevada | — | 7 | — | 4 | 11 |
| Puerto\tRico | — | — | — | 11 | 11 |
| Tennessee | — | — | — | 8 | 8 |
| Colorado | — | 5 | — | 3 | 8 |
| Georgia | — | 5 | — | 3 | 8 |
| New\tJersey | — | — | — | 8 | 8 |
| Michigan | — | 5 | — | 3 | 8 |
| Washington | — | 4 | — | 3 | 7 |
| North\tCarolina | — | 2 | — | 5 | 7 |
| Others | — | 7 | 1 | 37 | 45 |
| Total | 13 | 244 | 20 | 259 | 536 |

The	medical	centers	we	operate	are	primarily	located	in	Florida	and	Texas,	including	full-service,	multi-specialty	medical	centers	staffed	by	primary	care	providers and	medical	specialists.	Of	the	medical	centers	included	in	the	table	above,	approximately	68	of	these	facilities	are	leased	or	subleased	to	our	contracted	providers	to operate.

Our	principal	executive	office	is	located	in	the	Humana	Building,	500	West	Main	Street,	Louisville,	Kentucky	40202.	In	addition	to	the	headquarters	in	Louisville, Kentucky,	we	maintain	other	principal	operating	facilities	used	for	customer	service,	enrollment,	and/or	claims	processing	and	certain	other	corporate	functions	in Louisville,	Kentucky;	Green	Bay,	Wisconsin;	Tampa,	Florida;	Cincinnati,	Ohio;	San	Antonio,	Texas;	and	San	Juan,	Puerto	Rico.

# ITEM	3.	LEGAL	PROCEEDINGS

We	are	party	to	a	variety	of	legal	actions	in	the	ordinary	course	of	business,	certain	of	which	may	be	styled	as	class-action	lawsuits.	Among	other	matters,	this litigation	may	include	employment	matters,	claims	of	medical	malpractice,	bad	faith,	nonacceptance	or	termination	of	providers,	anticompetitive	practices,	improper	rate setting,	provider	contract	rate	disputes,	failure	to	disclose	network	discounts	and	various	other	provider	arrangements,	general	contractual	matters,	intellectual	property matters,	and	challenges	to	subrogation	practices.	For	a	discussion	of	our	material	legal	actions,	including	those	not	in	the	ordinary	course	of	business,	see	"Legal Proceedings	and	Certain	Regulatory	Matters"	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.	MINE	SAFETY	DISCLOSURES

Not	applicable.

# PART	II

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

# SECURITIES

# 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,	2017	and	2016:

|  | High | Low |
| :--- | :--- | :--- |
| Year\tEnded\tDecember\t31,\t2017 |  |  |
| First\tquarter | $219.25 | $195.24 |
| Second\tquarter | $240.62 | $209.77 |
| Third\tquarter | $258.75 | $230.77 |
| Fourth\tquarter | $260.86 | $233.28 |
| Year\tEnded\tDecember\t31,\t2016 |  |  |
| First\tquarter | $186.91 | $156.96 |
| Second\tquarter | $190.07 | $165.23 |
| Third\tquarter | $180.86 | $153.38 |
| Fourth\tquarter | $216.76 | $165.31 |

# Holders	of	our	Capital	Stock

As	of	January	31,	2018,	there	were	approximately	2,500	holders	of	record	of	our	common	stock	and	approximately	94,900	beneficial	holders	of	our	common	stock.

# Dividends

The	following	table	provides	details	of	dividend	payments,	excluding	dividend	equivalent	rights,	in	2016	and	2017,	under	our	Board	approved	quarterly	cash dividend	policy:

| Record<br>Date | Payment<br>Date | Amount<br>per	Share | Total<br>Amount |
| :--- | :--- | :--- | :--- |
|  |  |  | (in\tmillions) |
| 2016\tpayments |  |  |  |
| 12/30/2015 | 1/29/2016 | $0.29 | $43 |
| 3/31/2016 | 4/29/2016 | $0.29 | $43 |
| 6/30/2016 | 7/29/2016 | $0.29 | $43 |
| 10/13/2016 | 10/28/2016 | $0.29 | $43 |
| 2017\tpayments |  |  |  |
| 1/12/2017 | 1/27/2017 | $0.29 | $43 |
| 3/31/2017 | 4/28/2017 | $0.40 | $58 |
| 6/30/2017 | 7/31/2017 | $0.40 | $58 |
| 9/29/2017 | 10/27/2017 | $0.40 | $57 |

On	November	2,	2017,	the	Board	declared	a	cash	dividend	of	$0.40	per	share	that	was	paid	on	January	26,	2018	to	stockholders	of	record	on	December	29,	2017,	for an	aggregate	amount	of	$55	million.

# Stock	Total	Return	Performance

The	following	graph	compares	our	total	return	to	stockholders	with	the	returns	of	the	Standard	&	Poor's	Composite	500	Index	("S&P	500")	and	the	Dow	Jones	US Select	Health	Care	Providers	Index	("Peer	Group")	for	the	five	years	ended	December	31,	2017.	The	graph	assumes	an	investment	of	$100	in	each	of	our	common	stock, the	S&P	500,	and	the	Peer	Group	on	December	31,	2012,	and	that	dividends	were	reinvested	when	paid.

|  | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| HUM | $100 | $152 | $214 | $267 | $307 | $377 |
| S&amp;P\t500 | $100 | $132 | $150 | $153 | $171 | $208 |
| Peer\tGroup | $100 | $137 | $175 | $186 | $188 | $238 |

The	stock	price	performance	included	in	this	graph	is	not	necessarily	indicative	of	future	stock	price	performance.

# Issuer	Purchases	of	Equity	Securities

The	following	table	provides	information	about	purchases	by	us	during	the	three	months	ended	December	31,	2017	of	equity	securities	that	are	registered	by	us pursuant	to	Section	12	of	the	Exchange	Act:

| Period | Total	Number<br>of	Shares<br>Purchased	(1) | Average<br>Price	Paid<br>per	Share | Total	Number	of<br>Shares	Purchased<br>as	Part	of	Publicly<br>Announced	Plans<br>or	Programs	(1)(2) | Dollar	Value	of<br>Shares	that	May<br>Yet	Be	Purchased<br>Under	the	Plans<br>or	Programs	(1)	(2) |
| :--- | :--- | :--- | :--- | :--- |
| October\t2017 | 916,505 | $244.44 | 916,505 | $286,200,345 |
| November\t2017 | 846,752 | 244.54 | 846,752 | 79,136,387 |
| December\t2017 | 3,595,536 | 244.51 | 3,595,536 | 2,200,000,000 |
| Total | 5,358,793 | $244.50 | 5,358,793 |  |

(1) On	February	14,	2017,	we	and	Aetna	agreed	to	mutually	terminate	the	Merger	Agreement.	We	also	announced	that	the	Board	had	approved	a	new	authorization for	 share	 repurchases	 of	 up	 to	$2.25	billion	of	our	common	stock	exclusive	of	shares	repurchased	 in	connection	with	employee	stock	plans,	expiring	on December	31,	2017.	We	repurchased	shares	under	an	accelerated	stock	repurchase	agreement	and	in	the	open	market,	utilizing	the	$2.25	billion	authorization prior	to	expiration.

On	December	14,	2017,	our	Board	of	Directors	authorized	the	repurchase	of	up	to	$3.0	billion	of	our	common	shares	expiring	on	December	31,	2020,	exclusive of	shares	repurchased	in	connection	with	employee	stock	plans.	Under	the	share	repurchase	authorization,	shares	may	be	purchased	from	 time	 to	 time	at prevailing	prices	in	the	open	market,	by	block	purchases,	through	plans	designed	to	comply	with	Rule	10b5-1	under	the	Securities	Exchange	Act	of	1934,	as amended,	or	 in	privately-negotiated	 transactions,	 including	pursuant	 to	accelerated	share	repurchase	agreements	with	 investment	banks,	subject	 to	certain regulatory	 restrictions	 on	 volume,	 pricing,	 and	 timing.	On	 December	 22,	 2017,	 we	 announced	 that	 we	 had	 entered	 into	 an	 accelerated	 stock	 repurchase agreement,	the	December	2017	ASR,	with	Bank	of	America,	N.A.,	or	BofA,	to	repurchase	$1.0	billion	of	our	common	stock	as	part	of	the	$3.0	billion	share repurchase	program	authorized	on	December	14,	2017.	On	December	22,	2017,	we	made	a	payment	of	$1.0	billion	to	BofA	from	available	cash	on	hand	and received	an	initial	delivery	of	3.28	million	shares	of	our	common	stock	from	BofA	based	on	the	then	current	market	price	of	Humana	common	stock.	The payment	to	BofA	was	recorded	as	a	reduction	to	stockholders'	equity,	consisting	of	an	$800	million	increase	in	treasury	stock,	which	reflects	the	value	of	the initial	3.28	million	shares	received	upon	initial	settlement,	and	a	$200	million	decrease	in	capital	in	excess	of	par	value,	which	reflected	the	value	of	stock	held back	by	BofA	pending	final	settlement	of	the	December	2017	ASR.	Our	remaining	repurchase	authorization	was	approximately	$2.0	billion	as	of	February	16, 2018,	excluding	the	$200	million	pending	final	settlement	of	our	December	22,	2017	ASR.

# (2) Excludes	0.14	million	shares	repurchased	in	connection	with	employee	stock

plans.

# ITEM	6.	SELECTED	FINANCIAL	DATA

| Premiums | $52,380 | $53,021 | $52,409 | $45,959 | $38,829 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Services | 982 | 969 | 1,406 | 2,164 | 2,109 |
| Investment\tincome | 405 | 389 | 474 | 377 | 375 |
| Total\trevenues | 53,767 | 54,379 | 54,289 | 48,500 | 41,313 |
| Operating\texpenses: |  |  |  |  |  |
| Benefits | 43,496 | 45,007 | 44,269 | 38,166 | 32,564 |
| Operating\tcosts | 6,567 | 7,173 | 7,295 | 7,639 | 6,355 |
| Merger\ttermination\tfee\tand\trelated\tcosts,\tnet | (936) | 104 | 23 | — | — |
| Depreciation\tand\tamortization | 378 | 354 | 355 | 333 | 333 |
| Total\toperating\texpenses | 49,505 | 52,638 | 51,942 | 46,138 | 39,252 |
| Income\tfrom\toperations | 4,262 | 1,741 | 2,347 | 2,362 | 2,061 |
| Gain\ton\tsale\tof\tbusiness | — | — | 270 | — | — |
| Interest\texpense | 242 | 189 | 186 | 192 | 140 |
| Income\tbefore\tincome\ttaxes | 4,020 | 1,552 | 2,431 | 2,170 | 1,921 |
| Provision\tfor\tincome\ttaxes | 1,572 | 938 | 1,155 | 1,023 | 690 |
| Net\tincome | $2,448 | $614 | $1,276 | $1,147 | $1,231 |
| Basic\tearnings\tper\tcommon\tshare | $16.94 | $4.11 | $8.54 | $7.44 | $7.81 |
| Diluted\tearnings\tper\tcommon\tshare | $16.81 | $4.07 | $8.44 | $7.36 | $7.73 |
| Dividends\tdeclared\tper\ncommon\tshare | $1.60 | $1.16 | $1.15 | $1.11 | $1.07 |
| Financial\tPosition: |  |  |  |  |  |
| Cash\tand\tinvestments | $16,344 | $13,675 | $11,681 | $11,482 | $10,938 |
| Total\tassets | 27,178 | 25,396 | 24,678 | 23,497 | 20,719 |
| Benefits\tpayable | 4,668 | 4,563 | 4,976 | 4,475 | 3,893 |
| Debt | 4,920 | 4,092 | 4,093 | 3,795 | 2,584 |
| Stockholders'\tequity | 9,842 | 10,685 | 10,346 | 9,646 | 9,316 |
| Cash\tflows\tfrom\toperations | $4,051 | $1,936 | $868 | $1,618 | $1,716 |
| Key\tFinancial\tIndicators: |  |  |  |  |  |
| Benefit\tratio | 83.0% | 84.9% | 84.5% | 83.0% | 83.9% |
| Operating\tcost\tratio | 12.3% | 13.3% | 13.6% | 15.9% | 15.5% |
| Membership\tby\tSegment: |  |  |  |  |  |
| Retail\tsegment: |  |  |  |  |  |
| Medical\tmembership | 9,206,300 | 8,751,300 | 8,327,700 | 7,360,300 | 5,953,900 |
| Group\tand\tSpecialty\tsegment: |  |  |  |  |  |
| Medical\tmembership | 4,638,200 | 4,793,300 | 4,963,400 | 5,430,200 | 5,501,600 |
| Specialty\tmembership | 6,986,000 | 6,961,200 | 7,221,800 | 7,668,500 | 7,823,300 |
| Individual\tcommercial\tsegment: |  |  |  |  |  |
| Medical\tmembership | 128,800 | 654,800 | 899,100 | 1,016,200 | 505,400 |
| Other\tBusinesses: |  |  |  |  |  |
| Medical\tmembership | 29,800 | 30,800 | 32,600 | 35,000 | 23,400 |
| Consolidated: |  |  |  |  |  |
| Total\tmedical\tmembership | 14,003,100 | 14,230,200 | 14,222,800 | 13,841,700 | 11,984,300 |
| Total\tspecialty\tmembership | 6,986,000 | 6,961,200 | 7,221,800 | 7,668,500 | 7,823,300 |

(a) Includes	a	reduction	in	premiums	revenue	of	 $583	million	($367	million	after	tax,	or	$2.43	per	diluted	common	share)	associated	with	the	write-off	of	commercial	risk	corridor	receivables. Also	includes	benefits	expense	of	$505	million	($318	million	after	tax,	or	$2.11	per	diluted	common	share)	for	reserve	strengthening	associated	with	our	non-strategic	closed	block	of	long- term	care	insurance	policies.

(b) Includes	a	gain	on	the	sale	of	Concentra	Inc.,	net	of	transaction	costs,	of	 $270	million	($238	million	after	tax,	or	$1.57	per	diluted	common	share).	Also	includes	benefits	expense	of $176 million	($112	million	after	tax,	or	0.74	per	diluted	common	share)	for	a	provision	for	probable

future	losses	(premium	deficiency)	for	individual	commercial	medical	business	compliant	with	the	Health	Care	Reform	Law	for	the	2016	coverage	year.

(c) Includes	benefits	expense	of	$243	million	($154	million	after	tax,	or	$0.99	per	diluted	common	share)	for	reserve	strengthening	associated	with	our	non-strategic	closed	block	of	long-term	care insurance	policies.

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

# Executive	Overview

Humana	Inc.,	headquartered	in	Louisville,	Kentucky,	is	a	leading	health	and	well-being	company	committed	to	helping	our	millions	of	medical	and	specialty members	achieve	their	best	health.	Our	successful	history	in	care	delivery	and	health	plan	administration	is	helping	us	create	a	new	kind	of	integrated	care	with	the power	to	improve	health	and	well-being	and	lower	costs.	Our	efforts	are	leading	to	a	better	quality	of	life	for	people	with	Medicare,	families,	individuals,	military	service personnel,	and	communities	at	large.	To	accomplish	that,	we	support	physicians	and	other	health	care	professionals	as	they	work	to	deliver	the	right	care	in	the	right place	for	their	patients,	our	members.	Our	range	of	clinical	capabilities,	resources	and	tools,	such	as	in-home	care,	behavioral	health,	pharmacy	services,	data	analytics and	wellness	solutions,	combine	to	produce	a	simplified	experience	that	makes	health	care	easier	to	navigate	and	more	effective.

Our	industry	relies	on	two	key	statistics	to	measure	performance.	The	benefit	ratio,	which	is	computed	by	taking	total	benefits	expense	as	a	percentage	of	premiums revenue,	represents	a	statistic	used	 to	measure	underwriting	profitability.	The	operating	cost	ratio,	which	 is	computed	by	 taking	 total	operating	costs,	excluding depreciation	and	amortization,	as	a	percentage	of	total	revenue	less	investment	income,	represents	a	statistic	used	to	measure	administrative	spending	efficiency.

On	July	2,	2015,	we	entered	into	an	Agreement	and	Plan	of	Merger,	which	we	refer	to	in	this	report	as	the	Merger	Agreement,	with	Aetna	Inc.	and	certain	wholly owned	subsidiaries	of	Aetna	Inc.,	which	we	refer	to	collectively	as	Aetna,	which	sets	forth	the	terms	and	conditions	under	which	we	agreed	to	merge	with,	and	become	a wholly	owned	subsidiary	of	Aetna,	a	transaction	we	refer	to	in	this	report	as	the	Merger.	On	February	14,	2017,	we	and	Aetna	agreed	to	mutually	terminate	the	Merger Agreement,	as	our	Board	determined	that	an	appeal	of	the	Court's	ruling	would	not	be	in	the	best	interest	of	our	stockholders.	On	February	16,	2017,	under	the	terms	of the	Merger	Agreement,	we	received	a	breakup	fee	of	$1	billion	from	Aetna,	which	is	included	in	our	consolidated	statement	of	income	in	the	line	captioned	Merger termination	fee	and	related	costs,	net.	Prior	period	Merger	related	transaction	costs,	previously	included	in	operating	costs,	have	been	reclassified	to	conform	to	the	2017 presentation.

# Acquisitions	and	Divestitures

On	December	19,	2017,	we	announced	that	we	have	entered	into	a	definitive	agreement	to	acquire	a	40%	minority	interest	in	the	Kindred	at	Home	Division (Kindred	at	Home)	of	Kindred	Healthcare,	Inc.	(Kindred)(NYSE:	KND),	the	nation's	largest	home	health	provider	and	second	largest	hospice	operator,	for	estimated cash	consideration	of	approximately	$800	million,	including	our	share	of	transaction	and	related	expenses,	to	facilitate	a	complete	separation	from	the	Long	Term	Acute Care	and	Rehabilitation	businesses	(the	Specialty	Hospital	company).

On	November	6,	2017,	we	entered	into	a	definitive	agreement	to	sell	the	stock	of	our	wholly-owned	subsidiary,	KMG	to	CGIC,	a	Texas-based	insurance	company wholly	owned	by	HC2	Holdings,	Inc.,	a	diversified	holding	company.	KMG's	subsidiary,	KIC,	includes	our	closed	block	of	non-strategic	commercial	long-term	care insurance	policies.	See	Note	18	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data,	for	a	discussion	of	our closed	block	of	long-term	care	insurance	policies.

These	transactions	are	more	fully	discussed	in	Note	2	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.

During	the	first	quarter	of	2017,	we	realigned	certain	of	our	businesses	among	our	reportable	segments	to	correspond	with	internal	management	reporting	changes corresponding	to	those	used	by	our	chief	operating	decision	maker	to

evaluate	results	of	operations	and	our	previously	announced	planned	exit	from	the	Individual	Commercial	medical	business	on	January	1,	2018.	Additionally,	we renamed	our	Group	segment	to	the	Group	and	Specialty	segment,	and	began	presenting	the	Individual	Commercial	business	results	as	a	separate	segment	rather	than	as part	of	the	Retail	segment.	Specialty	health	insurance	benefits,	including	dental,	vision,	other	supplemental	health,	and	financial	protection	products,	marketed	to individuals	are	now	included	in	the	Group	and	Specialty	segment.	Specialty	health	insurance	benefits	marketed	to	employer	groups	continue	to	be	included	in	the	Group and	 Specialty	 segment.	As	 a	 result	 of	 this	 realignment,	 our	 reportable	 segments	 now	 include	 Retail,	 Group	 and	 Specialty,	 Healthcare	 Services,	 and	 Individual Commercial.	Prior	period	segment	financial	information	has	been	recast	to	conform	to	the	2017	presentation.	See	Note	17	to	the	consolidated	financial	statements included	in	Item	8.	-	Financial	Statements	and	Supplementary	Data	for	segment	financial	information.

The	Retail	segment	consists	of	Medicare	benefits,	marketed	to	individuals	or	directly	via	group	accounts.	In	addition,	the	Retail	segment	also	includes	our	contract with	CMS	 to	administer	 the	Limited	Income	Newly	Eligible	Transition,	or	LI-NET,	prescription	drug	plan	program	and	contracts	with	various	states	 to	provide Medicaid,	dual	eligible,	and	Long-Term	Support	Services	benefits,	which	we	refer	to	collectively	as	our	state-based	contracts.	The	Group	and	Specialty	segment	consists of	employer	group	commercial	fully-insured	medical	and	specialty	health	insurance	benefits	marketed	to	individuals	and	employer	groups,	including	dental,	vision,	and other	supplemental	health	and	voluntary	insurance	benefits,	and	financial	protection	products,	as	well	as	administrative	services	only,	or	ASO	products.	In	addition,	our Group	and	Specialty	segment	includes	military	services	business,	primarily	our	TRICARE	contract.	The	Healthcare	Services	segment	includes	services	offered	to	our health	plan	members	as	well	as	to	third	parties,	including	pharmacy	solutions,	provider	services,	and	clinical	care	service,	such	as	home	health	and	other	services	and capabilities	to	promote	wellness	and	advance	population	health.	The	Individual	Commercial	segment	consists	of	our	individual	commercial	fully-insured	medical	health insurance	benefits.	We	report	under	the	category	of	Other	Businesses	those	businesses	that	do	not	align	with	the	reportable	segments	described	above,	primarily	our closed-block	long-term	care	insurance	policies.

The	results	of	each	segment	are	measured	by	income	before	income	taxes.	Transactions	between	reportable	segments	primarily	consist	of	sales	of	services	rendered by	our	Healthcare	Services	segment,	primarily	pharmacy,	provider,	and	clinical	care	services,	to	our	Retail,	Group	and	Specialty,	and	Individual	Commercial	segment customers.	Intersegment	sales	and	expenses	are	recorded	at	fair	value	and	eliminated	in	consolidation.	Members	served	by	our	segments	often	use	the	same	provider networks,	enabling	us	in	some	instances	to	obtain	more	favorable	contract	terms	with	providers.	Our	segments	also	share	indirect	costs	and	assets.	As	a	result,	the profitability	of	each	segment	is	interdependent.	We	allocate	most	operating	expenses	to	our	segments.	Assets	and	certain	corporate	income	and	expenses	are	not allocated	to	the	segments,	including	the	portion	of	investment	income	not	supporting	segment	operations,	interest	expense	on	corporate	debt,	and	certain	other	corporate expenses.	These	 items	 are	 managed	 at	 a	 corporate	 level.	These	 corporate	 amounts	 are	 reported	 separately	 from	 our	 reportable	 segments	 and	 are	 included	 with intersegment	eliminations.

# Seasonality

One	of	the	product	offerings	of	our	Retail	segment	is	Medicare	stand-alone	prescription	drug	plans,	or	PDPs,	under	the	Medicare	Part	D	program.	Our	quarterly Retail	segment	earnings	and	operating	cash	flows	are	impacted	by	the	Medicare	Part	D	benefit	design	and	changes	in	the	composition	of	our	membership.	The	Medicare Part	D	benefit	design	results	in	coverage	that	varies	as	a	member's	cumulative	out-of-pocket	costs	pass	through	successive	stages	of	a	member's	plan	period,	which begins	annually	on	January	1	for	renewals.	These	plan	designs	generally	result	in	us	sharing	a	greater	portion	of	the	responsibility	for	total	prescription	drug	costs	in	the early	stages	and	less	in	the	latter	stages.	As	a	result,	the	PDP	benefit	ratio	generally	decreases	as	the	year	progresses.	In	addition,	the	number	of	low

income	senior	members	as	well	as	year-over-year	changes	in	the	mix	of	membership	in	our	stand-alone	PDP	products	affects	the	quarterly	benefit	ratio	pattern.

In	addition,	the	Retail	segment	also	experiences	seasonality	in	the	operating	cost	ratio	as	a	result	of	costs	incurred	in	the	second	half	of	the	year	associated	with	the Medicare	marketing	season.

Our	Group	and	Specialty	segment	also	experiences	seasonality	in	the	benefit	ratio	pattern.	However,	the	effect	is	opposite	of	Medicare	stand-alone	PDP	in	the	Retail segment,	with	the	Group	and	Specialty	segment's	benefit	ratio	increasing	as	fully-insured	members	progress	through	their	annual	deductible	and	maximum	out-of- pocket	expenses.

Certain	of	our	fully-insured	individual	commercial	medical	products	in	our	Individual	Commercial	segment	experience	seasonality	in	the	benefit	ratio	similar	to	the Group	and	Specialty	segment,	including	the	effect	of	existing	previously	underwritten	members	transitioning	to	policies	compliant	with	the	Health	Care	Reform	Law with	us	and	other	carriers.	As	previously	underwritten	members	transition,	it	results	in	policy	lapses	and	the	release	of	reserves	for	future	policy	benefits	partially	offset by	the	recognition	of	previously	deferred	acquisition	costs.	The	recognition	of	a	premium	deficiency	reserve	for	our	Individual	Commercial	medical	business	compliant with	the	Health	Care	Reform	Law	in	the	fourth	quarter	of	2015,	and	subsequent	changes	in	estimate,	also	impacted	the	quarterly	benefit	ratio	pattern	for	this	business	in 2016.

# Highlights

# Consolidated

•Our	2017	 results	 reflect	 the	 continued	 implementation	 of	 our	 strategy	 to	 offer	 our	 members	 affordable	 health	 care	 combined	 with	 a	 positive	 consumer experience	in	growing	markets.	At	the	core	of	this	strategy	is	our	integrated	care	delivery	model,	which	unites	quality	care,	high	member	engagement,	and sophisticated	data	analytics.	Our	approach	to	primary,	physician-directed	care	for	our	members	aims	to	provide	quality	care	that	is	consistent,	integrated,	cost- effective,	and	member-focused,	provided	by	both	employed	physicians	and	physicians	with	network	contract	arrangements.	The	model	is	designed	to	improve health	outcomes	and	affordability	for	individuals	and	for	the	health	system	as	a	whole,	while	offering	our	members	a	simple,	seamless	healthcare	experience. We	believe	this	strategy	is	positioning	us	for	long-term	growth	in	both	membership	and	earnings.	We	offer	providers	a	continuum	of	opportunities	to	increase the	integration	of	care	and	offer	assistance	to	providers	in	transitioning	from	a	fee-for-service	to	a	value-based	arrangement.	These	include	performance bonuses,	shared	savings	and	shared	risk	relationships.	At	December	31,	2017,	 approximately	1,901,300	 members,	 or	66.5%,	 of	 our	 individual	 Medicare Advantage	 members	 were	 in	 value-based	 relationships	 under	 our	 integrated	 care	 delivery	 model,	 as	 compared	 to	1,816,300	 members,	 or	64.0%,	 at December	31,	2016.

•Our	consolidated	pretax	results	of	$4.02	billion	for	2017,	an	increase	of	$2.47	billion,	from	$1.55	billion	in	2016,	primarily	reflects	the	net	gain	associated	with the	terminated	Merger	Agreement,	mainly	the	break-up	fee,	along	with	the	year-over-year	improvement	in	earnings	for	our	Individual	Commercial,	Retail	and Group	and	Specialty	segments.	The	year-over-year	comparison	was	also	favorably	impacted	by	the	reserve	strengthening	for	our	non-strategic	closed	block	of long-term	care	insurance	business	recorded	in	2016.	These	items	were	partially	offset	by	lower	pretax	earnings	in	the	Healthcare	Services	segment,	charges associated	with	voluntary	and	involuntary	workforce	reduction	programs	recorded	during	the	second	half	of	2017,	as	well	as	the	estimated	guaranty	fund assessment	expense	to	support	the	policyholder	obligations	of	Penn	Treaty	(an	unaffiliated	long-term	care	insurance	company).

•Year-over-year	comparisons	of	diluted	earnings	per	common	share	reflect	the	same	factors	impacting	our	consolidated	pretax	income	comparisons	year-over- year	as	well	as	the	beneficial	effect	of	the	lower	effective	tax	rate	in	light	of	pricing	and	benefit	design	assumptions	associated	with	the	2017	temporary suspension	of	the	health	insurance	industry	fee.	In	addition	the	year-over-year	comparisons	were	favorably	impacted	by	lower	number	of	shares,	primarily reflecting	share	repurchases.

•We	recorded	a	net	gain	associated	with	the	terminated	Merger	Agreement,	consisting	primarily	of	the	breakup	fee,	of	approximately	$936	million,	or	$4.31	per diluted	common	share,	during	2017.	During	2016,	we	recorded	transaction	costs	in	connection	with	the	Merger	of	approximately	$104	million,	or	$0.64	per diluted	common	share.	Certain	costs	associated	with	the	Merger	were	previously	not	deductible	for	tax	purposes,	but	became	deductible,	and	were	recorded	as such,	in	the	first	quarter	2017	as	a	result	of	the	termination	of	the	Merger	Agreement.

•During	2017,	we	initiated	a	voluntary	early	retirement	program	and	an	involuntary	workforce	reduction	program.	These	programs	impacted	approximately 3,600	associates,	or	7.8%	of	our	workforce.	As	a	result,	we	recorded	charges	of	$148	million,	or	$0.64	per	diluted	common	share.	This	charge	is	included	with operating	costs	in	the	consolidated	statements	of	income	for	the	year	ended	December	31,	2017	and	included	at	the	corporate	level	in	the	segment	financial information.	Payments	under	these	programs	are	made	upon	termination	during	the	early	retirement	or	severance	pay	period,	beginning	in	the	first	quarter	of 2018.	We	expect	this	liability	to	be	primarily	paid	within	the	next	12	months	and	classified	it	as	a	current	liability,	included	in	our	consolidated	balance	sheet	in the	trade	accounts	payable	and	accrued	expenses	line.

•On	March	1,	2017,	a	court	ordered	the	liquidation	of	Penn	Treaty	(an	unaffiliated	long-term	care	insurance	company),	which	triggered	assessments	from	state guaranty	associations	that	resulted	in	our	recording	a	$54	million,	or	$0.24	per	diluted	common	share,	charge	in	operating	costs.

•The	annual	health	insurance	industry	fee	has	been	suspended	for	calendar	year	2017	but	has	resumed	in	calendar	year	2018.	Operating	cost	associated	with	the health	insurer	fee	attributable	to	2016	was	$916	million.	This	fee	is	not	deductible	for	tax	purposes,	which	significantly	increased	our	effective	income	tax	rate. The	one-year	suspension	in	2017	of	the	health	insurer	fee	has	significantly	reduced	our	operating	costs	and	effective	tax	rate	during	2017.	The	Continuing Resolution	bill,	H.R.	195,	enacted	on	January	22,	2018,	included	a	one	year	suspension	in	2019	of	the	health	insurer	fee,	but	the	fee	is	scheduled	to	resume	in calendar	year	2020.

•Investment	income	increased	$16	million	in	2017,	primarily	due	to	higher	average	invested	balances	and	interest	rates	in	2017,	partially	offset	by	lower	realized capital	gains.

•Operating	cash	flow	provided	by	operations	was	$4.1	billion	for	the	year	ended	December	31,	2017	as	compared	to	operating	cash	flow	provided	by	operations of	$1.9	billion	for	the	year	ended	December	31,	2016.	The	increase	in	operating	cash	flow	primarily	was	due	to	the	receipt	of	the	merger	termination	fee,	net	of related	expenses	and	taxes	paid,	higher	earnings	and	the	timing	of	working	capital	items.

# Retail	Segment

•In	2017,	 our	 Retail	 segment	 pretax income increased	 by	$288	million,	 or	17.0%, from	2016	primarily	driven	by the	year-over-year improvement in	our Medicare	Advantage	business.

•On	February	1,	2018,	CMS	issued	its	preliminary	2019	Medicare	Advantage	and	Part	D	payment	rates	and	proposed	policy	changes,	which	we	refer	to collectively	as	the	Advance	Notice.	CMS	has	invited	public	comment	on	the	Advance	Notice	before	publishing	final	rates	on	April	2,	2018	(the	Final	Notice). In	the	Advance	Notice,	CMS	estimates	Medicare	Advantage	plans	across	the	sector	will,	on	average,	experience	a	1.84	percent	increase	in	benchmark	funding based	on	proposals	included	therein.	As	indicated	by	CMS,	its	estimate	excludes	the	impact	of	fee-for-service	county	re-basing/re-pricing	since	the	related impact	is	dependent	upon	finalization	of	certain	data,	which	will	be	available	with	the	publication	of	the	Final	Notice.	CMS'	estimate	includes	30	basis	points of	negative	impact	associated	with	the	proposed	Employer	Group	Waiver	Plan	Payment	Policy	for	2019.	Excluding	that	item,	CMS'	estimate	would	be	a	2.14 percent	increase.	Based	on	our	preliminary	analysis	using	the	same	factors	CMS	included	in	its	estimate,	the	components	of	which	are	detailed	on	CMS'	web site,	we	anticipate	the	proposals	in	the	Advance	Notice	would	result	in	a	change	to	our	benchmark	funding	relatively	in	line	with	CMS'	estimate,	excluding	the impact	attributable	to	the	Employer	Group	Waiver	Plan	Payment	Policy.

# Group	and	Specialty	Segment

•Group	and	Specialty	segment	pretax	income	was	$412	million	in	2017,	an	increase	of	$68	million,	or	19.8%,	from	$344	million	in	2016	primarily	reflecting	the impact	of	higher	pretax	earnings	associated	with	our	fully-insured	commercial	medical	products	as	well	as	higher	earnings	from	our	military	services	business resulting	from	higher	performance	incentives	earned	under	the	TRICARE	contract.

•On	July	21,	2016,	we	were	notified	by	the	Defense	Health	Agency,	or	DHA,	that	we	were	awarded	the	contract	for	the	new	TRICARE	T2017	East	Region.	The T2017	 East	 Region	 contract	 is	 a	 consolidation	 of	 the	 former	T3	 North	 and	 South	 Regions,	 comprising	 thirty-two	 states	 and	 approximately	 six	 million TRICARE	beneficiaries,	with	delivery	of	health	care	services	commencing	on	January	1,	2018.	The	T2017	East	contract	is	a	5-year	contract	set	to	expire	on December	31,	2022.

# Healthcare	Services	Segment

•Healthcare	Services	segment	pretax	 income	was	$967	million	 in	2017,	 a	decrease	$129	million,	 or	11.8%,	 from	2016	primarily	due	 to	 the	 impact	of	 the optimization	process	associated	with	our	chronic	care	management	programs,	as	well	as	lower	earnings	in	our	provider	services	business	reflecting	lower Medicare	rates	year-over-year	in	geographies	where	our	provider	assets	are	primarily	located.	The	reductions	in	pharmacy	solutions	intersegment	revenues	were offset	by	similar	reductions	in	operating	costs	associated	with	the	pharmacy	solutions	business.

•At	December	31,	2017,	approximately	52,200	primary	care	providers	were	in	value-based	relationships,	an	increase	of	3.6%	from	50,400	at	December	31, 2016.	At	December	31,	2017,	66%	of	our	individual	Medicare	Advantage	members	were	in	value-based	relationships	compared	to	64%	at	December	31,	2016.

•Medicare	Advantage	and	dual	demonstration	program	membership	enrolled	in	a	Humana	chronic	care	management	program	was	794,900	at	December	31, 2017,	a	decrease	of	27.7%	from	1,099,200	at	December	31,	2016.	We	have	undergone	an	optimization	process	that	ensures	the	appropriate	level	of	member interaction	with	clinicians	to	drive	quality	outcomes,	which	has	resulted	in	reduced	segment	earnings	but	higher	returns	on	investment.

# Individual	Commercial	Segment

•As	announced	on	February	14,	2017,	we	exited	our	Individual	Commercial	medical	business	January	1,

•In	2017,	our	Individual	Commercial	segment	pretax	income	was	$193	million,	an	increase	of	$1.1	billion,	from	a	pretax	loss	of	$869	million	in	2016	primarily due	to	the	exit	of	certain	markets	in	2017,	and	per-member	premium	increases,	as	well	as	the	reduction	of	premiums	related	to	the	write-off	of	receivables associated	with	the	commercial	risk	corridor	premium	stabilization	program.

The	Health	Care	Reform	Law	enacted	significant	reforms	to	various	aspects	of	the	U.S.	health	insurance	industry.	Certain	significant	provisions	of	the	Health	Care Reform	Law	include,	among	others,	mandated	coverage	requirements,	mandated	benefits	and	guarantee	issuance	associated	with	commercial	medical	insurance,	rebates to	policyholders	based	on	minimum	benefit	ratios,	adjustments	to	Medicare	Advantage	premiums,	the	establishment	of	federally-facilitated	or	state-based	exchanges coupled	with	programs	designed	to	spread	risk	among	insurers,	and	the	introduction	of	plan	designs	based	on	set	actuarial	values.	In	addition,	the	Health	Care	Reform Law	established	insurance	industry	assessments,	including	an	annual	health	insurance	industry	fee	and	a	three-year	$25	billion	industry	wide	commercial	reinsurance fee.	The	annual	health	insurance	industry	fee	levied	on	the	insurance	industry	is	$14.3	billion	in	2018	and	is	not	deductible	for	income	tax	purposes,	which	significantly increases	our	effective	income	tax	rate.	A	one	year	suspension	in	2017	and	2019	of	the	health	insurer	fee	significantly	impacts	our	trend	in	key	operating	metrics including	our	operating	cost	and	medical	expense	ratios,	as	well	as	our	effective	tax	rate.

In	addition,	the	Health	Care	Reform	Law	expands	federal	oversight	of	health	plan	premium	rates	and	could	adversely	affect	our	ability	to	appropriately	adjust	health plan	premiums	on	a	timely	basis.	Financing	for	these	reforms	comes,	in	part,	from	material	additional	fees	and	taxes	on	us	(as	discussed	above)	and	other	health	plans and	individuals	which

began	in	2014,	as	well	as	reductions	in	certain	levels	of	payments	to	us	and	other	health	plans	under	Medicare	as	described	in	this	2017	Form	10-K.

As	noted	above,	the	Health	Care	Reform	Law	required	the	establishment	of	health	insurance	exchanges	for	individuals	and	small	employers	to	purchase	health insurance	that	became	effective	January	1,	2014,	with	an	annual	open	enrollment	period.	For	2017,	we	offered	on-exchange	individual	commercial	medical	plans	in	11 states,	a	reduction	from	the	15	states	in	which	we	offered	on-exchange	coverage	in	2016.	In	addition,	we	discontinued	substantially	all	Health	Care	Reform	Law compliant	 off-exchange	 individual	 commercial	 medical	 plans	 effective	 January	 1,	 2017.	 Effective	 January	 1,	 2018,	 we	 have	 exited	 our	 remaining	 Individual Commercial	medical	business.

As	discussed	above,	it	is	reasonably	possible	that	the	Health	Care	Reform	Law	and	related	regulations,	as	well	as	future	legislative	changes,	including	legislative restrictions	on	our	ability	to	manage	our	provider	network	or	otherwise	operate	our	business,	or	regulatory	restrictions	on	profitability,	including	by	comparison	of	our Medicare	Advantage	profitability	to	our	non-Medicare	Advantage	business	profitability	and	a	requirement	that	they	remain	within	certain	ranges	of	each	other,	in	the aggregate	may	have	a	material	adverse	effect	on	our	results	of	operations	(including	restricting	revenue,	enrollment	and	premium	growth	in	certain	products	and	market segments,	restricting	our	ability	to	expand	into	new	markets,	increasing	our	medical	and	operating	costs,	further	lowering	our	Medicare	payment	rates	and	increasing	our expenses	associated	with	the	non-deductible	health	insurance	industry	fee	and	other	assessments);	our	financial	position	(including	our	ability	to	maintain	the	value	of our	goodwill);	and	our	cash	flows.

On	November	10,	2016,	the	U.S.	Court	of	Federal	Claims	ruled	in	favor	of	the	government	in	one	of	a	series	of	cases	filed	by	insurers,	unrelated	to	us,	against	HHS to	collect	risk	corridor	payments,	rejecting	all	of	 the	 insurer's	statutory,	contract	and	Constitutional	claims	for	payment.	On	November	18,	2016,	HHS	 issued	a memorandum	indicating	a	significant	funding	shortfall	for	the	2015	coverage	year,	the	second	consecutive	year	of	significant	shortfalls.	Given	the	successful	challenge of	the	risk	corridor	provisions	in	court,	Congressional	inquiries	into	the	funding	of	the	risk	corridor	program,	and	significant	funding	shortfalls	under	the	first	two	years of	the	program,	during	the	fourth	quarter	of	2016	we	wrote-off	$583	million	in	risk	corridor	receivables	outstanding	as	of	September	30,	2016,	including	$415	million associated	with	the	2014	and	2015	coverage	years.	From	inception	of	the	risk	corridor	program	through	December	31,	2017,	we	collected	approximately	$39	million from	CMS	for	risk	corridor	receivables	associated	with	the	2014	coverage	year	funded	by	HHS	in	accordance	with	previous	guidance,	utilizing	funds	HHS	collected from	us	and	other	carriers	under	the	2014	and	2015	risk	corridor	program.	On	November	2,	2017,	we	filed	suit	against	the	United	States	of	America	in	the	United	States Court	of	Federal	Claims,	on	behalf	of	our	health	plans	seeking	recovery	from	the	federal	government	of	approximately	$611	million	in	payments	under	the	risk	corridor premium	stabilization	program	established	under	the	Health	Care	Reform	Law,	for	years	2014,	2015	and	2016.

We	intend	for	the	discussion	of	our	financial	condition	and	results	of	operations	that	follows	to	assist	in	the	understanding	of	our	financial	statements	and	related changes	in	certain	key	items	in	those	financial	statements	from	year	to	year,	including	the	primary	factors	that	accounted	for	those	changes.	Transactions	between reportable	segments	primarily	consist	of	sales	of	services	rendered	by	our	Healthcare	Services	segment,	primarily	pharmacy,	provider,	and	clinical	care	services,	to	our Retail,	Group	and	Specialty,	and	Individual	Commercial	segment	customers	and	are	described	in	Note	17	to	the	consolidated	financial	statements	included	in	Item	8. Financial	Statements	and	Supplementary	Data	in	this	2017	Form	10-K.

# Comparison	of	Results	of	Operations	for	2017	and	2016

Certain	financial	data	on	a	consolidated	basis	and	for	our	segments	was	as	follows	for	the	years	ended	December	31,	2017	and	2016:

|  | 2017 | 2016 | Dollars | Percentage |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (dollars\tin\tmillions,\texcept\tper |  |  |
|  |  | common\tshare\tresults) |  |  |
| Revenues: |  |  |  |  |
| Premiums: |  |  |  |  |
| Retail | $44,626 | $43,223 | $1,403 | 3.2\t% |
| Group\tand\tSpecialty | 6,772 | 6,696 | 76 | 1.1\t% |
| Individual\tCommercial | 947 | 3,064 | (2,117) | (69.1)% |
| Other\tBusinesses | 35 | 38 | (3) | (7.9)% |
| Total\tpremiums | 52,380 | 53,021 | (641) | (1.2)% |
| Services: |  |  |  |  |
| Retail | 10 | 6 | 4 | 66.7\t% |
| Group\tand\tSpecialty | 626 | 643 | (17) | (2.6)% |
| Healthcare\tServices | 338 | 310 | 28 | 9.0\t% |
| Other\tBusinesses | 8 | 10 | (2) | (20.0)% |
| Total\tservices | 982 | 969 | 13 | 1.3\t% |
| Investment\tincome | 405 | 389 | 16 | 4.1\t% |
| Total\trevenues | 53,767 | 54,379 | (612) | (1.1)% |
| Operating\texpenses: |  |  |  |  |
| Benefits | 43,496 | 45,007 | (1,511) | (3.4)% |
| Operating\tcosts | 6,567 | 7,173 | (606) | (8.4)% |
| Merger\ttermination\tfee\tand\trelated\tcosts,\tnet | (936) | 104 | (1,040) | (1,000.0)% |
| Depreciation\tand\tamortization | 378 | 354 | 24 | 6.8\t% |
| Total\toperating\texpenses | 49,505 | 52,638 | (3,133) | (6.0)% |
| Income\tfrom\toperations | 4,262 | 1,741 | 2,521 | 144.8\t% |
| Interest\texpense | 242 | 189 | 53 | 28.0\t% |
| Income\tbefore\tincome\ttaxes | 4,020 | 1,552 | 2,468 | 159.0\t% |
| Provision\tfor\tincome\ttaxes | 1,572 | 938 | 634 | 67.6\t% |
| Net\tincome | $2,448 | $614 | $1,834 | 298.7\t% |
| Diluted\tearnings\tper\tcommon\tshare | $16.81 | $4.07 | $12.74 | 313.0\t% |
| Benefit\tratio\t(a) | 83.0% | 84.9% |  | (1.9)% |
| Operating\tcost\tratio\t(b) | 12.3% | 13.3% |  | (1.0)% |
| Effective\ttax\trate | 39.1% | 60.5% |  | (21.4)% |

(a) Represents total benefits expense as a percentage of premiums revenue.

(b) Represents total	 operating	 costs,	 excluding	 depreciation	 and	 amortization,	 as	 a	 percentage	 of total	 revenues less investment income.

# Summary

Net	income	for	2017	was	$2.4	billion,	or	$16.81	per	diluted	common	share	compared	to	$614	million,	or	$4.07	per	diluted	common	share,	in	2016.	Net	income	in 2017	includes	a	net	gain	of	$4.31	per	diluted	common	share	associated	with	the	terminated	Merger	Agreement	consisting	primarily	of	the	break-up	fee,	and	the beneficial	effect	of	the	lower	effective	tax	rate	in	light	of	pricing	and	benefit	design	assumptions	with	the	temporary	suspension	of	the	health	insurance	industry	fee	of $2.15	per	diluted	common	share,	excluding	the	Individual	Commercial	business	impact.	The	year-over-year	comparison	was	also	favorably	impacted	by	a	write-off	of $2.43	per	diluted	common	share	in	receivables	associated	with	the	commercial	risk	corridor	premium	stabilization	program,	and	the	reserve	strengthening	for	our	non- strategic	closed	block	of	long-term	care	insurance	business	of	$2.11	per	common	diluted	share	recorded	in	2016.	These	items	were	partially	offset	by	the	impact	of	the tax	reform	law	enacted	on	December	22,	2017,	or	the	Tax	Reform	Law,	which	resulted	in	the	reduction	of	our	net	income	due	to	the	remeasurement	of	deferred	tax assets	 at	 lower	 enacted	 corporate	 tax	 rates	 of	 $0.92	 per	 diluted	 common	 share,	$0.64	 per	 common	 diluted	 share	 in	 charges	 associated	 with	 both	 voluntary	 and involuntary	workforce	reduction	programs	in	2017,	as	well	as	the	estimated	guaranty	fund	assessment	expense	to	support	the	policyholder	obligations	of	Penn	Treaty	(an unaffiliated	long-term	care	insurance	company)	of	$0.24	per	diluted	common	share.	Excluding	the	impacts	of	the	items	above,	the	increase	in	net	income	primarily	was due	to	year-over-year	improvements	in	earnings	for	our	Individual	Commercial,	Retail,	and	Group	and	Specialty	segments,	partially	offset	by	lower	earnings	in	the Healthcare	Services	segment.

# Premiums	Revenue

Consolidated	 premiums	decreased	$641	million,	 or	1.2%,	 from	2016	 to	$52.4	billion	 for	2017	primarily	due	to	lower	premiums	in	the	Individual	Commercial segment,	partially	offset	by	higher	premiums	in	the	Retail	segment,	primarily	resulting	from	growth	in	our	Medicare	Advantage	business,	and	higher	premiums	in	the Group	and	Specialty	segment,	as	discussed	in	the	detailed	segment	results	discussion	that	follows.

# Services	Revenue

Consolidated	services	revenue	increased	$13	million,	 or	1.3%,	 from	2016	 for	2017	primarily	due	to	an	increase	in	services	revenue	in	the	Healthcare	Services segment,	partially	offset	by	a	decrease	in	services	revenue	in	the	Group	and	Specialty	segment	as	discussed	in	the	detailed	segment	results	discussion	that	follows.

# Investment	Income

Investment	income	was	$405	million	for	2017,	increasing	$16	million,	 or	4.1%, from	2016,	primarily	due	higher	average	invested	balances	and	interest	rates	in 2017,	partially	offset	by	lower	realized	capital	gains.

# Benefits	Expense

Consolidated	benefits	expense	was	$43.5	billion	for	2017,	a	decrease	of	$1.5	billion,	or	3.4%,	from	2016	reflecting	$505	million	in	incremental	benefits	expense	for the	reserve	strengthening	in	our	non-strategic	closed	block	of	long-term	care	insurance	policies	recorded	in	2016.	Excluding	the	long-term	care	reserve	strengthening	in 2016,	the	decrease	primarily	was	due	to	a	decrease	in	the	Individual	Commercial	segment	benefits	expense,	partially	offset	by	an	increase	in	the	Retail	and	Group	and Specialty	segments	benefits	expense	as	discussed	in	the	detailed	segment	results	discussion	that	follows.	As	more	fully	described	herein	under	the	section	entitled "Benefits	Expense	Recognition",	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.	We	experienced	favorable	medical	claims	reserve	development	related	to	prior	fiscal	years	of	$483	million	in 2017	and	$582	million	in	2016.

The	consolidated	benefit	ratio	for	2017	was	83.0%,	a	decrease	 of	190	basis	points	from	2016	primarily	due	to	the	incremental	benefits	expense	in	2016	for	the reserve	strengthening	in	our	non-strategic	closed	block	of	long-term	care	insurance	policies.	Excluding	the	impact	of	the	above,	the	decrease	in	the	consolidated	benefit ratio	primarily	was	due	to	the	decrease	in	the	Individual	Commercial	segment	benefit	ratio,	partially	offset	by	the	increase	in	the	Retail	and	Group	and	Specialty	segment benefit	 ratio	 as	 discussed	 in	 the	 segment	 results	 of	 operation	 discussion	 that	 follows.	 Favorable	 prior-period	 medical	 claims	 reserve	 development	decreased	 the consolidated	benefit	ratio	by	approximately	90	basis	points	in	2017	versus	approximately	110	basis	points	in	2016.

# Operating	Costs

Our	segments	incur	both	direct	and	shared	indirect	operating	costs.	We	allocate	the	indirect	costs	shared	by	the	segments	primarily	as	a	function	of	revenues.	As	a result,	the	profitability	of	each	segment	is	interdependent.

Consolidated	operating	costs	decreased	$606	million,	or	8.4%,	from	2016	to	$6.6	billion	in	2017	primarily	due	to	the	temporary	suspension	of	the	health	insurance industry	fee	for	 the	calendar	year	2017	and	 lower	Individual	Commercial	membership.	This	was	partially	offset	by	charges	associated	with	both	voluntary	and involuntary	workforce	reduction	programs,	an	increase	in	employee	compensation	costs	resulting	from	the	continued	strong	performance,	increased	spending	associated with	the	Medicare	Annual	Election	Period,	or	AEP,	as	well	as	the	estimated	guaranty	fund	assessment	expense	recorded	to	support	the	policyholder	obligations	of	Penn Treaty	(an	unaffiliated	long-term	care	insurance	company).

The	consolidated	operating	cost	ratio	for	2017	was	12.3%,	decreasing	100	basis	points	from	2016	primarily	due	to	the	temporary	suspension	of	the	health	insurance industry	fee	for	the	calendar	year	2017,	the	write-off	of	receivables	associated	with	the	commercial	risk	corridor	premium	stabilization	program	in	2016,	as	well	as operating	cost	efficiencies,	partially	offset	by	the	loss	of	scale	efficiency	from	market	exits	in	the	2017	period	associated	with	the	Individual	Commercial	product,	the estimated	charges	associated	with	both	voluntary	and	involuntary	workforce	reduction	programs	recorded	in	2017,	increased	employee	compensation	costs	resulting from	the	continued	strong	performance,	as	well	as	the	impact	of	the	estimated	guaranty	fund	assessment	expense	recorded	to	support	the	policyholder	obligations	of Penn	Treaty	(an	unaffiliated	long-term	care	insurance	company).	The	non-deductible	health	insurance	industry	fee	impacted	the	operating	cost	ratio	by	170	basis	points in	2016.

# Depreciation	and	Amortization

Depreciation	and	amortization	for	2017	of	$378	million	was	relatively	unchanged	from	2016.

# Interest	Expense

Interest	expense	was	$242	million	for	2017	compared	to	$189	million	for	2016,	an	increase	of	$53	million,	or	28.0%,	due	to	the	issuance	of	$1.8	billion	in	senior notes,	a	portion	of	the	proceeds	which	were	used	to	redeem	$800	million	of	senior	notes	scheduled	to	mature	in	2018.	We	recognized	a	loss	on	extinguishment	of	debt	of approximately	$17	million	in	December	2017	for	the	redemption	of	these	senior	notes,	which	is	included	in	interest	expense.

# Income	Taxes

Our	effective	tax	rate	during	2017	was	39.1%	compared	to	the	effective	tax	rate	of	60.5%	in	2016	primarily	reflecting	the	suspension	of	the	annual	health	insurance industry	fee	in	2017,	as	well	as	previously	non-deductible	transaction	costs	that,	as	a	result	of	termination	of	the	Merger	Agreement,	became	deductible	for	tax	purposes and	were	recorded	as	such	in	the	first	quarter	of	2017,	partially	offset	by	the	Tax	Reform	Law,	which	increased	our	effective	tax	rate	due	to	the	remeasurement	of deferred	 tax	 assets	 at	 lower	 enacted	 corporate	 tax	 rates.	 See	 Note	 11	 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.

The	tax	reform	law	enacted	on	December	22,	2017	significantly	reduced	our	federal	corporate	tax	rate.	As	a	result,	we	expect	our	effective	tax	rate	for	2018	to	be approximately	32.5%	to	33.5%.	The	decline	in	the	effective	tax	rate	for	2018	primarily	is	due	to	the	enactment	of	tax	reform,	partially	offset	by	the	resumption	of	the annual	health	insurance	industry	fee	in	2018.

|  | 2017 | 2016 | Members | Percentage |
| :--- | :--- | :--- | :--- | :--- |
| Membership: |  |  |  |  |
| Medical\tmembership: |  |  |  |  |
| Individual\tMedicare\tAdvantage | 2,860,800 | 2,837,600 | 23,200 | 0.8\t% |
| Group\tMedicare\tAdvantage | 441,400 | 355,400 | 86,000 | 24.2\t% |
| Medicare\tstand-alone\tPDP | 5,308,100 | 4,951,400 | 356,700 | 7.2\t% |
| Total\tRetail\tMedicare | 8,610,300 | 8,144,400 | 465,900 | 5.7\t% |
| State-based\tMedicaid | 360,100 | 388,100 | (28,000) | (7.2)% |
| Medicare\tSupplement | 235,900 | 218,800 | 17,100 | 7.8\t% |
| Total\tRetail\tmedical\tmembers | 9,206,300 | 8,751,300 | 455,000 | 5.2\t% |

|  | 2017 | 2016 | Dollars | Percentage |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions) |  |  |
| Premiums\tand\tServices\tRevenue: |  |  |  |  |
| Premiums: |  |  |  |  |
| Individual\tMedicare\tAdvantage | $32,720 | $31,863 | $857 | 2.7\t% |
| Group\tMedicare\tAdvantage | 5,155 | 4,283 | 872 | 20.4\t% |
| Medicare\tstand-alone\tPDP | 3,702 | 4,009 | (307) | (7.7)% |
| Total\tRetail\tMedicare | 41,577 | 40,155 | 1,422 | 3.5\t% |
| State-based\tMedicaid | 2,571 | 2,640 | (69) | (2.6)% |
| \t\t\t\t\t\t\t\t\t\tMedicare\tSupplement | 478 | 428 | 50 | 11.7\t% |
| Total\tpremiums | 44,626 | 43,223 | 1,403 | 3.2\t% |
| Services | 10 | 6 | 4 | 66.7\t% |
| Total\tpremiums\tand\tservices\trevenue | $44,636 | $43,229 | $1,407 | 3.3\t% |
| Income\tbefore\tincome\ttaxes | $1,978 | $1,690 | $288 | 17.0\t% |
| Benefit\tratio | 85.6% | 85.1% |  | 0.5\t% |
| Operating\tcost\tratio | 9.6% | 10.8% |  | (1.2)% |

# Pretax	Results

•Retail	segment	pretax	 income	was	$2.0	billion in	2017,	an	increase	 of	$288	million,	 or	17.0%,	 compared to	2016	primarily	driven	by the	year-over-year improvement	in	our	Medicare	Advantage	business.

# Enrollment

•Individual	Medicare	Advantage	membership	increased	23,200	members,	or	0.8%,	from	December	31,	2016	to	December	31,	2017	reflecting	net	membership additions	for	Medicare	beneficiaries	including	the	effect	of	planned	market	and	product	exits	in	2017.	We	decided	certain	markets	and/or	products	were	not meeting	 long	 term	 strategic	 and	 financial	 objectives.	Additionally,	 membership	 growth	 was	 muted	 due	 to	 competitive	 actions	 including	 the	 uncertainty associated	with	the	then-pending	Merger	transaction	during	last	year's	AEP.	For	full	year	2018,	we	anticipate	net	membership	growth	in	our	individual	Medicare Advantage	offerings	of	180,000	to	200,000.

•Group	Medicare	Advantage	membership	increased	86,000	members,	or	24.2%,	from	December	31,	2016	to	December	31,	2017	reflecting	the	addition	of	a	large account	in	January	2017.	For	full	year	2018,	we	anticipate	net	membership	growth	in	our	group	Medicare	Advantage	offerings	of	65,000	to	70,000.

•Medicare	 stand-alone	 PDP	 membership	increased	356,700	 members,	 or	7.2%,	 from	 December	 31,	2016	 to	 December	 31,	2017	reflecting	net	membership additions,	primarily	for	our	Humana-Walmart	plan	offering,	for	the	2017	plan	year. 	For	full	year	2018,	we	anticipate	a	net	membership	decline	in	our	Medicare stand-alone	PDP	offerings	of	280,000	to	320,000,	primarily	attributable	to	the	loss	of	auto	assign	members	in	Florida	and	South	Carolina	due	to	pricing	over	the CMS	low	income	benchmark	and	continued	membership	declines	in	our	Enhanced	Plan	offering.

•State-based	Medicaid	membership	decreased	28,000	members,	or	7.2%,	from	December	31,	2016	to	December	31,	2017,	primarily	driven	by	lower	membership associated	with	our	Florida	contracts	resulting	from	network	realignments.

•Retail	segment	premiums	increased	$1.4	billion,	 or	3.2%,	 from	2016	 to	2017	primarily	due	to	Medicare	Advantage	membership	growth	and	increased	per- member	premiums	for	certain	of	the	segment's	products.	Average	group	and	individual	Medicare	Advantage	membership	 increased	3.4%	 in	2017.	Average membership	is	calculated	by	summing	the	ending	membership	for	each	month	in	a	period	and	dividing	the	result	by	the	number	of	months	in	a	period. Premiums	revenue	reflects	changes	in	membership	and	average	per-member	premiums.	Items	impacting	average	per-member	premiums	include	changes	in premium	rates	as	well	as	changes	in	the	geographic	mix	of	membership,	the	mix	of	product	offerings,	and	the	mix	of	benefit	plans	selected	by	our	membership.

•The	Retail	segment	benefit	ratio	of	85.6%	for	2017	increased	50	basis	points	from	2016	primarily	due	to	the	impact	of	the	temporary	suspension	of	the	health insurance	industry	fee	for	calendar	year	2017	which	was	contemplated	in	the	pricing	and	benefit	design	of	our	products,	margin	compression	associated	with	the competitive	environment	in	the	group	Medicare	Advantage	business	and	slightly	lower	favorable	prior-period	medical	claims	reserve	development.	These increases	were	partially	offset	by	the	impact	of	planned	exits	from	certain	Medicare	Advantage	markets	that	carried	a	higher	benefit	ratio	than	other	markets	as well	as	lower	than	expected	medical	costs	as	compared	to	the	assumptions	used	in	the	pricing	of	our	individual	Medicare	Advantage	business.

•The	Retail	segment's	benefits	expense	for	2017	included	the	beneficial	effect	of	$386	million	in	favorable	prior-year	medical	claims	reserve	development	versus $429	million	in	2016.	This	favorable	prior-year	medical	claims	reserve	development	decreased	the	Retail	segment	benefit	ratio	by	approximately	90	basis	points in	2017	versus	approximately	100	basis	points	in	2016.

•The	Retail	segment	operating	cost	ratio	of	9.6%	 for	2017	decreased	120	 basis	 points	 from	2016	primarily	due	to	the	temporary	suspension	of	the	health insurance	industry	fee	for	calendar	year	2017,	partially	offset	by	increased	spending	associated	with	AEP,	investments	in	our	integrated	care	delivery	model, and	the	increase	in	employee	compensation	costs	resulting	from	the	continued	strong	performance.	The	non-deductible	health	insurance	industry	fee	increased the	operating	cost	ratio	by	approximately	170	basis	points	in	2016.

|  | 2017 | 2016 | Members | Percentage |
| :--- | :--- | :--- | :--- | :--- |
| Membership: |  |  |  |  |
| Medical\tmembership: |  |  |  |  |
| Fully-insured\tcommercial\tgroup | 1,097,700 | 1,136,000 | (38,300) | (3.4)% |
| ASO | 458,700 | 573,200 | (114,500) | (20.0)% |
| Military\tservices | 3,081,800 | 3,084,100 | (2,300) | (0.1)% |
| Total\tgroup\tmedical\tmembers | 4,638,200 | 4,793,300 | (155,100) | (3.2)% |
| Specialty\tmembership\t(a) | 6,986,000 | 6,961,200 | 24,800 | 0.4\t% |

(a) Specialty	products	include	dental,	vision,	voluntary	benefit	products	and	other	supplemental	health	and	financial	protection	products.	Members	included	in	these products	may	not	be	unique	to	each	product	since	members	have	the	ability	to	enroll	in	multiple	products.

|  | 2017 | 2016 | Dollars | Percentage |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions) |  |  |
| Premiums\tand\tServices\tRevenue: |  |  |  |  |
| Premiums: |  |  |  |  |
| Fully-insured\tcommercial\tgroup | $5,462 | $5,405 | $57 | 1.1\t% |
| Specialty | 1,310 | 1,279 | 31 | 2.4\t% |
| Military\tservices | — | 12 | (12) | (100.0)% |
| Total\tpremiums | 6,772 | 6,696 | 76 | 1.1\t% |
| Services | 626 | 643 | (17) | (2.6)% |
| Total\tpremiums\tand\tservices\trevenue | $7,398 | $7,339 | $59 | 0.8\t% |
| Income\tbefore\tincome\ttaxes | $412 | $344 | $68 | 19.8\t% |
| Benefit\tratio | 79.2% | 78.2% |  | 1.0\t% |
| Operating\tcost\tratio | 21.4% | 23.5% |  | (2.1)% |

•Group	and	Specialty	segment	pretax	income	was	$412	million	in	2017,	an	increase	of	$68	million,	or	19.8%,	from	$344	million	in	2016	primarily	reflecting	the impact	of	higher	pretax	earnings	associated	with	our	fully-insured	commercial	business	as	well	as	higher	earnings	from	our	military	services	business	resulting from	higher	performance	incentives	earned	under	the	TRICARE	contract.

•Fully-insured	commercial	group	medical	membership	decreased	38,300	members,	or	3.4%	 from	 December	 31,	2016	reflecting	lower	membership	in	small group	accounts	due	in	part	to	more	small	group	accounts	selecting	ASO	products	in	2017.

•Group	ASO	commercial	medical	membership	decreased	114,500	members,	or	20.0%,	from	December	31,	2016	to	December	31,	2017	primarily	due	to	the	loss of	certain	large	group	accounts	as	a	result	of	continued	discipline	in	pricing	of	services	for	self-funded	accounts	amid	a	highly	competitive	environment, partially	offset	by	more	small	group	accounts	selecting	ASO	products	in	2017.

•Specialty	membership	increased	24,800	members,	or	0.4%,	from	December	31,	2016	to	December	31,	2017	primarily	due	to	strong	growth	in	vision	products marketed	to	employer	groups.

•Group	and	Specialty	segment	premiums	increased	$76	million,	or	1.1%,	 from	2016	 to	2017	primarily	due	to	an	increase	in	group	fully-insured	commercial medical	per-member	premiums,	partially	offset	by	a	decline	in	average	group	fully-insured	commercial	medical	membership.

•Group	and	Specialty	segment	services	revenue	decreased	$17	million,	or	2.6%,	from	2016	 to	2017	 primarily	due	to	a	decline	in	revenue	in	our	group	ASO commercial	medical	business	mainly	due	to	membership	declines	partially	offset	by	higher	revenue	from	our	military	services	business	resulting	from	higher performance	incentives	earned	under	the	TRICARE	contract.

•The	Group	and	Specialty	segment	benefit	ratio	increased	100	basis	points	from	78.2%	in	2016	to	79.2%	in	2017	primarily	due	to	the	impact	of	the	temporary suspension	of	the	health	insurance	industry	fee	for	calendar	year	2017	which	was	contemplated	in	the	pricing	of	our	products.	The	increase	was	further impacted	by	an	increased	proportion	of	small	group	members	transitioning	to	community	rated	plans	that	carry	a	higher	benefit	ratio.	These	increases	were partially	offset	by	lower	utilization	for	the	fully-insured	commercial	medical	business	in	2017,	primarily	associated	with	the	large	group	business.

•The	Group	and	Specialty	segment's	benefits	expense	included	the	beneficial	effect	of	$40	million	in	favorable	prior-year	medical	claims	reserve	development	in 2017	versus	$46	million	in	2016.	This	favorable	prior-year	medical	claims	reserve	development	decreased	the	Group	and	Specialty	segment	benefit	ratio	by approximately	60	basis	points	in	2017	versus	approximately	70	basis	points	in	2016.

•The	Group	and	Specialty	segment	operating	cost	ratio	of	21.4%	 for	2017	decreased	210	basis	points	from	23.5%	 for	2016	primarily	due	to	the	temporary suspension	of	the	health	insurance	industry	fee	for	calendar	year	2017	as	well	as	operating	cost	efficiencies,	partially	offset	by	an	increase	in	employee compensation	costs	resulting	from	the	continued	strong	performance.	The	non-deductible	health	insurance	industry	fee	increased	the	operating	cost	ratio	by approximately	150	basis	points	in	2016.

|  | 2017 | 2016 | Dollars | Percentage |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions) |  |  |
| Revenues: |  |  |  |  |
| Services: |  |  |  |  |
| Clinical\tcare\tservices | $181 | $201 | $(20) | (10.0)% |
| Pharmacy\tsolutions | 80 | 31 | 49 | 158.1\t% |
| Provider\tservices | 77 | 78 | (1) | (1.3)% |
| Total\tservices\trevenues | 338 | 310 | 28 | 9.0\t% |
| Intersegment\trevenues: |  |  |  |  |
| Pharmacy\tsolutions | 20,881 | 21,952 | (1,071) | (4.9)% |
| Provider\tservices | 1,593 | 1,677 | (84) | (5.0)% |
| Clinical\tcare\tservices | 1,111 | 1,343 | (232) | (17.3)% |
| Total\tintersegment\trevenues | 23,585 | 24,972 | (1,387) | (5.6)% |
| Total\tservices\tand\tintersegment\trevenues | $23,923 | $25,282 | $(1,359) | (5.4)% |
| Income\tbefore\tincome\ttaxes | $967 | $1,096 | $(129) | (11.8)% |
| Operating\tcost\tratio | 95.5% | 95.2% |  | 0.3\t% |

•Healthcare	Services	segment	pretax	income	was	$967	million	in	2017,	a	decrease	of	$129	million,	or	11.8%,	from	2016	primarily	was	due	to	the	impact	of	the optimization	process	associated	with	our	chronic	care	management	programs,	as	well	as	lower	earnings	in	our	provider	services	business	reflecting	lower Medicare	rates	year-over-year	in	geographies	where	our	provider	assets	are	primarily	located.	The	reductions	in	pharmacy	solutions	intersegment	revenues	were offset	by	similar	reductions	in	operating	costs	associated	with	the	pharmacy	solutions	business.

# Script	Volume

•Humana	Pharmacy	Solutions®	script	volumes	for	the	Retail	and	Group	and	Specialty	segment	membership	increased	to	approximately	433	million	in	2017,	up 2%	versus	scripts	of	approximately	426	million	in	2016.	The	increase	primarily	reflects	growth	associated	with	higher	Medicare	membership	for	2017	than	in 2016,	partially	offset	by	the	decline	in	Individual	Commercial	membership.

•Services	revenue	increased	$28	million,	or	9.0%,	from	2016	to	$338	million	for	2017	primarily	due	to	service	revenue	growth	from	our	pharmacy	solutions business.

# Intersegment	revenues

•Intersegment	revenues	decreased	$1.4	billion,	or	5.6%,	from	2016	to	$23.6	billion	 for	2017	primarily	due	to	our	pharmacy	solutions	business	as	well	as	the result	of	the	optimization	process	associated	with	our	chronic	care	management	programs	discussed	previously,	as	well	as	lower	revenue	in	our	provider services	business	reflecting	lower	Medicare	rates	year-over-year	in	geographies	where	our	provider	assets	are	primarily	located.	Our	pharmacy	solutions business	revenues	were	impacted	by	improvements	in	net	pharmacy	costs	driven	by	our	pharmacy	benefit	manager	and	an	increase	in	the	generic	dispensing rate.	These	items	were	partially	offset	by	higher	year-over-year	script	volume	from	growth	in	our	Medicare	Advantage	and	standalone	PDP	membership, partially	offset	by	the	impact	of	lower	Individual	Commercial	membership.	Our	generic	dispensing	rate	improved	to	91.3%	during	2017	from	90.5%	during 2016.	The	higher	generic	dispensing	rate

reduced	revenues	(and	operating	costs)	for	our	pharmacy	solutions	business	as	generic	drugs	are	generally	priced	lower	than	branded	drugs.

•The	Healthcare	Services	segment	operating	cost	ratio	of	95.5% for	2017	 was relatively	unchanged from	95.2%	for 2016.

•Individual	commercial	medical	membership	decreased	526,000	members,	or	80.3%,	from	December	31,	2016	to	December	31,	2017	reflecting	the	decline	in	the number	of	counties	we	offered	on-exchange	coverage	and	the	discontinuance	of	offering	off-exchange	products.

•				The	Individual	Commercial	segment	benefit	ratio	of	57.4%	for	2017	decreased	from	107.7%	in	2016	primarily	due	to	the	reduction	of	premiums	related	to the	write-off	of	receivables	associated	with	the	commercial	risk	corridor	premium	stabilization	program,	as	well	as	the	planned	exits	in	2017	in	certain	markets that	carried	a	higher	benefit	ratio	and	per-member	premium	increases.

•The	Individual	Commercial	segment	operating	cost	ratio	of	21.2%	for	2017	increased	160	basis	points	from	2016	primarily	due	to	the	loss	of	scale	efficiency from	market	exits	in	2017,	partially	offset	by	the	write-off	of	receivables	associated	with	the	commercial	risk	corridor	premium	stabilization	program	and	the temporary	suspension	of	the	health	insurance	industry	fee	for	calendar	year	2017.

As	previously	disclosed,	 in	 the	fourth	quarter	of	2016,	we	 increased	future	policy	benefits	expense	by	approximately	$505	million	for	reserve	strengthening associated	with	our	closed	block	of	long-term	care	insurance	policies.	This	increase	primarily	was	driven	by	emerging	experience	indicating	longer	claims	duration,	a prolonged	lower	interest	rate	environment,	and	an	increase	in	policyholder	life	expectancies	as	discussed	further	in	Note	18	to	the	consolidated	financial	statements included	in	Item	8.	Financial	Statements	and	Supplementary	Data	in	this	2017	Form	10-K.

|  | 2016 | 2015 | Dollars | Percentage |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (dollars\tin\tmillions,\texcept\tper |  |  |
|  |  | common\tshare\tresults) |  |  |
| Revenues: |  |  |  |  |
| Premiums: |  |  |  |  |
| Retail | $43,223 | $41,605 | $1,618 | 3.9\t% |
| Group\tand\tSpecialty | 6,696 | 6,830 | (134) | (2.0)% |
| Individual\tCommercial | 3,064 | 3,939 | (875) | (22.2)% |
| Other\tBusinesses | 38 | 35 | 3 | 8.6\t% |
| Total\tpremiums | 53,021 | 52,409 | 612 | 1.2\t% |
| Services: |  |  |  |  |
| Retail | 6 | 8 | (2) | (25.0)% |
| Group\tand\tSpecialty | 643 | 658 | (15) | (2.3)% |
| Healthcare\tServices | 310 | 726 | (416) | (57.3)% |
| Other\tBusinesses | 10 | 14 | (4) | (28.6)% |
| Total\tservices | 969 | 1,406 | (437) | (31.1)% |
| Investment\tincome | 389 | 474 | (85) | (17.9)% |
| Total\trevenues | 54,379 | 54,289 | 90 | 0.2\t% |
| Operating\texpenses: |  |  |  |  |
| Benefits | 45,007 | 44,269 | 738 | 1.7\t% |
| Operating\tcosts | 7,173 | 7,295 | (122) | (1.7)% |
| Merger\ttermination\tfee\tand\trelated\tcosts,\tnet | 104 | 23 | 81 | 352.2\t% |
| Depreciation\tand\tamortization | 354 | 355 | (1) | (0.3)% |
| Total\toperating\texpenses | 52,638 | 51,942 | 696 | 1.3\t% |
| Income\tfrom\toperations | 1,741 | 2,347 | (606) | (25.8)% |
| Gain\ton\tsale\tof\tbusiness | — | 270 | (270) | (100.0)% |
| Interest\texpense | 189 | 186 | 3 | 1.6\t% |
| Income\tbefore\tincome\ttaxes | 1,552 | 2,431 | (879) | (36.2)% |
| Provision\tfor\tincome\ttaxes | 938 | 1,155 | (217) | (18.8)% |
| Net\tincome | $614 | $1,276 | $(662) | (51.9)% |
| Diluted\tearnings\tper\tcommon\tshare | $4.07 | $8.44 | $(4.37) | (51.8)% |
| Benefit\tratio\t(a) | 84.9% | 84.5% |  | 0.4\t% |
| Operating\tcost\tratio\t(b) | 13.3% | 13.6% |  | (0.3)% |
| Effective\ttax\trate | 60.5% | 47.5% |  | 13.0\t% |

Net	income	was	$614	million,	 or	$4.07	per	diluted	common	share,	in	2016	compared	 to	$1.3	billion,	 or	$8.44	per	diluted	common	share,	in	2015.	Net	income includes	 a	 write-off	 of	$2.43	 per	 diluted	 common	 share	 in	 receivables	 associated	 with	 the	 commercial	 risk	 corridor	 premium	 stabilization	 program	 and	 reserve strengthening	for	our	non-strategic	closed	block	of	long-term	care	insurance	business	of	$2.11	per	diluted	common	share,	as	discussed	below.	These	items	were	partially offset	 by	 the	 impact	 of	 the	 premium	 deficiency	 reserve	 of	$0.74	per	diluted	common	share	recorded	 in	 the	fourth	quarter	of	2015	for	certain	of	our	 individual commercial	medical	products	for	the	2016	coverage	year.	In	addition,	the	completion	of	the	sale	of	Concentra	on	June	1,	2015	resulted	in	an	after-tax	gain	of	$1.57	per diluted	common	share	in	2015.	Excluding	these	items,	the	increase	primarily	was	due	to	year-over-year	improvement	in	results	for	our	individual	Medicare	Advantage business	and	our	Healthcare	Services	segment	as	well	as	increased	profitability	in	our	state-based	Medicaid	business,	partially	offset	by	an	increase	in	the	effective	tax rate	as	discussed	below.	In	addition,	2016	includes	expenses	of	$0.64	per	diluted	common	share	and	2015	includes	expenses	of	$0.14	per	diluted	common	share	for transaction	and	integration	planning	costs	associated	with	the	Merger,	certain	of	which	were	not	deductible	for	tax	purposes	until	2017.

Consolidated	premiums	increased	$612	million,	or	1.2%,	from	2015	to	$53.0	billion	for	2016	primarily	reflecting	higher	premiums	in	the	Retail	segment	mainly driven	by	average	membership	growth	and	per	member	premium	increases	for	certain	of	our	lines	of	business.	These	increases	were	partially	offset	by	the	write-off	of $583	million	of	receivables	associated	with	the	commercial	risk	corridor	premium	stabilization	program,	the	loss	of	premiums	associated	with	a	large	group	Medicare account	that	moved	to	a	private	exchange	on	January	1,	2016,	and	a	decline	in	premiums	revenue	associated	with	fewer	individual	commercial	medical	members	as discussed	in	our	segment	results	of	operations	discussion	that	follows.	Average	membership	is	calculated	by	summing	the	ending	membership	for	each	month	in	a	period and	dividing	the	result	by	the	number	of	months	in	a	period.	Premiums	revenue	reflects	changes	in	membership	and	average	per	member	premiums.	Items	impacting average	per	member	premiums	include	changes	in	premium	rates	as	well	as	changes	in	the	geographic	mix	of	membership,	the	mix	of	product	offerings,	and	the	mix	of benefit	plans	selected	by	our	membership.

Consolidated	services	revenue	decreased	$437	million,	or	31.1%,	from	2015	to	$1.0	billion	for	2016	primarily	due	to	the	completion	of	the	sale	of	Concentra	on June	1,	2015.

Investment	income	totaled	$389	million	for	2016,	a	decrease	of	$85	million,	or	17.9%,	from	2015,	primarily	due	to	lower	realized	capital	gains	in	2016	and	lower interest	rates	partially	offset	by	a	higher	average	invested	balance.

Consolidated	benefits	expense	was	$45.0	billion	for	2016,	an	increase	of	$738	million,	or	1.7%,	from	2015	primarily	due	to	$505	million	in	incremental	benefits expense	for	the	reserve	strengthening	in	our	non-strategic	closed	block	of	long-term	care	insurance	policies	partially	offset	by	the	premium	deficiency	reserve	recorded in	the	fourth	quarter	of	2015	for	certain	of	our	individual	commercial	medical	products	for	the	2016	coverage	year.	Excluding	the	long-term	care	reserve	strengthening and	impact	of	the	premium	deficiency	reserve,	the	increase	is	primarily	due	to	an	increase	in	the	Retail	segment	mainly	driven	by	higher	average	individual	Medicare Advantage	membership.	As	more	fully	described	herein	under	the	section	entitled	"Benefits	Expense	Recognition",	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.	We	experienced	favorable medical	claims	reserve	development	related	to	prior	fiscal	years	of	$582	million	in	2016	and	$236	million	in	2015.	The	increase	in	prior-period	medical	claims	reserve development	year	over-year	primarily	was	due	to	favorable	year-over-year	comparisons	for	our	Medicare	Advantage	and	individual	commercial	medical	businesses.

The	consolidated	benefit	ratio	for	2016	 was	84.9%,	an	increase	 of	40	basis	points	from	2015	primarily	due	to	the	incremental	benefits	expense	for	the	reserve strengthening	in	our	non-strategic	closed	block	of	long-term	care	insurance	policies,	the	impact	on	the	benefit	ratio	of	lower	consolidated	premiums	associated	with	the write-off	of	receivables	for	the	commercial	risk	corridor	premium	stabilization	program,	and	the	impact	of	the	premium	deficiency	reserve	recorded	in	the	fourth	quarter of	2015	for	certain	of	our	individual	commercial	medical	products	for	the	2016	coverage	year.	Excluding	the	impact	of	the	write-off	of	the	commercial	risk	corridor receivables	and	the	premium	deficiency	reserve,	these	items	were	partially	offset	by	year-over-year	improvement	in	both	the	Retail	and	Group	and	Specialty	segment benefit	ratios	as	discussed	in	the	segment	results	of	operations	discussion	that	follows.	Favorable	prior-period	medical	claims	reserve	development	decreased	 the consolidated	benefit	ratio	by	approximately	110	basis	points	in	2016	versus	approximately	50	basis	points	in	2015.

Consolidated	operating	costs	decreased	$122	million,	or	1.7%,	from	2015	to	$7.2	billion	in	2016	primarily	due	to	the	completion	of	the	sale	of	Concentra	on	June	1,

The	consolidated	operating	cost	ratio	for	2016	was	13.3%,	decreasing	30	basis	points	from	2015	primarily	due	to	the	completion	of	the	sale	of	Concentra	on	June	1, 2015.	Concentra	carried	a	higher	operating	cost	ratio	than	our	Group	and	Specialty	and	Retail	segments.	This	was	partially	offset	by	the	unfavorable	year-over-year comparison	associated	with	the	temporary	suspension	of	certain	discretionary	administrative	costs	in	the	latter	half	of	2015,	along	with	the	impact	of	the	commercial	risk corridor	receivables	write-off	in	the	fourth	quarter	of	2016.

Our	effective	tax	rate	during	2016	 was	60.5%	compared	to	the	effective	tax	rate	of	47.5%	 in	2015	primarily	reflecting	lower	pretax	income	year-over-year,	the beneficial	effect	of	the	sale	of	Concentra	on	June	1,	2015	and	the	impact	of	non-deductible	transaction	costs	associated	with	the	Merger.	Non-deductible	transaction	and integration	 planning	 costs	 associated	 with	 the	 Merger	 increased	 our	 effective	 tax	 rate	 by	 approximately	3.4	 percentage	 points	 in	2016	 versus	 approximately	0.4 percentage	points	in	2015.	Conversely,	the	tax	effect	of	the	sale	of	Concentra	reduced	our	effective	tax	rate	by	approximately	4.5	percentage	points	in	2015.	See	Note	11 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.

The	effective	tax	rate	for	2016	also	reflects	tax	benefits	associated	with	adopting	new	guidance	related	to	the	accounting	for	employee	share-based	payments effective	January	1,	2016	as	described	in	Note	2	to	the	condensed	consolidated	financial	statements	included	in	this	report,	which	decreased	our	effective	tax	rate	by approximately	1.2	percentage	points	in	2016.

|  | 2016 | 2015 | Members | Percentage |
| :--- | :--- | :--- | :--- | :--- |
| Membership: |  |  |  |  |
| Medical\tmembership: |  |  |  |  |
| Individual\tMedicare\tAdvantage | 2,837,600 | 2,753,400 | 84,200 | 3.1\t% |
| Group\tMedicare\tAdvantage | 355,400 | 484,100 | (128,700) | (26.6)% |
| Medicare\tstand-alone\tPDP | 4,951,400 | 4,557,900 | 393,500 | 8.6\t% |
| Total\tRetail\tMedicare | 8,144,400 | 7,795,400 | 349,000 | 4.5\t% |
| State-based\tMedicaid | 388,100 | 373,700 | 14,400 | 3.9\t% |
| Medicare\tSupplement | 218,800 | 158,600 | 60,200 | 38.0\t% |
| Total\tRetail\tmedical\tmembers | 8,751,300 | 8,327,700 | 423,600 | 5.1\t% |

|  | 2016 | 2015 | Dollars | Percentage |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions) |  |  |
| Premiums\tand\tServices\tRevenue: |  |  |  |  |
| Premiums: |  |  |  |  |
| Individual\tMedicare\tAdvantage | $31,863 | $29,526 | $2,337 | 7.9\t% |
| Group\tMedicare\tAdvantage | 4,283 | 5,588 | (1,305) | (23.4)% |
| Medicare\tstand-alone\tPDP | 4,009 | 3,846 | 163 | 4.2\t% |
| Total\tRetail\tMedicare | 40,155 | 38,960 | 1,195 | 3.1\t% |
| State-based\tMedicaid | 2,640 | 2,341 | 299 | 12.8\t% |
| \t\t\t\t\t\t\t\t\t\tMedicare\tSupplement | 428 | 304 | 124 | 40.8\t% |
| Total\tpremiums | 43,223 | 41,605 | 1,618 | 3.9\t% |
| Services | 6 | 8 | (2) | (25.0)% |
| Total\tpremiums\tand\tservices\trevenue | $43,229 | $41,613 | $1,616 | 3.9\t% |
| Income\tbefore\tincome\ttaxes | $1,690 | $1,259 | $431 | 34.2\t% |
| Benefit\tratio | 85.1% | 86.7% |  | (1.6)% |
| Operating\tcost\tratio | 10.8% | 10.3% |  | 0.5\t% |

•Retail	segment	pretax	income	was	$1,690	million	in	2016,	an	increase	 of	$431	million,	 or	34.2%,	compared	to	2015	primarily	driven	by	the	year-over-year improvement	in	our	individual	Medicare	Advantage	and	state-based	Medicaid	businesses.

•Individual	Medicare	Advantage	membership	increased	84,200	members,	or	3.1%,	from	December	31,	2015	to	December	31,	2016	reflecting	net	membership additions,	particularly	for	our	HMO	offerings,	for	the	2016	plan	year.

•Group	Medicare	Advantage	membership	decreased	128,700	members,	or	26.6%,	from	December	31,	2015	to	December	31,	2016	reflecting	the	loss	of	a	large account	that	moved	to	a	private	exchange	offering	on	January	1,	2016.

•Medicare	 stand-alone	 PDP	 membership	increased	393,500	 members,	 or	8.6%,	 from	 December	 31,	2015 to	 December	 31,	2016	reflecting	net	membership additions,	primarily	for	our	Humana-Walmart	plan	offering,	for	the	2016	plan	year.

•State-based	Medicaid	membership	increased	14,400	members,	or	3.9%,	from	December	31,	2015	to	December	31,	2016	primarily	driven	by	the	addition	of members	under	our	Florida	Medicaid	contract.

•Retail	segment	premiums	increased	$1,618	million,	 or	3.9%,	 from	2015	 to	2016	primarily	due	to	higher	average	membership	for	our	individual	Medicare Advantage	and	state-based	Medicaid	businesses	and	per	member	premium	increases	for	certain	lines	of	business.	Average	individual	Medicare	Advantage membership	increased	3.9%	in	2016.

•The	 Retail	 segment	 benefit	 ratio	 of	85.1%	 for	2016	decreased	 160	 basis	 points from	2015	 primarily	 due to lower	 year-over-year	 Medicare	Advantage utilization,	and	favorable	comparisons	of	prior-year	medical	claims	reserve	development.

•The	Retail	segment's	benefits	expense	for	2016	included	the	beneficial	effect	of	$429	million	in	favorable	prior-year	medical	claims	reserve	development	versus $248	million in	2015.	This	favorable	prior-year	medical	claims	reserve	development	decreased	the	Retail	segment	benefit	ratio	by	approximately	100	basis points	in	2016	versus	approximately	60	basis	points	in	2015.	The	year-over-year	increase	in	prior-period	medical	claims	reserve	development	primarily	was	due to	favorable	year-over-year	comparisons	for	our	Medicare	Advantage	business.

•The	Retail	segment	operating	cost	ratio	of	10.8%	for	2016	increased	50	basis	points	from	2015	primarily	due	to	the	unfavorable	comparison	to	unusually	low operating	expenses	in	2015	resulting	from	the	temporary	suspension	of	certain	discretionary	administrative	costs,	and	the	loss	of	a	large	group	Medicare Advantage	account	which	carried	a	lower	operating	cost	ratio	than	that	for	our	individual	Medicare	Advantage	business.	The	non-deductible	health	insurance industry	fee	increased	the	operating	cost	ratio	by	approximately	170	basis	points	in	2016	as	compared	to	160	basis	points	in	2015.

|  | 2016 | 2015 | Members | Percentage |
| :--- | :--- | :--- | :--- | :--- |
| Membership: |  |  |  |  |
| Medical\tmembership: |  |  |  |  |
| Fully-insured\tcommercial\tgroup | 1,136,000 | 1,178,300 | (42,300) | (3.6)% |
| ASO | 573,200 | 710,700 | (137,500) | (19.3)% |
| Military\tservices | 3,084,100 | 3,074,400 | 9,700 | 0.3\t% |
| Total\tgroup\tmedical\tmembers | 4,793,300 | 4,963,400 | (170,100) | (3.4)% |
| Specialty\tmembership\t(a) | 6,961,200 | 7,221,800 | (260,600) | (3.6)% |

Change

|  | 2016 | 2015 | Dollars | Percentage |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions) |  |  |
| Premiums\tand\tServices\tRevenue: |  |  |  |  |
| Premiums: |  |  |  |  |
| Fully-insured\tcommercial\tgroup | $5,405 | $5,493 | $(88) | (1.6)% |
| Specialty | 1,279 | 1,316 | (37) | (2.8)% |
| Military\tservices | 12 | 21 | (9) | (42.9)% |
| Total\tpremiums | 6,696 | 6,830 | (134) | (2.0)% |
| Services | 643 | 658 | (15) | (2.3)% |
| Total\tpremiums\tand\tservices\trevenue | $7,339 | $7,488 | $(149) | (2.0)% |
| Income\tbefore\tincome\ttaxes | $344 | $321 | $23 | 7.2\t% |
| Benefit\tratio | 78.2% | 78.8% |  | (0.6)% |
| Operating\tcost\tratio | 23.5% | 23.4% |  | 0.1\t% |

•Group	 and	 Specialty	 segment	 pretax	 income	 was	$344	million in	2016, an	increase of	$23	million, or	7.2%, from	$321	 million in	2015	 driven	 by the improvement	in	the	benefit	ratio	as	discussed	below.

•Fully-insured	commercial	group	medical	membership	decreased	42,300	members,	or	3.6%	from	December	31,	2015	reflecting	lower	membership	in	both	large and	small	group	accounts.

•Group	ASO	commercial	medical	membership	decreased	137,500	members,	or	19.3%,	from	December	31,	2015	to	December	31,	2016	primarily	due	to	the	loss of	certain	large	group	accounts	as	a	result	of	continued	discipline	in	pricing	of	services	for	self-funded	accounts	amid	a	highly	competitive	environment.

•Specialty	membership	decreased	260,600	members,	or	3.6%,	from	December	31,	2015	to	December	31,	2016	primarily	due	to	the	loss	of	several	large	stand- alone	dental	and	vision	accounts	as	well	as	the	loss	of	certain	fully-insured	group	medical	accounts	that	also	had	specialty	coverage.	The	decrease	includes	the loss	of	certain	individual	commercial	medical	members	that	also	had	specialty	coverage.

•Group	and	Specialty	segment	premiums	decreased	$134	million,	or	2.0%,	from	2015	to	2016	primarily	due	to	a	decline	in	fully-insured	commercial	medical membership	as	described	above,	partially	offset	by	an	increase	in	fully-insured	commercial	medical	per	member	premiums.

•Group	and	Specialty	segment	services	revenue	decreased	$15	million,	or	2.3%,	from	2015	to	2016	primarily	due	to	a	decline	in	group	ASO	commercial	medical membership.

•The	Group	and	Specialty	segment	benefit	ratio	decreased	60	basis	points	from	78.8% in	2015 to	78.2% in	2016	primarily	reflecting	the	beneficial	effect	of higher	prior-year	medical	claims	reserve	development	in	2016	and	lower	utilization.

•The	Group	and	Specialty	segment's	benefits	expense	included	the	beneficial	effect	of	$46	million	in	favorable	prior-year	medical	claims	reserve	development	in 2016	versus	$7	million	in	2015.	This	favorable	prior-year

medical	claims	reserve	development	decreased	the	Group	and	Specialty	segment	benefit	ratio	by	approximately	70	basis	points	in	2016	versus	approximately	10 basis	points	in	2015.

•The	Group	and	Specialty	segment	operating	cost	ratio	of	23.5%	 for	2016	increased	10	basis	points	from	23.4%	 for	2015,	primarily	due	to	the	unfavorable comparison	to	unusually	low	operating	expenses	in	2015	resulting	from	the	temporary	suspension	of	certain	discretionary	administrative	costs.	The	non- deductible	health	insurance	industry	fee	increased	the	operating	cost	ratio	by	approximately	150	basis	points	in	2016	as	compared	to	140	basis	points	in	2015.

|  | 2016 | 2015 | Dollars | Percentage |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions) |  |  |
| Revenues: |  |  |  |  |
| Services: |  |  |  |  |
| Clinical\tcare\tservices | $201 | $181 | $20 | 11.0\t% |
| Provider\tservices | 78 | 515 | (437) | (84.9)% |
| Pharmacy\tsolutions | 31 | 30 | 1 | 3.3\t% |
| Total\tservices\trevenues | 310 | 726 | (416) | (57.3)% |
| Intersegment\trevenues: |  |  |  |  |
| Pharmacy\tsolutions | 21,952 | 20,551 | 1,401 | 6.8\t% |
| Provider\tservices | 1,677 | 1,291 | 386 | 29.9\t% |
| Clinical\tcare\tservices | 1,343 | 1,208 | 135 | 11.2\t% |
| Total\tintersegment\trevenues | 24,972 | 23,050 | 1,922 | 8.3\t% |
| Total\tservices\tand\tintersegment\trevenues | $25,282 | $23,776 | $1,506 | 6.3\t% |
| Income\tbefore\tincome\ttaxes | $1,096 | $1,022 | $74 | 7.2\t% |
| Operating\tcost\tratio | 95.2% | 95.0% |  | 0.2\t% |

•Healthcare	Services	segment	pretax	 income	of	$1,096	million	 for	2016	increased	$74	million,	 or	7.2%,	 from	2015	primarily	 due	 to	 incremental	 earnings associated	with	revenue	growth	from	our	pharmacy	solutions	business	as	it	increased	mail-order	penetration	and	served	our	growing	individual	Medicare membership.	The	increase	was	partially	offset	by	lower	earnings	in	our	provider	services	business	reflecting	significantly	lower	Medicare	rates	year-over-year associated	with	CMS'	risk	coding	recalibration	for	2016	in	geographies	where	our	provider	assets	are	primarily	located.

•Humana	Pharmacy	Solutions®	script	volumes	for	the	Retail	and	Group	and	Specialty	segment	membership	increased	to	approximately	426	million	in	2016,	up 7%	versus	scripts	of	approximately	398	million	in	2015.	The	increase	primarily	reflects	growth	associated	with	higher	average	medical	membership	for	2016 than	in	2015.

•Intersegment	revenues	increased	$1.9	billion,	or	8.3%,	from	2015	to	$25.0	billion	for	2016	primarily	due	to	increased	mail	order	penetration	and	growth	in	our individual	Medicare	Advantage	and	Medicare	stand-alone	PDP	membership	which	resulted	in	increased	engagement	of	members	in	clinical	programs	and higher	utilization	of	services	across	the	segment.

•The	Healthcare	Services	segment	operating	cost	ratio	of	95.2%	for	2016	increased	slightly	from	2015	primarily	due	to	a	higher	operating	cost	ratio	for	our provider	services	business	reflecting	significantly	 lower	Medicare	rates	year-over-year	as	discussed	above,	partially	offset	by	operating	cost	efficiencies associated	with	our	pharmacy	operations.

•In	2016,	our	Individual	Commercial	segment	pretax	loss	decreased	by	$436	million,	or	100.7%,	from	2015	primarily	driven	by	the	write-off	of	commercial	risk corridor	receivables,	partially	offset	by	the	impact	of	the	premium	deficiency	reserve	recorded	in	the	fourth	quarter	of	2015	associated	with	certain	individual commercial	medical	policies	from	the	2016	coverage	year.

•Individual	commercial	medical	membership	decreased	244,300	members,	or	27.2%,	from	December	31,	2015	to	December	31,	2016	primarily	reflecting	the loss	of	on-exchange	members	due	to	product	competitiveness,	the	loss	of	membership	associated	with	the	discontinuance	of	certain	Health	Care	Reform	Law compliant	plans	in	2016,	the	loss	of	membership	associated	with	non-payment	of	premiums	or	termination	by	CMS	due	to	lack	of	eligibility	documentation, and	the	loss	of	members	subscribing	to	plans	that	are	not	compliant	with	the	Health	Care	Reform	Law.

•The	Individual	Commercial	segment	benefit	ratio	of	107.7%	for	2016	increased	from	91.1%	in	2015	primarily	due	to	the	reduction	of	premiums	related	to	the write-off	of	receivables	associated	with	the	commercial	risk	corridor	premium	stabilization	program,	partially	offset	by	the	impact	of	the	premium	deficiency reserve	recorded	in	the	fourth	quarter	of	2015	for	certain	of	our	individual	commercial	medical	products	for	the	2016	coverage	year.	As	previously	disclosed,	in the	fourth	quarter	of	2015	we	recorded	a	premium	deficiency	reserve	associated	with	our	2016	individual	commercial	offerings	compliant	with	the	Health	Care Reform	Law.	During	2016,	we	increased	the	premium	deficiency	reserve	for	the	2016	coverage	year	and	recorded	a	change	in	estimate	of	$208	million	with	a corresponding	increase	in	benefits	expense	primarily	as	a	result	of	unfavorable	current	and	projected	claims	experience.

•The	Individual	Commercial	segment	operating	cost	ratio	of	19.6%	for	2016	increased	40	basis	points	from	2015	primarily	due	to	the	impact	on	premiums	of	the write-off	 of	 receivables	 associated	 with	 the	 commercial	 risk	 corridor	 premium	 stabilization	 program.	 The	 non-deductible	 health	 insurance	 industry	 fee increased	the	operating	cost	ratio	by	approximately	200	basis	points	in	2016	as	compared	to	170	basis	points	in	2015.

# Liquidity

Historically,	our	primary	sources	of	cash	have	included	receipts	of	premiums,	services	revenue,	and	investment	and	other	income,	as	well	as	proceeds	from	the	sale or	maturity	of	our	investment	securities,	borrowings,	and	proceeds	from	sales	of	businesses.	Our	primary	uses	of	cash	historically	have	included	disbursements	for claims	payments,	operating	costs,	 interest	on	borrowings,	 taxes,	purchases	of	 investment	securities,	acquisitions,	capital	expenditures,	repayments	on	borrowings, dividends,	and	share	repurchases.	Because	premiums	generally	are	collected	in	advance	of	claim	payments	by	a	period	of	up	to	several	months,	our	business	normally should	produce	positive	cash	flows	during	periods	of	increasing	premiums	and	enrollment.	Conversely,	cash	flows	would	be	negatively	impacted	during	periods	of decreasing	premiums	and	enrollment.	From	period	to	period,	our	cash	flows	may	also	be	affected	by	the	timing	of	working	capital	items	including	premiums	receivable, benefits	payable,	and	other	receivables	and	payables.	Our	cash	flows	are	impacted	by	the	timing	of	payments	to	and	receipts	from	CMS	associated	with	Medicare	Part	D subsidies	for	which	we	do	not	assume	risk.	The	use	of	cash	flows	may	be	limited	by	regulatory	requirements	of	state	departments	of	insurance	(or	comparable	state regulators)	which	require,	among	other	items,	that	our	regulated	subsidiaries	maintain	minimum	levels	of	capital	and	seek	approval	before	paying	dividends	from	the subsidiaries	to	the	parent.	Our	use	of	cash	flows	derived	from	our	non-insurance	subsidiaries,	such	as	in	our	Healthcare	Services	segment,	is	generally	not	restricted	by state	departments	of	insurance	(or	comparable	state	regulators).

The	effect	of	the	commercial	risk	adjustment,	risk	corridor,	and	reinsurance	provisions	of	the	Health	Care	Reform	Law	have	impacted	the	timing	of	our	operating cash	flows,	as	we	build	receivables	for	each	coverage	year	that	are	expected	to	be	collected	in	subsequent	coverage	years.	Net	collections	under	the	3Rs	associated	with prior	coverage	years	were	$440	million	in	2017	as	compared	to	$383	million	in	2016.	As	more	fully	described	in	Note	7	to	the	consolidated	financial	statements	included in	Item	8.	–	Financial	Statements	and	Supplementary	Data,	we	wrote	off	$583	million	in	risk	corridor	receivables	outstanding	as	of	September	30,	2016,	including	$415 million	associated	with	the	2014	and	2015	coverage	years.	From	inception	of	the	risk	corridor	program	through	December	31,	2017,	we	collected	approximately	$39 million	from	CMS	for	risk	corridor	receivables	associated	with	the	2014	coverage	year	funded	by	HHS	in	accordance	with	previous	guidance,	utilizing	funds	HHS collected	from	us	and	other	carriers	under	the	2014	and	2015	risk	corridor	program.	On	November	2,	2017,	we	filed	suit	against	the	United	States	of	America	in	the United	States	Court	of	Federal	Claims,	on	behalf	of	our	health	plans	seeking	recovery	from	the	federal	government	of	approximately	$611	million	in	payments	under	the risk	corridor	premium	stabilization	program	established	under	the	Health	Care	Reform	Law,	for	years	2014,	2015	and	2016.The	remaining	net	receivable	balance associated	with	the	3Rs	was	approximately	$31	million	at	December	31,	2017,	including	the	$44	million	reinsurance	receivable	related	to	the	2016	coverage	year,	as compared	to	$456	million	at	December	31,	2016.	The	remaining	net	receivable	balance	is	primarily	related	to	our	Individual	Commercial	medical	business	which	we have	exited	January	1,	2018.

For	additional	information	on	our	liquidity	risk,	please	refer	to	Item	1A.	–	Risk	Factors	in	this	2017	Form	10-K.

Cash	and	cash	equivalents	increased	to	$4.0	billion	at	December	31,	2017	from	$3.9	billion	at	December	31,	2016.	The	change	in	cash	and	cash	equivalents	for	the years	ended	December	31,	2017,	2016	and	2015	is	summarized	as	follows:

| Net	cash	provided	by	operating	activities | $4,051 | $1,936 | $868 |
| :--- | :--- | :--- | :--- |
| \t\t\t\tNet\tcash\t(used\tin)\tprovided\tby\tinvesting\tactivities | (2,941) | (1,362) | 320 |
| \t\t\t\tNet\tcash\t(used\tin)\tprovided\tby\tfinancing\tactivities | (945) | 732 | (552) |
| Increase\tin\tcash\tand\tcash\tequivalents | $165 | $1,306 | $636 |

# Cash	Flow	from	Operating	Activities

The	change	in	operating	cash	flows	over	the	three	year	period	primarily	results	from	the	corresponding	change	in	the	timing	of	working	capital	items,	earnings,	and enrollment	activity	as	discussed	below.	The	increase	in	operating	cash	flows	in	2017	primarily	was	due	to	the	receipt	of	the	merger	termination	fee,	net	of	related expenses	and	taxes	paid,	higher	earnings	and	the	timing	of	working	capital	items.	The	increase	in	operating	cash	flows	in	2016	primarily	was	due	to	the	timing	of working	capital	items	and	higher	earnings	exclusive	of	the	commercial	risk	corridor	receivables	write-off	and	the	long-term	care	reserve	strengthening	in	2016,	as	well as	the	gain	on	sale	of	Concentra	and	the	recognition	of	the	premium	deficiency	reserve	in	2015	discussed	previously.

The	most	significant	drivers	of	changes	in	our	working	capital	are	typically	the	timing	of	payments	of	benefits	expense	and	receipts	for	premiums.	We	illustrate these	changes	with	the	following	summaries	of	benefits	payable	and	receivables.

|  | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (in\tmillions) |  |  |  |
| IBNR\t(1) | $3,154 | $3,422 | $3,730 | $(268) | $(308) | $476 |
| Reported\tclaims\tin\tprocess\t(2) | 614 | 654 | 600 | (40) | 54 | 125 |
| Premium\tdeficiency\treserve\t(3) | — | — | 176 | — | (176) | 176 |
| Other\tbenefits\tpayable\t(4) | 900 | 487 | 470 | 413 | 17 | (276) |
| Total\tbenefits\tpayable | $4,668 | $4,563 | $4,976 | $105 | $(413) | $501 |

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

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

(3) Premium	deficiency	reserve	recognized	for	our	individual	commercial	medical	business	compliant	with	the	Health	Care	Reform	Law	associated	with	the	2016 coverage	year.

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

The	increase	in	benefits	payable	in	2017	largely	was	due	to	an	increase	in	amounts	owed	under	capitated,	risk	sharing,	and	quality	incentive	arrangements,	partially offset	 by	a	decrease	in	IBNR.	Benefits	payable	decreased	in	2016	primarily	due	to	a	decrease	in	IBNR,	as	well	as	the	application	of	2016	results	to	the	premium deficiency	reserve	liability	recognized	in	2015	associated	with	our	individual	commercial	medical	products	compliant	with	the	Health	Care	Reform	Law	for	the	2016 coverage	year.	There	was	no	premium	deficiency	reserve	liability	at	December	31,	2016	or	2017.	The	increase	in	benefits	payable	in	2015	largely	was	due	to	increases	in IBNR	and	in	the	amount	of	processed	but	unpaid	claims	due	to	our	pharmacy	benefit	administrator,	which	fluctuates	due	to	month-end	cutoff.	These	items	were	partially offset	by	a	decrease	in	amounts	owed	to	providers	under	capitated	and	risk	sharing	arrangements	in	2015,	including	the	disbursement	of	a	portion	of	our	Medicare	risk adjustment	collections	under	our	contractual	obligations	associated	with	our	risk	sharing	arrangements.	In	addition,	benefits	payable	in	2015	reflects	the	recognition	of the	premium	deficiency	reserve	discussed	previously.

IBNR	decreased	during	2017	and	2016	primarily	due	to	declines	in	individual	and	fully-insured	group	commercial	membership.	The	decrease	in	IBNR	during	2016 was	also	impacted	by	declines	in	group	Medicare	Advantage.	IBNR	increased	during	2015	primarily	as	a	result	of	individual	Medicare	Advantage	membership	growth. As	discussed	previously,	our	cash	flows	are	impacted	by	changes	in	enrollment.	The	decline	in	membership	experienced	in	2017	and	2016	negatively	impacted	operating cash	flows	for	those	years.

|  | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (in\tmillions) | (in\tmillions) |  |  |
| Medicare | $511 | $787 | $765 | $(276) | $22 | $101 |
| Commercial\tand\tother | 273 | 579 | 420 | (306) | 159 | 39 |
| Military\tservices | 166 | 32 | 77 | 134 | (45) | (29) |
| Allowance\tfor\tdoubtful\taccounts | (96) | (118) | (101) | 22 | (17) | (3) |
| Total\tnet\treceivables | $854 | $1,280 | $1,161 | (426) | 119 | 108 |
| Reconciliation\tto\tcash\tflow\tstatement: |  |  |  |  |  |  |
| Provision\tfor\tdoubtful\taccounts |  |  | 20 | 20 | 39 | 61 |
| Change\tin\treceivables\tacquired, |  |  |  |  |  |  |
| held-for-sale,\tor\tdisposed |  |  |  |  |  |  |
| from\tsale\tof\tbusiness |  |  |  | — | — | 11 |
| Change\tin\treceivables\tper\tcash\tflow |  |  |  |  |  |  |
| statement\tresulting\tin\tcash\tfrom |  |  |  |  |  |  |
| operations |  |  |  | $(406) | $158 | $180 |

Medicare	receivables	are	impacted	by	changes	in	revenue	associated	with	individual	and	group	Medicare	membership	changes	as	well	as	the	timing	of	accruals	and related	collections	associated	with	the	CMS	risk-adjustment	model.

The	decrease	in	commercial	and	other	receivables	in	2017	as	compared	to	2016	primarily	was	due	to	a	decrease	in	our	receivable	associated	with	the	commercial risk	adjustment	provision	of	the	Health	Care	Reform	Law.	The	increases	in	commercial	and	other	receivables	in	2016	and	2015	primarily	reflect	increases	in	our receivable	associated	with	the	commercial	risk	adjustment	provision	of	the	Health	Care	Reform	Law.

Military	services	receivables	at	December	31,	2017,	2016,	and	2015	primarily	consist	of	administrative	services	only	fees	owed	from	the	federal	government	for administrative	services	provided	under	our	TRICARE	South	Region	contract.	The	2017	balance	also	includes	transition-in	receivables	under	our	T2017	East	Region contract	with	collection	scheduled	in	2018.

Many	provisions	of	the	Health	Care	Reform	Law	became	effective	in	2014,	including	the	commercial	risk	adjustment,	risk	corridor,	and	reinsurance	provisions	as well	as	the	non-deductible	health	insurance	industry	fee.	As	discussed	previously,	the	timing	of	payments	and	receipts	associated	with	these	provisions	impacted	our operating	cash	flows	as	we	built	receivables	for	each	coverage	year	that	were	expected	to	be	collected	in	subsequent	coverage	years.	Net	collections	under	the	3Rs associated	with	prior	coverage	years	were	$440	million	as	compared	to	net	collections	of	$383	million	in	2016.	The	net	receivable	balance	associated	with	the	3Rs	was approximately	$31	million	at	December	31,	2017,	including	certain	amounts	recorded	in	receivables	as	noted	above.	The	annual	health	insurance	industry	fee	was suspended	for	the	calendar	year	2017,	but	has	resumed	in	calendar	year	2018.	The	annual	health	insurance	industry	fee	was	also	suspended	for	the	calendar	year	2019 and	is	scheduled	to	resume	in	calendar	year	2020.	We	paid	the	federal	government	annual	health	insurance	industry	fees	of	$916	million	in	2016	and	$867	million	in 2015.	We	have	exited	our	individual	commercial	medical	business	effective	January	1,	2018.

In	addition	to	the	timing	of	payments	of	benefits	expense,	receipts	for	premiums	and	services	revenues,	and	amounts	due	under	the	risk	limiting	and	health	insurance industry	fee	provisions	of	the	Health	Care	Reform	Law,	other	items	impacting	operating	cash	flows	include	income	tax	payments	and	the	timing	of	payroll	cycles resulting	in	one	less	payroll	cycle	in	2016	than	in	2015.

# Cash	Flow	from	Investing	Activities

Our	ongoing	capital	expenditures	primarily	relate	to	our	information	technology	initiatives,	support	of	services	in	our	provider	services	operations	including	medical and	administrative	facility	improvements	necessary	for	activities	such	as	the	provision	of	care	to	members,	claims	processing,	billing	and	collections,	wellness	solutions, care	coordination,	regulatory	compliance	and	customer	service.	Total	capital	expenditures,	excluding	acquisitions,	were	$526	million	in	2017,	$527	million	in	2016,	and $523	million	in	2015.

We	reinvested	a	portion	of	our	operating	cash	flows	in	investment	securities,	primarily	investment-grade	fixed	income	securities,	totaling	$2.4	billion	in	2017	and $828	million	in	2016.	Proceeds	from	sales	and	maturities	of	investment	securities	exceeded	purchases	by	$103	million	in	2015.	These	net	proceeds	were	used	to	fund normal	working	capital	needs	due	to	an	increase	in	receivables	associated	with	the	3Rs	in	addition	to	the	timing	of	payments	to	and	receipts	from	CMS	associated	with Medicare	Part	D	reinsurance	subsidies,	as	discussed	below.

In	2015,	we	purchased	a	$284	million	note	receivable	directly	from	a	third-party	bank	syndicate	related	to	the	financing	of	MCCI	Holdings,	LLC's	business	as described	in	Note	2	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.	The	purchase	of	this	note	is	included with	purchases	of	investment	securities	in	our	consolidated	statement	of	cash	flows.

On	June	1,	2015,	we	completed	the	sale	of	Concentra	for	approximately	$1,055	million	in	cash,	excluding	approximately	$22	million	of	transaction	costs.

Cash	consideration	paid	for	acquisitions,	net	of	cash	acquired,	was	$31	million	in	2017,	$7	million in	2016,	 and	$38	million in	2015.	Acquisitions	in	each	year included	Healthcare	Services	segment	related	acquisitions.

# Cash	Flow	from	Financing	Activities

Our	financing	cash	flows	are	significantly	impacted	by	the	timing	of	claims	payments	and	the	related	receipts	from	CMS	associated	with	Medicare	Part	D	claim subsidies	for	which	we	do	not	assume	risk.	Monthly	prospective	payments	from	CMS	for	reinsurance	and	low-income	cost	subsidies	are	based	on	assumptions	submitted with	our	annual	bid.	Settlement	of	the	reinsurance	and	low-income	cost	subsidies	is	based	on	a	reconciliation	made	approximately	9	months	after	the	close	of	each calendar	year.	Receipts	from	CMS	associated	with	Medicare	Part	D	claim	subsidies	for	which	we	do	not	assume	risk	were	$1.9	billion	higher	than	claims	payments during	2017	 and	 were	$1.1	billion	 higher	 than	claims	 payments	 during	2016.	Claim	 payments	 were	$361	million	higher	than	receipts	from	CMS	associated	with Medicare	Part	D	claims	subsidies	for	which	we	do	not	assume	risk	during	2015.	In	2015,	we	experienced	higher	specialty	prescription	drug	costs	associated	with	a	new treatment	for	Hepatitis	C	than	were	contemplated	in	our	bids	which	resulted	in	higher	subsidy	receivable	balances	under	the	terms	of	our	contracts	with	CMS.	Our	net payable	for	CMS	subsidies	and	brand	name	prescription	drug	discounts	was	$1.0	billion	at	December	31,	2017	compared	to	a	net	receivable	of	$0.9	billion	at	December 31,	2016.	Refer	to	Note	6	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.

Under	our	administrative	services	only	TRICARE	South	Region	contract,	reimbursements	from	the	federal	government	exceeded	health	care	cost	payments	for which	we	do	not	assume	risk	by	$11	million	in	2017.	Health	care	cost	payments	for	which	we	do	not	assume	risk	exceeded	reimbursements	from	the	federal	government by	$25	million	in	2016	and	$4	million	in	2015.

Claims	payments	associated	with	cost	sharing	provisions	of	the	Health	Care	Reform	Law	for	which	we	do	not	assume	risk	were	higher	than	reimbursements	from HHS	 by	$44	million	 in	2017	and	by	$28	million	 in	2016.	Claim	payments	were	less	than	reimbursements	by	$69	million	 in	2015.	See	Note	2	to	the	consolidated financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data	for	further	description.

We	repurchased	12.99	million	shares	for	$3.05	billion	in	2017	 and	1.85	million	shares	for	$329	million	 in	2015	under	share	repurchase	plans	authorized	by	the Board	of	Directors.	We	did	not	repurchase	shares	in	2016	due	to	restrictions	under	the	Merger	Agreement.	We	also	acquired	common	shares	in	connection	with employee	stock	plans	for	an	aggregate	cost	of	$115	million	in	2017,	$104	million	in	2016,	and	$56	million	in	2015.

We	entered	into	a	commercial	paper	program	in	October	2014.	Net	repayments	of	commercial	paper	were	$153	million	in	2017	and	the	maximum	principal	amount outstanding	 at	 any	 one	 time	 during	2017	 was	$500	million.	 Net	 repayments	 of	 commercial	 paper	 were	$2	million	 in	2016	 and	 the	 maximum	 principal	 amount outstanding	at	any	one	time	during	2016	was	$475	million.	Net	proceeds	from	the	issuance	of	commercial	paper	were	$298	million	in	2015	and	the	maximum	principal amount	outstanding	at	any	one	time	during	2015	was	$414	million.

In	March	2017,	we	issued	$600	million	of	3.95%	senior	notes	due	March	15,	2027	and	$400	million	of	4.80%	senior	notes	due	March	15,	2047.	Our	net	proceeds, reduced	for	the	underwriters'	discount	and	commission	and	offering	expenses	paid	as	of	March	31,	2017,	were	$991	million.	The	net	proceeds	from	these	issuances	are being	used	for	general	corporate	purposes.

In	December	2017,	we	issued	$400	million	of	2.50%	senior	notes	due	December	15,	2020	and	$400	million	of	2.90%	senior	notes	due	December	15,	2022.	Our	net proceeds,	reduced	for	the	underwriters'	discount	and	commission	and	offering	expenses	paid	as	of	December	31,	2017,	were	$794	million.	We	used	the	net	proceeds, together	with	available	cash,	to	fund	the	redemption	of	our	$300	million	aggregate	principal	amount	of	6.30%	senior	notes	maturing	in	August	2018	and	our	$500 million	aggregate	principal	amount	of	7.20%	senior	notes	maturing	in	June	2018	at	100%	of	the	principal	amount	plus	applicable	premium	for	early	redemption	and accrued	and	unpaid	interest	to	the	redemption	date,	for	cash	totaling	approximately	$829	million.

The	remainder	of	the	cash	used	in	or	provided	by	financing	activities	in	2017,	2016,	and	2015	primarily	resulted	from	proceeds	from	stock	option	exercises	and	the change	in	book	overdraft.

# Future	Sources	and	Uses	of	Liquidity

For	a	detailed	discussion	of	dividends	to	stockholders,	please	refer	to	Note	15	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and Supplementary	Data.

# Stock	Repurchases

For	a	detailed	discussion	of	stock	repurchases,	please	refer	to	Note	15	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and Supplementary	Data.

For	a	detailed	discussion	of	our	debt,	including	our	senior	notes,	credit	agreement	and	commercial	paper	program,	please	refer	to	Note	12	to	the	consolidated financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.

# Acquisitions	&	Divestitures

On	November	6,	2017,	we	entered	into	a	definitive	agreement	to	sell	the	stock	of	our	wholly-owned	subsidiary	KMG	to	CGIC,	a	Texas-based	insurance	company wholly	owned	by	HC2	Holdings,	Inc.,	a	diversified	holding	company.	KMG's	subsidiary,	KIC,	includes	our	closed	block	of	non-strategic	commercial	long-term	care insurance	policies.	We	will	fund	the	transaction	with	approximately	$203	million	of	parent	company	cash	contributed	into	KMG,	subject	to	customary	adjustments,	in addition	to	the	transfer	of	approximately	$150	million	of	statutory	capital	with	the	sale.	The	KMG	transaction	is	anticipated	to	close	by	the	third	quarter	of	2018	subject to	customary	closing	conditions,	including	South	Carolina	Department	of	Insurance	approval.	There	can	be	no	assurance	we	will	obtain	regulatory	approvals	needed	to sell	the	business	or	do	so	under	terms	acceptable	to	us.

On	December	19,	2017,	we	announced	that	we	have	entered	into	a	definitive	agreement	to	acquire	a	40%	minority	interest	in	the	Kindred	at	Home	Division (Kindred	at	Home)	of	Kindred	Healthcare,	Inc.	(Kindred)(NYSE:	KND),	the	nation's	largest	home	health	provider	and	second	largest	hospice	operator,	for	estimated cash	consideration	of	approximately	$800	million,	including	our	share	of	transaction	and	related	expenses,	to	facilitate	a	complete	separation	from	the	Long	Term	Acute Care	and	Rehabilitation	businesses	(the	Specialty	Hospital	company).	The	Kindred	transaction,	which	is	anticipated	to	close	in	the	summer	of	2018,	is	subject	to customary	state	and	federal	regulatory	approvals,	including	approval	by	the	stockholders	of	Kindred	and	the	expiration	of	the	waiting	period	under	the	Hart-Scott- Rodino	Antitrust	Improvement	Act	of	1976,	as	amended,	as	well	as	other	customary	closing	conditions.	We	expect	to	fund	the	transaction	through	the	use	of	parent company	cash	and	will	account	for	the	minority	investment	under	the	equity	method.	The	pending	transaction	did	not	have	a	material	impact	to	earnings	in	2017.

For	a	detailed	discussion	of	the	above	please	refer	to	Note	2	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary

# Data.

# Liquidity	Requirements

We	believe	our	cash	balances,	investment	securities,	operating	cash	flows,	and	funds	available	under	our	credit	agreement	and	our	commercial	paper	program	or from	other	public	or	private	financing	sources,	taken	together,	provide	adequate	resources	to	fund	ongoing	operating	and	regulatory	requirements,	acquisitions,	future expansion	opportunities,	and	capital	expenditures	for	at	least	the	next	twelve	months,	as	well	as	to	refinance	or	repay	debt,	and	repurchase	shares.

Adverse	changes	in	our	credit	rating	may	increase	the	rate	of	interest	we	pay	and	may	impact	the	amount	of	credit	available	to	us	in	the	future.	Our	investment- grade	credit	rating	at	December	31,	2017	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	$2	million,	up	to	a	maximum	100	basis	points,	or annual	interest	expense	by	$8	million.

In	addition,	we	operate	as	a	holding	company	in	a	highly	regulated	industry.	Humana	Inc.,	our	parent	company,	is	dependent	upon	dividends	and	administrative expense	reimbursements	from	our	subsidiaries,	most	of	which	are	subject	to	regulatory	restrictions.	We	continue	to	maintain	significant	levels	of	aggregate	excess statutory	capital	and	surplus	in	our	state-regulated	operating	subsidiaries.	Cash,	cash	equivalents,	and	short-term	investments	at	the	parent	company	decreased	to	$688 million	at	December	31,	2017	 from	$2.0	billion	 at	 December	 31,	2016.	This	decrease	primarily	reflects	common	stock	repurchases,	insurance	subsidiaries'	capital contributions	and	capital	expenditures,	partially	offset	by	insurance	subsidiaries	dividends,	non-insurance	subsidiaries'	profits	and	net	proceeds	from	debt	issuance.	Our use	of	operating	cash	derived	from	our	non-insurance	subsidiaries,	such	as	our	Healthcare	Services	segment,	is	generally	not	restricted	by	Departments	of	Insurance	(or comparable	state	regulatory	agencies).	Our	regulated	subsidiaries	paid	dividends	to	the	parent	of	$1.4	billion	in	2017,	$763	million	in	2016,	and	$493	million	in	2015. Subsidiary	dividends	in	2015	reflect	the	impact	of	losses	for	our	individual	commercial	medical	business	compliant	with	the	Health	Care	Reform	Law	and	the	November 5,	2015	revised	statutory	accounting	guidance	requiring	the	exclusion	of	risk	corridor	receivables	from	related	statutory	surplus.	Refer	to	our	parent	company	financial statements	and	accompanying	notes	in	Schedule	I	-	Parent	Company	Financial	Information.	Excluding	Puerto	Rico	subsidiaries,	the	amount	of	ordinary	dividends	that may	be	paid	to	our	parent	company	in	2018	is	approximately	$1.1	billion,	in	the	aggregate.	Actual	dividends	paid	may	vary	due	to	consideration	of	excess	statutory capital	and	surplus	and	expected	future	surplus	requirements	related	to,	for	example,	premium	volume	and	product	mix.

Our	parent	company	funded	a	subsidiary	capital	contribution	of	approximately	$535	million	in	the	first	quarter	of	2017	for	reserve	strengthening	associated	with our	closed	block	of	long-term	care	insurance	policies	discussed	further	in	Note	18	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements and	Supplementary	Data.

# Regulatory	Requirements

For	a	detailed	discussion	of	our	regulatory	requirements,	including	aggregate	statutory	capital	and	surplus	as	well	as	dividends	paid	from	the	subsidiaries	to	the parent,	please	refer	to	Note	15	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.

# Contractual	Obligations

We	are	contractually	obligated	to	make	payments	for	years	subsequent	to	December	31,	2017	as	follows:

|  |  | Less	than |  |  | More	than |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Total | 1\tYear | 1-3\tYears | 3-5\tYears | 5\tYears |
|  |  |  | (in\tmillions) |  |  |
| Debt | $4,950 | $150 | $1,200 | $600 | $3,000 |
| Interest\t(1) | 3,021 | 200 | 379 | 347 | 2,095 |
| Operating\tleases\t(2) | 519 | 152 | 218 | 97 | 52 |
| Purchase\tobligations\t(3) | 429 | 226 | 188 | 15 | — |
| Future\tpolicy\tbenefits\tpayable\tand\tother\tlong-term\tliabilities\t(4) | 3,396 | 91 | 482 | 208 | 2,615 |
| Total | $12,315 | $819 | $2,467 | $1,267 | $7,762 |

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

(2) We	lease	facilities,	computer	hardware,	and	other	furniture	and	equipment	under	long-term	operating	leases	that	are	noncancelable	and	expire	on	various	dates through	2046.	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	19	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	of	December	31,	2017,	we	were	not	involved	in	any	special	purpose	entity,	or	SPE,	transactions.	For	a	detailed	discussion	of	off-balance	sheet	arrangements, please	refer	to	Note	16	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.

# Guarantees	and	Indemnifications

For	a	detailed	discussion	of	our	guarantees	and	indemnifications,	please	refer	to	Note	16	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial Statements	and	Supplementary	Data.

# Government	Contracts

For	a	detailed	discussion	of	our	government	contracts,	including	our	Medicare,	Military,	and	Medicaid	contracts,	please	refer	to	Note	16	to	the	consolidated financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.

# Other

On	February	14,	2017,	we	and	Aetna	agreed	to	mutually	terminate	the	Merger	Agreement,	as	our	Board	determined	that	an	appeal	of	the	Court's	ruling	would	not	be in	the	best	interest	of	our	stockholders.	On	February	16,	2017,	under	the	terms	of	the	Merger	Agreement,	we	received	a	breakup	fee	of	$1	billion.

# 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	primarily	related	to	benefits	expense	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.

# Benefits	Expense	Recognition

Benefits	expense	is	recognized	in	the	period	in	which	services	are	provided	and	includes	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,	2017 | Percentage<br>of	Total | December	31,	2016 | Percentage<br>of	Total |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (dollars\tin\tmillions) | (dollars\tin\tmillions) |  |
| IBNR | $3,154 | 67.6% | $3,422 | 75.0% |
| Reported\tclaims\tin\tprocess | 614 | 13.1% | 654 | 14.3% |
| Other\tbenefits\tpayable | 900 | 19.3% | 487 | 10.7% |
| Total\tbenefits\tpayable | $4,668 | 100.0% | $4,563 | 100.0% |

Our	reserving	practice	 is	 to	consistently	recognize	 the	actuarial	best	point	estimate	within	a	 level	of	confidence	required	by	actuarial	standards.	For	further discussion	of	our	reserving	methodology,	including	our	use	of	completion	and	claims	per	member	per	month	trend	factors	to	estimate	IBNR,	refer	to	Note	2	to	the consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.

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	two	months	is	generally	less	variable	than	the	portion	of	IBNR	estimated	using	trend	factors.	The following	table	illustrates	the	sensitivity	of	these	factors	assuming	moderately	adverse	experience	and	the	estimated	potential	impact	on	our	operating	results	caused	by reasonably	likely	changes	in	these	factors	based	on	December	31,	2017	data:

(a) Reflects	estimated	potential	changes	in	benefits	payable	at	December	31,	2017	caused	by	changes	in	completion	factors	for	incurred	months	prior	to	the	most recent	two	months.

(b) Reflects	estimated	potential	changes	in	benefits	payable	at	December	31,	2017	caused	by	changes	in	annualized	claims	trend	used	for	the	estimation	of	per member	per	month	incurred	claims	for	the	most	recent	two	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	benefits	expense	as	well	as	adjustments	to	prior	year	estimated	accruals.	Refer	to Note	10	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data	for	Retail,	Group	and	Specialty,	and	Individual Commercial	segment	tables	including	information	about	incurred	and	paid	claims	development	as	of	December	31,	2017,	net	of	reinsurance,	as	well	as	cumulative claim	frequency	and	the	total	of	IBNR	included	within	the	net	incurred	claims	amounts.

| Balances	at	January	1 | $4,563 | $4,976 | $4,475 |
| :--- | :--- | :--- | :--- |
| Less:\tPremium\tdeficiency\treserve | — | (176) | — |
| Less:\tReinsurance\trecoverables | (76) | (85) | (78) |
| Balances\tat\tJanuary\t1,\tnet | 4,487 | 4,715 | 4,397 |
| Incurred\trelated\tto: |  |  |  |
| Current\tyear | 44,001 | 45,318 | 44,397 |
| Prior\tyears | (483) | (582) | (236) |
| Total\tincurred | 43,518 | 44,736 | 44,161 |
| Paid\trelated\tto: |  |  |  |
| Current\tyear | (39,496) | (40,852) | (39,802) |
| Prior\tyears | (3,911) | (4,112) | (4,041) |
| Total\tpaid | (43,407) | (44,964) | (43,843) |
| Premium\tdeficiency\treserve | — | — | 176 |
| Reinsurance\trecoverable | 70 | 76 | 85 |
| Balances\tat\tDecember\t31 | \t $4,668 | \t $4,563 | \t $4,976 |

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	benefits	expense	ultimately	incurred	as	determined	from	subsequent	claim	payments.

|  | Amount | Factor<br>Change	(a) | Amount | Factor<br>Change	(a) | Amount | Factor<br>Change	(a) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (dollars\tin\tmillions) |  |  |  |
| Trend\tfactors | $(279) | (2.6)% | $(316) | (2.9)% | $(145) | (1.5)% |
| Completion\tfactors | (204) | 0.7\t% | (266) | 0.9\t% | (91) | 0.4\t% |
| Total | $(483) |  | $(582) |  | $(236) |  |

(a) The	factor	change	indicated	represents	the	percentage	point

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.	We	experienced	favorable	medical	claims	reserve	development	related	to	prior	fiscal	years	of	$483	million	in	2017,	$582	million	in	2016,	and	$236	million in	2015.	The	table	below	details	our	favorable	medical	claims	reserve	development	related	to	prior	fiscal	years	by	segment	for	2017,	2016,	and	2015.

|  |  | Favorable	Medical	Claims	Reserve<br>Development |  | Change |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | 2015 | 2017 | 2016 |
|  |  |  | (in\tmillions) |  |  |
| Retail\tSegment | $(386) | $(429) | $(248) | $43 | $(181) |
| Group\tand\tSpecialty\tSegment | (40) | (46) | (7) | 6 | (39) |
| Individual\tCommercial\tSegment | (56) | (106) | 20 | 50 | (126) |
| Other\tBusinesses | (1) | (1) | (1) | — | — |
| Total | $(483) | $(582) | $(236) | $99 | $(346) |

The	favorable	medical	claims	reserve	development	for	2017,	2016,	and	2015	primarily	reflects	the	consistent	application	of	trend	and	completion	factors	estimated using	an	assumption	of	moderately	adverse	conditions.	Our	favorable	development	for	each	of	 the	years	presented	above	 is	discussed	further	 in	Note	10	 to	 the consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.

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,	2017	estimates	would	fall	towards	the	middle	of	the	ranges	previously	presented	in	our	sensitivity	table.

Benefits	expense	excluded	from	the	previous	table	was	as	follows	for	the	years	ended	December	31,	2017,	2016	and	2015:

| Premium	deficiency	reserve	for	short-duration	policies | $— | $(176) | $176 |
| :--- | :--- | :--- | :--- |
| Military\tservices | — | 8 | 12 |
| Future\tpolicy\tbenefits | (22) | 439 | (80) |
| Total | $(22) | $271 | $108 |

In	the	fourth	quarter	of	2015,	we	recognized	a	premium	deficiency	reserve	for	our	individual	commercial	medical	business	compliant	with	the	Health	Care	Reform Law	associated	with	the	2016	coverage	year	as	discussed	in	more	detail	in	Note	7	to	the	consolidated	financial	statements	included	in	Item	8.	–	Financial	Statements	and Supplementary	Data.

Military	services	benefits	expense	for	each	year	in	the	table	above	reflect	expenses	associated	with	our	contracts	with	the	Veterans	Administration.

The	higher	benefits	expense	associated	with	future	policy	benefits	payable	during	2016	primarily	relates	to	reserve	strengthening	for	our	closed	block	of	long-term care	insurance	policies	acquired	in	connection	with	the	2007	KMG	acquisition	as	more	fully	described	below	and	in	Note	18	to	the	consolidated	financial	statements included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.	Certain	health	policies	sold	to	individuals	prior	to	2014	(the	first	year	plans	compliant	with	the Health	Care	Reform	Law	were	effective)	are	accounted	for	as	long-duration	as	more	fully	described	below.	Benefits	expense	associated	with	future	policy	benefits payable	in	2015	primarily	reflects	the	release	of	reserves	as	individual	commercial	medical	members	transitioned	to	plans	compliant	with	the	Health	Care	Reform	Law.

Future	policy	benefits	payable	of	$2.9	billion	and	$2.8	billion	at	December	31,	2017	and	2016,	respectively,	represent	liabilities	for	long-duration	insurance	policies including	long-term	care	insurance,	life	insurance,	annuities,	and	certain	health	and	other	supplemental	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.	At	policy	issuance,	these	reserves	are	recognized	on	a	net	level	premium method	based	on	premium	rate	 increase,	 interest	rate,	mortality,	morbidity,	persistency	(the	percentage	of	policies	remaining	 in-force),	and	maintenance	expense assumptions.	Interest	rates	are	based	on	our	expected	net	investment	returns	on	the	investment	portfolio	supporting	the	reserves	for	these	blocks	of	business.	Mortality,	a measure	of	expected	death,	and	morbidity,	a	measure	of	health	status,	assumptions	are	based	on	published	actuarial	tables,	modified	based	upon	actual	experience.	The assumptions	used	to	determine	the	liability	for	future	policy	benefits	are	established	and	locked	in	at	the	time	each	contract	is	issued	and	only	change	if	our	expected future	experience	deteriorates	to	the	point	that	the	level	of	the	liability,	together	with	the	present	value	of	future	gross	premiums,	are	not	adequate	to	provide	for	future expected	policy	benefits	and	maintenance	costs	(i.e.	the	loss	recognition	date).	Because	these	policies	have	long-term	claim	payout	periods,	there	is	a	greater	risk	of significant	variability	in	claims	costs,	either	positive	or	negative.	We	perform	loss	recognition	tests	at	least	annually	in	the	fourth	quarter,	and	more	frequently	if	adverse events	or	changes	in	circumstances	indicate	that	the	level	of	the	liability,	together	with	the	present	value	of	future	gross	premiums,	may	not	be	adequate	to	provide	for future	expected	policy	benefits	and	maintenance	costs.

Future	policy	benefits	payable	include	$2.3	billion	at	December	31,	2017	 and	$2.2	billion	at	December	31,	2016	associated	with	a	non-strategic	closed	block	of long-term	care	insurance	policies	acquired	in	connection	with	the	2007	acquisition	of	KMG.	Approximately	29,800	policies	remain	in	force	as	of	December	31,	2017. No	new	policies	have	been	written	since	2005	under	this	closed	block.	Future	policy	benefits	payable	includes	amounts	charged	to	accumulated	other	comprehensive income	for	an	additional	liability	that	would	exist	on	our	closed-block	of	long-term	care	insurance	policies	if	unrealized	gains	on	the	sale	of	the	investments	backing such	products	had	been	realized	and	the	proceeds	reinvested	at	then	current	yields.	There	was	a	$168	million	additional	liability	at	December	31,	2017	and	$77	million additional	liability	at	December	31,	2016.	Amounts	charged	to	accumulated	other	comprehensive	income	are	net	of	applicable	deferred	taxes.

Long-term	care	insurance	policies	provide	nursing	home	and	home	health	coverage	for	which	premiums	are	collected	many	years	in	advance	of	benefits	paid,	if	any. Therefore,	our	actual	claims	experience	will	emerge	many	years	after	assumptions	have	been	established.	The	risk	of	a	deviation	of	the	actual	interest,	morbidity, mortality,	and	maintenance	expense	assumptions	from	those	assumed	in	our	reserves	are	particularly	significant	to	our	closed	block	of	long-term	care	insurance	policies. A	prolonged	period	during	which	interest	rates	remain	at	levels	lower	than	those	anticipated	in	our	reserving	would	result	in	shortfalls	in	investment	income	on	assets supporting	our	obligation	under	long	term	care	policies	because	the	long	duration	of	the	policy	obligations	exceeds	the	duration	of	the	supporting	investment	assets. Further,	we	monitor	the	loss	experience	of	these	long-term	care	insurance	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.	To	the	extent	premium	rate	increases,	interest	rates,	and/or	loss	experience	vary	from	our	loss recognition	date	assumptions,	future	material	adjustments	to	reserves	could	be	required.

During	2016,	we	recorded	a	loss	for	a	premium	deficiency.	The	premium	deficiency	was	based	on	current	and	anticipated	experience	that	had	deteriorated	from	our locked-in	assumptions	from	the	previous	December	31,	2013	loss	recognition	date,	particularly	as	they	related	to	emerging	experience	indicating	longer	claims	duration, a	prolonged	lower	interest	rate	environment,	and	an	increase	in	policyholder	life	expectancies.	Based	on	this	deterioration,	we	determined	that	our	existing	future	policy benefits	payable,	together	with	the	present	value	of	future	gross	premiums,	associated	with	our	closed	block	of	long-term	care	insurance	policies	were	not	adequate	to provide	for	future	policy	benefits	and	maintenance	costs	under	these	policies;	therefore	we	unlocked	and	modified	our	assumptions	based	on	current	expectations. Accordingly,	during	2016	we	recorded	$505	million	of	additional	benefits	expense,	with	a	corresponding	increase	in	future	policy	benefits	payable	of	$659	million partially	offset	by	a	related	reinsurance	recoverable	of	$154	million	included	in	other	long-term	assets.

For	our	closed	block	of	long-term	care	policies,	actuarial	assumptions	used	to	estimate	reserves	are	inherently	uncertain	due	to	the	potential	changes	in	trends	in mortality,	morbidity,	persistency	and	interest	rates	as	well	as	premium	rate	increases.	As	a	result,	our	long	term	care	reserves	may	be	subject	to	material	increases	if these	trends	develop	adversely	to	our	expectations.	The	estimated	increase	in	reserves	and	additional	benefit	expense	from	hypothetically	modeling	adverse	variations	in our	actuarial	assumptions,	in	the	aggregate,	could	be	up	to	$250	million,	net	of	reinsurance.	Although	such	hypothetical	revisions	are	not	currently	appropriate,	we believe	they	could	occur	based	on	past	variances	in	experience	and	our	expectation	of	the	ranges	of	future	experience	that	could	reasonably	occur,	and	any	such	revision could	be	material.	Generally	accepted	accounting	principles	do	not	allow	us	to	unlock	our	assumptions	for	favorable	items.

In	addition,	future	policy	benefits	payable	includes	amounts	of	$199	million	 at	 December	 31,	2017,	$201	million	 at	 December	 31,	2016,	 and	$205	million	at December	31,	2015	which	are	subject	to	100%	coinsurance	agreements	as	more	fully	described	in	Note	19	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.

# 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	employee	basis	for	each	month	of	coverage	based	on	the	type	of	coverage	purchased	(single	to	family	coverage options).	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.

Premiums	revenue	and	administrative	services	only,	or	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,	and	for	estimated rebates	under	the	minimum	benefit	ratios	required	under	the	Health	Care	Reform	Law.	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,	estimated	rebates, as	well	as	prevailing	and	anticipated	economic	conditions,	and	reflect	any	required	adjustments	in	the	current	period's	revenue.

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

# Medicare	Risk-Adjustment	Provisions

CMS	utilizes	a	risk-adjustment	model	which	apportions	premiums	paid	to	Medicare	Advantage,	or	MA,	plans	according	to	health	severity.	The	risk-adjustment model,	which	CMS	implemented	pursuant	to	the	Balanced	Budget	Act	of	1997(BBA)	and	the	Benefits	Improvement	and	Protection	Act	of	2000	(BIPA),	generally	pays more	 for	 enrollees	 with	 predictably	 higher	 costs.	 Under	 the	 risk-adjustment	 methodology,	 all	 MA	 plans	 must	 collect	 and	 submit	 the	 necessary	 diagnosis	 code information	 from	 hospital	 inpatient,	 hospital	 outpatient,	 and	 physician	 providers	 to	 CMS	 within	 prescribed	 deadlines.	The	 CMS	 risk-adjustment	 model	 uses	 this diagnosis	data	to	calculate	the	risk-adjusted	premium	payment	to	MA	plans.	Rates	paid	to	MA	plans	are	established	under	an	actuarial	bid	model,	including	a	process that	bases	our	payments	on	a	comparison	of	our	beneficiaries'	risk	scores,	derived	from	medical	diagnoses,	to	those	enrolled	in	the	government's	Medicare	FFS program.	We	generally	rely	on	providers,	including	certain	providers	in	our	network	who	are	our	employees,	to	code	their	claim	submissions	with	appropriate	diagnoses, which	we	send	to	CMS	as	the	basis	for	our	payment	received	from	CMS	under	the	actuarial	risk-adjustment	model.	We	also	rely	on	providers	to	appropriately	document all	medical	data,	including	the	diagnosis	data	submitted	with	claims.	CMS	is	phasing-in	the	process	of	calculating	risk	scores	using	diagnoses	data	from	the	Risk Adjustment	Processing	System,	or	RAPS,	to	diagnoses	data	from	the	Encounter	Data	System,	or	EDS.	The	RAPS	process	requires	MA	plans	to	apply	a	filter	logic	based on	CMS	guidelines	and	only	submit	claims	that	satisfy	those	guidelines.	For	submissions	through	EDS,	CMS	requires	MA	plans	to	submit	all	the	encounter	data	and CMS	will	apply	the	risk	adjustment	filtering	logic	to	determine	the	risk	scores.	For	2016,	10%	of	the	risk	score	was	calculated	from	claims	data	submitted	through	EDS, increasing	to	25%	of	the	risk	score	calculated	from	claims	data	through	EDS	for	2017.	In	April	2017,	CMS	revised	the	pace	of	the	phase-in.	For	2018,	15%	of	the	risk score	will	be	calculated	from	claims	data	submitted	through	EDS.	The	phase-in	from	RAPS	to	EDS	could	result	in	different	risk	scores	from	each	dataset	as	a	result	of plan	processing	issues,	CMS	processing	issues,	or	filtering	logic	differences	between	RAPS	and	EDS,	and	could	have	a	material	adverse	effect	on	our	results	of operations,	financial	position,	or	cash	flows.	We	estimate	risk-adjustment	revenues	based	on	medical	diagnoses	for	our	membership.	The	risk-adjustment	model, including	CMS	changes	to	the	submission	process,	is	more	fully	described	in	Item	1.	–	Business	under	the	section	titled	"Individual	Medicare."

# Investment	Securities

Investment	securities	 totaled	$12.3	billion,	 or	45%	of	 total	assets	at	December	31,	2017,	 and	$9.8	billion,	 or	39%	of	 total	assets	at	December	31,	2016.	Debt securities,	detailed	below,	comprised	this	entire	investment	portfolio	at	December	31,	2017	and	2016.	The	fair	value	of	debt	securities	were	as	follows	at	December	31, 2017	and	2016:

|  | December	31,	2017 | Percentage<br>of	Total | December	31,	2016 | Percentage<br>of	Total |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (dollars\tin\tmillions) | (dollars\tin\tmillions) |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\tcorporations\tand\nagencies: |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | $531 | 4.3% | $786 | 8.0% |
| Mortgage-backed\tsecurities | 1,610 | 13.1% | 1,637 | 16.7% |
| Tax-exempt\tmunicipal\tsecurities | 3,889 | 31.6% | 3,305 | 33.7% |
| Mortgage-backed\tsecurities: |  |  |  |  |
| Residential | 26 | 0.2% | 9 | 0.1% |
| Commercial | 456 | 3.7% | 304 | 3.1% |
| Asset-backed\tsecurities | 408 | 3.3% | 160 | 1.7% |
| Corporate\tdebt\tsecurities | 5,382 | 43.8% | 3,597 | 36.7% |
| Total\tdebt\tsecurities | $12,302 | 100.0% | $9,798 | 100.0% |

Approximately	98%	of	our	debt	securities	were	investment-grade	quality,	with	a	weighted	average	credit	rating	of	AA	by	S&P	at	December	31,	2017.	Most	of	the debt	securities	that	were	below	investment-grade	were	rated	BB,	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	$222	million	at	December	31,	2017	and	$276	million	at	December	31,	2016.	These	pre-refunded bonds	were	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	at	the	time	the	fund	is	established.	Tax-exempt	municipal	securities	that	were	not	pre-refunded were	diversified	among	general	obligation	bonds	of	U.S.	states	and	local	municipalities	as	well	as	special	revenue	bonds.	General	obligation	bonds,	which	are	backed	by the	taxing	power	and	full	faith	of	the	issuer,	accounted	for	$1.8	billion	of	these	municipals	in	the	portfolio.	Special	revenue	bonds,	issued	by	a	municipality	to	finance	a specific	public	works	project	such	as	utilities,	water	and	sewer,	transportation,	or	education,	and	supported	by	the	revenues	of	that	project,	accounted	for	$1.9	billion	of these	municipals.	Our	general	obligation	bonds	are	diversified	across	the	U.S.	with	no	individual	state	exceeding	9%.	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	 $94	million	and	$132	million	at	December	31,	2017	and	2016,	respectively,	of tax-exempt	securities	guaranteed	by	monoline	insurers.	The	equivalent	weighted	average	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	less	than	$1	million	at	December	31,	2017	and	December	31,	2016.	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	30%	at	December	31,	2017	and	23%	at	December	31,	2016.

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,	2017:

|  | Less	than	12	months |  | 12	months	or	more |  | Total |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Fair\nValue | Gross\nUnrealized\nLosses | Fair\nValue | Gross\nUnrealized\nLosses | Fair\nValue | Gross\nUnrealized\nLosses |
|  |  |  | (in\tmillions) |  |  |  |
| \tDecember\t31,\t2017 |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\ncorporations\tand\tagencies: |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | $273 | $(1) | $130 | $(1) | $403 | $(2) |
| Mortgage-backed\tsecurities | 581 | (2) | 672 | (17) | 1,253 | (19) |
| \tTax-exempt\tmunicipal\tsecurities | 1,590 | (16) | 661 | (12) | 2,251 | (28) |
| \tMortgage-backed\tsecurities: |  |  |  |  |  |  |
| Residential | 20 | — | 3 | — | 23 | — |
| Commercial | 131 | (1) | 28 | (1) | 159 | (2) |
| \tAsset-backed\tsecurities | 107 | — | 10 | — | 117 | — |
| \tCorporate\tdebt\tsecurities | 1,297 | (10) | 804 | (27) | 2,101 | (37) |
| Total\tdebt\tsecurities | $3,999 | $(30) | $2,308 | $(58) | $6,307 | $(88) |

Under	the	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	other-than-temporary	impairment	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	declines	in	fair	value	may	occur	and	additional	material	realized losses	from	sales	or	other-than-temporary	impairments	may	be	recorded	in	future	periods.

The	 recoverability	 of	 our	 non-agency	 residential	 and	 commercial	 mortgage-backed	 securities	 is	 supported	 by	 factors	 such	 as	 seniority,	 underlying	 collateral characteristics	 and	 credit	 enhancements.	These	 residential	 and	 commercial	 mortgage-backed	 securities	 at	 December	 31,	2017	 primarily	 were	 composed	 of	 senior tranches	having	high	credit	support,	with	over	99%	of	the	collateral	consisting	of	prime	loans.	The	weighted	average	credit	rating	of	all	commercial	mortgage-backed securities	was	AA+	at	December	31,	2017.

All	issuers	of	securities	we	own	that	were	trading	at	an	unrealized	loss	at	December	31,	2017	remain	current	on	all	contractual	payments.	After	taking	into	account these	and	other	factors	previously	described,	we	believe	these	unrealized	losses	primarily	were	caused	by	an	increase	in	market	interest	rates	in	the	current	markets	than when	the	securities	were	purchased.	At	December	31,	2017,	we	did	not	intend	to	sell	the	securities	with	an	unrealized	loss	position	in	accumulated	other	comprehensive income,	and	it	is	not	likely	that	we	will	be	required	to	sell	these	securities	before	recovery	of	their	amortized	cost	basis.	As	a	result,	we	believe	that	the	securities	with	an unrealized	loss	were	not	other-than-temporarily	impaired	at	December	31,	2017.	There	were	no	material	other-than-temporary	impairments	in	2017,	2016,	or	2015.

# Goodwill	and	Long-lived	Assets

At	December	31,	2017,	goodwill	and	other	long-lived	assets	represented	19%	of	total	assets	and	52%	of	total	stockholders'	equity,	compared	to	20% and	47%, respectively,	at	December	31,	2016.

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	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.	The	carrying	amount	of	goodwill for	our	reportable	segments	has	been	retrospectively	adjusted	to	conform	to	the	2017	segment	change	discussed	in	Note	2	to	the	consolidated	financial	statements included	in	Item	8.	–	Financial	Statements	and	Supplementary	Data.

We	use	the	one-step	process	to	review	goodwill	for	impairment	to	determine	both	the	existence	and	amount	of	goodwill	impairment,	if	any.	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	operating	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	Health	Care	Reform Law	or	changes	in	Government	rates,	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	substantial margin.	A	100	basis	point	increase	in	the	discount	rate	would	not	have	a	significant	impact	on	the	amount	of	margin	for	any	of	our	reporting	units	with	significant goodwill,	with	the	exception	of	our	provider	services	reporting	unit	in	our	Healthcare	Services	segment.	The	provider	services	reporting	unit,	with	$590	million	of goodwill,	would	decline	to	less	than	10%	margin	after	factoring	in	a	100	basis	point	increase	in	the	discount	rate.

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	material	impairment	losses	in	the	last	three	years.

# 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.	Prior	to 2009,	under	interest	rate	swap	agreements,	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.	We	terminated	all	of	our	interest	rate	swap	agreements	in	2008.	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	$2.0	billion	unsecured	revolving	credit	agreement	bear	interest	at	either LIBOR	plus	a	spread	or	the	base	rate	plus	a	spread.	There	were	no	borrowings	outstanding	under	our	credit	agreement	at	December	31,	2017	or	December	31,	2016.

Interest	rate	risk	also	represents	a	market	risk	factor	affecting	our	consolidated	financial	position	due	to	our	significant	investment	portfolio,	consisting	primarily	of fixed	maturity	securities	of	investment-grade	quality	with	a	weighted	average	S&P	credit	rating	of	AA	at	December	31,	2017.	Our	net	unrealized	position	increased	$226 million	 from	 a	 net	 unrealized	 loss	 position	 of	$28	million	 at	December	 31,	 2016	 to	 a	 net	 unrealized	 gain	 position	 of	$198	 million	 at	December	 31,	 2017.	At December	31,	2017,	we	had	gross	unrealized	losses	of	$88	million	on	our	investment	portfolio	primarily	due	to	an	increase	in	market	interest	rates	since	the	time	the securities	were	purchased.	There	were	no	material	other-than-temporary	impairments	during	2017.	While	we	believe	that	these	impairments	are	temporary	and	we currently	do	not	have	the	intent	to	sell	such	securities,	given	the	current	market	conditions	and	the	significant	judgments	involved,	there	is	a	continuing	risk	that	future declines	in	fair	value	may	occur	and	material	realized	losses	from	sales	or	other-than-temporary	impairments	may	be	recorded	in	future	periods.

Duration	is	the	time-weighted	average	of	the	present	value	of	the	bond	portfolio's	cash	flow.	Duration	is	indicative	of	the	relationship	between	changes	in	fair	value and	changes	in	interest	rates,	providing	a	general	indication	of	the	sensitivity	of	the	fair	values	of	our	fixed	maturity	securities	to	changes	in	interest	rates.	However, actual	fair	values	may	differ	significantly	from	estimates	based	on	duration.	The	average	duration	of	our	investment	portfolio,	including	cash	and	cash	equivalents,	was approximately	4.1	years	as	of	December	31,	2017	and	4.4	years	as	of	December	31,	2016.	Based	on	the	duration	including	cash	equivalents,	a	1%	increase	in	interest rates	would	generally	decrease	the	fair	value	of	our	securities	by	approximately	$697	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	at December	31,	2017	and	2016.	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	affect	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	once,	have	not	changed	between	200	and	300	basis	points,	have	changed	between	100	and	200	basis	points	once,	and	have	changed	by	less	than	100	basis	points eight	times.

|  |  | Increase	(decrease)	in<br>pretax	earnings	given	an<br>interest	rate	decrease	of<br>X	basis	points |  |  | Increase	(decrease)	in<br>pretax	earnings	given	an<br>interest	rate	increase	of<br>X	basis	points |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | (300) | (200) | (100) | 100 | 200 | 300 |
|  |  |  | (in\tmillions) |  |  |  |
| As\tof\tDecember\t31,\t2017 |  |  |  |  |  |  |
| Investment\tincome\t(a) | $(87) | $(83) | $(67) | $67 | $134 | $202 |
| Interest\texpense\t(b) | 2 | 2 | 2 | (2) | (3) | (5) |
| Pretax | $(85) | $(81) | $(65) | $65 | $131 | $197 |
| As\tof\tDecember\t31,\t2016 |  |  |  |  |  |  |
| Investment\tincome\t(a) | $(49) | $(44) | $(36) | $53 | $107 | $162 |
| Interest\texpense\t(b) | 3 | 3 | 3 | (2) | (5) | (9) |
| Pretax | $(46) | $(41) | $(33) | $51 | $102 | $153 |

(a) As	of	December	31,	2017	and	2016,	some	of	our	investments	had	interest	rates	below	3%	so	the	assumed	hypothetical	change	in	pretax	earnings	does	not	reflect the	full	3%	point	reduction.

(b) The	interest	rate	under	our	senior	notes	is	fixed.	There	were	no	borrowings	outstanding	under	the	credit	agreement	at	December	31,	2017	or	December	31,	2016. There	 was	$150	million	 outstanding	 under	 our	 commercial	 paper	 program	 at	December	31,	2017.	 As	 of	December	31,	2017,	 our	 interest	 rate	 under	 our commercial	paper	program	was	less	than	2%	so	the	assumed	hypothetical	change	in	pretax	earnings	does	not	reflect	the	full	2%	point	reduction.

# ITEM	8.	FINANCIAL	STATEMENTS	AND	SUPPLEMENTARY	DATA

# CONSOLIDATED	BALANCE	SHEETS

| Cash	and	cash	equivalents | $4,042 | $3,877 |
| :--- | :--- | :--- |
| Investment\tsecurities | 9,557 | 7,595 |
| Receivables,\tless\tallowance\tfor\tdoubtful\taccounts\nof\t$96\tin\t2017\tand\t$118\tin\t2016 | 854 | 1,280 |
| Other\tcurrent\tassets | 2,949 | 3,438 |
| Total\tcurrent\tassets | 17,402 | 16,190 |
| Property\tand\tequipment,\tnet | 1,584 | 1,505 |
| Long-term\tinvestment\tsecurities | 2,745 | 2,203 |
| Goodwill | 3,281 | 3,272 |
| Other\tlong-term\tassets | 2,166 | 2,226 |
| Total\tassets | $27,178 | $25,396 |
| LIABILITIES\tAND\tSTOCKHOLDERS'\tEQUITY |  |  |
| Current\tliabilities: |  |  |
| Benefits\tpayable | $4,668 | $4,563 |
| Trade\taccounts\tpayable\tand\taccrued\texpenses | 4,069 | 2,467 |
| Book\toverdraft | 141 | 212 |
| Unearned\trevenues | 378 | 280 |
| Short-term\tborrowings | 150 | 300 |
| Total\tcurrent\tliabilities | 9,406 | 7,822 |
| Long-term\tdebt | 4,770 | 3,792 |
| Future\tpolicy\tbenefits\tpayable | 2,923 | 2,834 |
| Other\tlong-term\tliabilities | 237 | 263 |
| Total\tliabilities | 17,336 | 14,711 |
| Commitments\tand\tcontingencies\t(Note\t16) |  |  |
| Stockholders'\tequity: |  |  |
| Preferred\tstock,\t$1\tpar;\t10,000,000\tshares\tauthorized;\tnone\tissued | — | — |
| Common\tstock,\t$0.16\t2/3\tpar;\t300,000,000\tshares\tauthorized; |  |  |
| 198,572,458\tshares\tissued\tat\tDecember\t31,\t2017\tand\t198,495,007 |  |  |
| shares\tissued\tat\tDecember\t31,\t2016 | 33 | 33 |
| Capital\tin\texcess\tof\tpar\tvalue | 2,445 | 2,562 |
| Retained\tearnings | 13,670 | 11,454 |
| Accumulated\tother\tcomprehensive\tincome\t(loss) | 19 | (66) |
| Treasury\tstock,\tat\tcost,\t60,893,762\tshares\tat\tDecember\t31,\t2017\nand\t49,189,811\tshares\tat\tDecember\t31,\t2016 | (6,325) | (3,298) |
| Total\tstockholders'\tequity | 9,842 | 10,685 |
| Total\tliabilities\tand\tstockholders'\tequity | $27,178 | $25,396 |

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

# CONSOLIDATED	STATEMENTS	OF	INCOME

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tmillions,\texcept\tper\tshare\tresults) |  |
| Revenues: |  |  |  |
| Premiums | $52,380 | $53,021 | $52,409 |
| Services | 982 | 969 | 1,406 |
| Investment\tincome | 405 | 389 | 474 |
| Total\trevenues | 53,767 | 54,379 | 54,289 |
| Operating\texpenses: |  |  |  |
| Benefits | 43,496 | 45,007 | 44,269 |
| Operating\tcosts | 6,567 | 7,173 | 7,295 |
| Merger\ttermination\tfee\tand\trelated\tcosts,\tnet | (936) | 104 | 23 |
| Depreciation\tand\tamortization | 378 | 354 | 355 |
| Total\toperating\texpenses | 49,505 | 52,638 | 51,942 |
| Income\tfrom\toperations | 4,262 | 1,741 | 2,347 |
| Gain\ton\tsale\tof\tbusiness | — | — | 270 |
| Interest\texpense | 242 | 189 | 186 |
| Income\tbefore\tincome\ttaxes | 4,020 | 1,552 | 2,431 |
| Provision\tfor\tincome\ttaxes | 1,572 | 938 | 1,155 |
| Net\tincome | $2,448 | $614 | $1,276 |
| Basic\tearnings\tper\tcommon\tshare | $16.94 | $4.11 | $8.54 |
| Diluted\tearnings\tper\tcommon\tshare | $16.81 | $4.07 | $8.44 |

# CONSOLIDATED	STATEMENTS	OF	COMPREHENSIVE	INCOME

| Net	income | $2,448 | $614 | $1,276 |
| :--- | :--- | :--- | :--- |
| Other\tcomprehensive\tincome\t(loss): |  |  |  |
| Change\tin\tgross\tunrealized\tinvestment\tgains/losses | 149 | (101) | (114) |
| Effect\tof\tincome\ttaxes | (55) | 38 | 42 |
| Total\tchange\tin\tunrealized\tinvestment\ngains/losses,\tnet\tof\ttax | 94 | (63) | (72) |
| Reclassification\tadjustment\tfor\tnet\trealized\ngains\tincluded\tin\tinvestment\tincome | (14) | (96) | (146) |
| Effect\tof\tincome\ttaxes | 5 | 35 | 53 |
| Total\treclassification\tadjustment,\tnet\tof\ttax | (9) | (61) | (93) |
| Other\tcomprehensive\tincome\t(loss),\tnet\tof\ttax | 85 | (124) | (165) |
| Comprehensive\tincome | $2,533 | $490 | $1,111 |

# CONSOLIDATED	STATEMENTS	OF	STOCKHOLDERS'	EQUITY

|  | Common	Stock<br>Issued<br>Shares | Amount | Capital	In<br>Excess	of<br>Par	Value | Retained<br>Earnings | Accumulated<br>Other<br>Comprehensive<br>Income	(Loss) | Treasury<br>Stock | Total<br>Stockholders'<br>Equity |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | (dollars\tin\tmillions,\tshare\tamounts\tin\tthousands) | (dollars\tin\tmillions,\tshare\tamounts\tin\tthousands) |  |  |
| Balances,\tJanuary\t1,\t2015 | 197,952 | $33 | $2,330 | $9,916 | $223 | $(2,856) | $9,646 |
| Net\tincome |  |  |  | 1,276 |  |  | 1,276 |
| Other\tcomprehensive\tloss |  |  |  |  | (165) |  | (165) |
| Common\tstock\trepurchases |  |  | 100 |  |  | (485) | (385) |
| Dividends\tand\tdividend\nequivalents |  |  | — | (175) |  |  | (175) |
| Stock-based\tcompensation |  |  | 109 |  |  |  | 109 |
| Restricted\tstock\tunit\tvesting | 159 | — | (49) |  |  | 49 | — |
| Stock\toption\texercises | 261 | — | 23 |  |  |  | 23 |
| Stock\toption\tand\trestricted\nstock\ttax\tbenefit |  |  | 17 |  |  |  | 17 |
| Balances,\tDecember\t31,\t2015 | 198,372 | 33 | 2,530 | 11,017 | 58 | (3,292) | 10,346 |
| Net\tincome |  |  |  | 614 |  |  | 614 |
| Other\tcomprehensive\tloss |  |  |  |  | (124) |  | (124) |
| Common\tstock\trepurchases |  |  | — |  |  | (104) | (104) |
| Dividends\tand\tdividend\nequivalents |  |  | — | (177) |  |  | (177) |
| Stock-based\tcompensation |  |  | 115 |  |  |  | 115 |
| Restricted\tstock\tunit\tvesting | 13 | — | (98) |  |  | 98 | — |
| Stock\toption\texercises | 110 | — | 13 |  |  |  | 13 |
| Stock\toption\tand\trestricted\nstock\ttax\tbenefit |  |  | 2 |  |  |  | 2 |
| Balances,\tDecember\t31,\t2016 | 198,495 | 33 | 2,562 | 11,454 | (66) | (3,298) | 10,685 |
| Net\tincome |  |  |  | 2,448 |  |  | 2,448 |
| Other\tcomprehensive\tincome |  |  |  |  | 85 |  | 85 |
| Common\tstock\trepurchases |  |  | (200) |  |  | (3,165) | (3,365) |
| Dividends\tand\tdividend\nequivalents |  |  | — | (232) |  |  | (232) |
| Stock-based\tcompensation |  |  | 157 |  |  |  | 157 |
| Restricted\tstock\tunit\tvesting | — | — | (138) |  |  | 138 | — |
| Stock\toption\texercises | 77 | — | 64 |  |  |  | 64 |
| Balances,\tDecember\t31,\t2017 | 198,572 | $33 | $2,445 | $13,670 | $19 | $(6,325) | $9,842 |

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS

| Net	income | $2,448 | $614 | $1,276 |
| :--- | :--- | :--- | :--- |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\nprovided\tby\toperating\tactivities: |  |  |  |
| Gain\ton\tsale\tof\tbusiness | — | — | (270) |
| Depreciation | 410 | 388 | 354 |
| Amortization | 75 | 77 | 93 |
| Stock-based\tcompensation | 157 | 115 | 109 |
| Net\trealized\tcapital\tgains | (14) | (96) | (146) |
| Provision\t(benefit)\tfor\tdeferred\tincome\ttaxes | 132 | (71) | (2) |
| Provision\tfor\tdoubtful\taccounts | 20 | 39 | 61 |
| Changes\tin\toperating\tassets\tand\tliabilities,\tnet\tof\neffect\tof\tbusinesses\tacquired\tand\tdispositions: |  |  |  |
| Receivables | 406 | (158) | (180) |
| Other\tassets | (582) | 426 | (872) |
| Benefits\tpayable | 105 | (413) | 501 |
| Other\tliabilities | 641 | 937 | (129) |
| Unearned\trevenues | 98 | (84) | 3 |
| Other | 155 | 162 | 70 |
| \t\t\t\tNet\tcash\tprovided\tby\toperating\tactivities | 4,051 | 1,936 | 868 |
| Cash\tflows\tfrom\tinvesting\tactivities |  |  |  |
| Acquisitions,\tnet\tof\tcash\tacquired | (31) | (7) | (38) |
| Proceeds\tfrom\tsale\tof\tbusiness | — | — | 1,061 |
| Purchases\tof\tproperty\tand\tequipment | (526) | (527) | (523) |
| Proceeds\tfrom\tsales\tof\tproperty\tand\tequipment | 2 | — | 1 |
| Purchases\tof\tinvestment\tsecurities | (6,265) | (6,566) | (6,739) |
| Maturities\tof\tinvestment\tsecurities | 1,111 | 1,426 | 1,065 |
| Proceeds\tfrom\tsales\tof\tinvestment\tsecurities | 2,768 | 4,312 | 5,493 |
| \t\t\t\tNet\tcash\t(used\tin)\tprovided\tby\tinvesting\tactivities | (2,941) | (1,362) | 320 |
| Cash\tflows\tfrom\tfinancing\tactivities |  |  |  |
| Receipts\t(withdrawals)\tfrom\tcontract\tdeposits,\tnet | 1,823 | 1,093 | (296) |
| Proceeds\tfrom\tissuance\tof\tsenior\tnotes,\tnet | 1,779 | — | — |
| (Repayments)\tproceeds\tfrom\tissuance\tof\tcommercial\tpaper,\tnet | (153) | (2) | 298 |
| Repayment\tof\tlong-term\tdebt | (800) | — | — |
| Common\tstock\trepurchases | (3,365) | (104) | (385) |
| Dividends\tpaid | (220) | (177) | (172) |
| Excess\ttax\tbenefit\tfrom\tstock-based\tcompensation | — | — | 15 |
| Change\tin\tbook\toverdraft | (71) | (89) | (33) |
| Proceeds\tfrom\tstock\toption\texercises\tand\tother,\tnet | 62 | 11 | 21 |
| \t\t\t\tNet\tcash\t(used\tin)\tprovided\tby\tfinancing\tactivities | (945) | 732 | (552) |
| Increase\tin\tcash\tand\tcash\tequivalents | 165 | 1,306 | 636 |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | 3,877 | 2,571 | 1,935 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $4,042 | $3,877 | $2,571 |
| Supplemental\tcash\tflow\tdisclosures: |  |  |  |
| Interest\tpayments | $216 | $185 | $187 |
| Income\ttax\tpayments,\tnet | $1,498 | $916 | $1,179 |
| Details\tof\tbusinesses\tacquired\tin\tpurchase\ttransactions: |  |  |  |
| Fair\tvalue\tof\tassets\tacquired,\tnet\tof\tcash\tacquired | $31 | $7 | $38 |
| Less:\tFair\tvalue\tof\tliabilities\tassumed | — | — | — |
| Cash\tpaid\tfor\tacquired\tbusinesses,\tnet\tof\tcash\tacquired | $31 | $7 | $38 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# 1.	REPORTING	ENTITY

# Nature	of	Operations

Humana	Inc.,	headquartered	in	Louisville,	Kentucky,	is	a	leading	health	and	well-being	company	committed	to	helping	our	millions	of	medical	and	specialty members	achieve	their	best	health.	Our	successful	history	in	care	delivery	and	health	plan	administration	is	helping	us	create	a	new	kind	of	integrated	care	with	the power	to	improve	health	and	well-being	and	lower	costs.	Our	efforts	are	leading	to	a	better	quality	of	life	for	people	with	Medicare,	families,	individuals,	military	service personnel,	and	communities	at	large.	To	accomplish	that,	we	support	physicians	and	other	health	care	professionals	as	they	work	to	deliver	the	right	care	in	the	right place	for	their	patients,	our	members.	Our	range	of	clinical	capabilities,	resources	and	tools,	such	as	in-home	care,	behavioral	health,	pharmacy	services,	data	analytics and	wellness	solutions,	combine	to	produce	a	simplified	experience	that	makes	health	care	easier	to	navigate	and	more	effective.	References	throughout	these	notes	to consolidated	financial	statements	to	"we,"	"us,"	"our,"	"Company,"	and	"Humana,"	mean	Humana	Inc.	and	its	subsidiaries.	We	derived	approximately	 79%	of	our	total premiums	and	services	revenue	from	contracts	with	the	federal	government	in	2017,	including	15%	related	to	our	federal	government	contracts	with	the	Centers	for Medicare	 and	 Medicaid	 Services,	 or	 CMS,	 to	 provide	 health	 insurance	 coverage	 for	 individual	 Medicare	Advantage	 members	 in	 Florida.	 CMS	 is	 the	 federal government's	agency	responsible	for	administering	the	Medicare	program.

# 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,	including	variable	interest	entities	associated	with medical	practices	for	which	we	are	the	primary	beneficiary.	We	do	not	own	many	of	our	medical	practices	but	instead	enter	into	exclusive	management	agreements	with the	affiliated	Professional	Associations,	or	P.A.s,	that	operate	these	medical	practices.	Based	upon	the	provisions	of	these	agreements,	these	affiliated	P.A.s	are	variable interest	entities	and	we	are	the	primary	beneficiary,	and	accordingly	we	consolidated	the	affiliated	P.A.s.	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,	future	policy	benefits	payable,	the	impact	of	risk	adjustment	provisions	related	to	our	Medicare	contracts,	the	valuation and	related	impairment	recognition	of	investment	securities,	and	the	valuation	and	related	impairment	recognition	of	long-lived	assets,	including	goodwill.	These estimates	are	based	on	knowledge	of	current	events	and	anticipated	future	events,	and	accordingly,	actual	results	may	ultimately	differ	materially	from	those	estimates.

# Acquisition	of	a	40%	Minority	Interest	in	Kindred's	Homecare	Business

On	December	19,	2017,	we	announced	that	we	have	entered	into	a	definitive	agreement	to	acquire	a	40%	minority	interest	in	the	Kindred	at	Home	Division (Kindred	at	Home)	of	Kindred	Healthcare,	Inc.	(Kindred)(NYSE:	KND),	the	nation's	largest	home	health	provider	and	second	largest	hospice	operator,	for	estimated cash	consideration	of	approximately	$800	million,	including	our	share	of	transaction	and	related	expenses,	to	facilitate	a	complete	separation	from	the	Long	Term	Acute Care	and	Rehabilitation	businesses	(the	Specialty	Hospital	company).	TPG	Capital	(TPG)	and	Welsh,	Carson,	Anderson	&	Stowe	(WCAS),	two	private	equity	funds, collectively,	 the	 Sponsors,	 along	 with	 us	 are	 jointly	 creating	 a	 consortium	 to	 purchase	 all	 of	 the	 outstanding	 and	 issued	 securities	 of	 Kindred	 Healthcare,	 Inc. Immediately	following	the	closing	of	that	transaction,	Kindred	at	Home	and	the	Specialty	Hospital	company	will	be	separated,	with	the	result	being	that	the	Specialty Hospital	Company	will	be	owned	by	the	Sponsors	and	Kindred	at	Home	will	be	owned	by	a	joint	venture	owned	by	the	Sponsors	and	us.	We	will	own	40%	of	Kindred at	Home,	with	the	remaining	60%	owned	by	a	new	entity	owned	by	TPG	and	WCAS.

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS—(Continued)

At	the	closing	of	the	transaction,	we	will	enter	a	shareholders	agreement	with	the	Sponsors	that	will	provide	for	certain	rights	and	obligations	of	each	party concerning	the	newly	formed	joint	venture	that	will	own	Kindred	at	Home.	The	shareholders	agreement	with	the	Sponsors	includes	a	put	option	under	which	they	have the	right	 to	require	us	 to	purchase	 their	 interest	 in	 the	 joint	venture	starting	at	 the	end	of	year	 three	and	ending	at	 the	end	of	year	four	following	 the	closing. Consideration	upon	exercise	of	the	put	option	per	the	agreement	would	be	valued	at	an	exit	multiple	of	10.5	times	the	preceding	twelve	months	earnings	before	interest, income	taxes,	depreciation	and	amortization,	or	EBITDA,	subject	to	certain	adjustments.	In	addition,	the	multiple	is	subject	to	adjustment	up	to	11.5	times	EBITDA based	on	the	achievement	of	certain	pre-defined	value-based	outcomes	tied	to	clinical	metrics.	The	11.5	times	EBITDA	exit	multiple	is	comparable	to	the	valuation	of our	acquired	interest	in	Kindred	at	Home.	Finally,	we	have	a	call	option	under	which	we	have	the	right	to	require	the	Sponsors	to	sell	their	interest	in	the	joint	venture	to Humana	beginning	at	the	end	of	year	four	and	ending	at	the	end	of	year	five	following	the	closing	for	cash	consideration	using	the	same	valuation	methodology applicable	to	the	previously	discussed	put	option	consideration.

The	above	transactions,	which	are	anticipated	to	close	in	the	summer	of	2018,	are	subject	to	customary	state	and	federal	regulatory	approvals,	including	approval	by the	stockholders	of	Kindred	and	the	expiration	of	the	waiting	period	under	the	Hart-Scott-Rodino	Antitrust	Improvement	Act	of	1976,	as	amended,	as	well	as	other customary	closing	conditions.	We	expect	to	fund	the	transaction	through	the	use	of	parent	company	cash	and	will	account	for	the	minority	investment	under	the	equity method.	The	pending	transaction	did	not	have	a	material	impact	to	earnings	in	2017.

# Sale	of	Closed	Block	of	Commercial	Long-Term	Care	Insurance	Business

On	November	6,	2017,	 we	 entered	 into	 a	 definitive	 agreement	 to	 sell	 the	 stock	 of	 our	 wholly-owned	 subsidiary,	 KMG	America	 Corporation,	 or	 KMG,	 to Continental	General	Insurance	Company,	or	CGIC,	a	Texas-based	insurance	company	wholly	owned	by	HC2	Holdings,	Inc.,	a	diversified	holding	company.	KMG's subsidiary,	Kanawha	Insurance	Company,	or	KIC,	includes	our	closed	block	of	non-strategic	commercial	long-term	care	insurance	policies.	Based	on	the	terms	of	the definitive	agreement	we	expect	to	record	a	net	loss	associated	with	the	sale	of	KMG	of	approximately	$365	million.	The	estimated	loss	includes	a	pretax	loss	of approximately	$780	million,	offset	by	the	expected	tax	benefit	of	approximately	$415	million.	We	will	fund	the	transaction	with	approximately	$203	million	of	parent company	cash	contributed	into	KMG,	subject	to	customary	adjustments,	in	addition	to	the	transfer	of	approximately	$150	million	of	statutory	capital	with	the	sale,	which together	should	be	more	 than	offset	by	 the	estimated	$415	million	cash	savings	associated	with	the	expected	tax	treatment	of	the	sale.	The	KMG	transaction	is anticipated	to	close	by	the	third	quarter	of	2018	subject	to	customary	closing	conditions,	including	South	Carolina	Department	of	Insurance	approval.	There	can	be	no assurance	we	will	obtain	regulatory	approvals	needed	to	sell	the	business	or	do	so	under	terms	acceptable	to	us.

# Workforce	Optimization

During	2017,	we	initiated	a	voluntary	early	retirement	program	and	an	involuntary	workforce	reduction	program.	These	programs	impacted	approximately	3,600 associates,	or	7.8%	of	our	workforce.	As	a	result,	we	recorded	charges	of	$148	million,	or	$0.64	per	diluted	common	share.	These	charges	are	included	with	operating costs	in	the	consolidated	statements	of	income	for	the	year	ended	December	31,	2017	and	are	included	at	the	corporate	level	in	the	segment	financial	information	in	Note 17.	Payments	under	these	programs	are	made	upon	termination	during	the	early	retirement	or	severance	pay	period,	beginning	in	the	first	quarter	of	2018.	We	expect	this liability	to	be	primarily	paid	within	the	next	12	months	and	classified	it	as	a	current	liability,	included	in	our	consolidated	balance	sheet	in	the	trade	accounts	payable	and accrued	expenses	line.

On	July	2,	2015,	we	entered	into	an	Agreement	and	Plan	of	Merger,	which	we	refer	to	in	this	report	as	the	Merger	Agreement,	with	Aetna	Inc.	and	certain	wholly owned	subsidiaries	of	Aetna	Inc.,	which	we	refer	to	collectively	as	Aetna,	which	sets	forth	the	terms	and	conditions	under	which	we	agreed	to	merge	with,	and	become	a wholly	owned	subsidiary	of	Aetna,	a	transaction	we	refer	to	in	this	report	as	the	Merger.

The	Merger	was	subject	to	customary	closing	conditions,	including,	among	other	things,	(i)	the	expiration	or	termination	of	the	applicable	waiting	period	under	the Hart-Scott-Rodino	Antitrust	Improvements	Act	of	1976,	as

amended,	and	the	receipt	of	necessary	approvals	under	state	insurance	and	healthcare	laws	and	regulations	and	pursuant	to	certain	licenses	of	certain	of	Humana's subsidiaries,	and	(ii)	the	absence	of	legal	restraints	and	prohibitions	on	the	consummation	of	the	Merger.

On	December	22,	2016,	in	order	to	extend	the	"End	Date"	(as	defined	in	the	Merger	Agreement),	Aetna	and	Humana	each	agreed	to	waive	until	11:59	p.m.	(Eastern time)	on	February	15,	2017	its	right	to	terminate	the	Merger	Agreement	due	to	a	failure	of	the	Mergers	to	have	been	completed	on	or	before	December	31,	2016.

On	July	21,	2016,	the	U.S.	Department	of	Justice,	or	DOJ,	and	the	attorneys	general	of	certain	U.S.	jurisdictions	filed	a	civil	antitrust	complaint	in	the	U.S.	District Court	for	the	District	of	Columbia	against	us	and	Aetna,	alleging	that	the	Merger	would	violate	Section	7	of	the	Clayton	Antitrust	Act	and	seeking	a	permanent injunction	to	prevent	the	Merger	from	being	completed.	On	January	23,	2017,	the	Court	ruled	in	favor	of	the	DOJ	and	granted	a	permanent	injunction	of	the	proposed transaction.	On	February	14,	2017,	we	and	Aetna	agreed	to	mutually	terminate	the	Merger	Agreement,	as	our	Board	determined	that	an	appeal	of	the	Court's	ruling would	not	be	in	the	best	interest	of	our	stockholders.	On	February	16,	2017,	under	the	terms	of	the	Merger	Agreement,	we	received	a	breakup	fee	of	$1	billion	from Aetna,	which	is	included	in	our	consolidated	statement	of	income	in	the	line	captioned	Merger	termination	fee	and	related	costs,	net.	Prior	period	Merger	related transaction	costs,	previously	included	in	operating	costs,	have	been	reclassified	to	conform	to	the	2017	presentation.

# Business	Segment	Reclassifications

During	the	first	quarter	of	2017,	we	realigned	certain	of	our	businesses	among	our	reportable	segments	to	correspond	with	internal	management	reporting	changes corresponding	to	those	used	by	our	chief	operating	decision	maker	to	evaluate	results	of	operations	and	our	previously	announced	planned	exit	from	the	Individual Commercial	medical	business	on	January	1,	2018.	Additionally,	we	renamed	our	Group	segment	 to	 the	Group	and	Specialty	segment,	and	began	presenting	 the Individual	Commercial	business	results	as	a	separate	segment	rather	than	as	part	of	the	Retail	segment.	Specialty	health	insurance	benefits,	including	dental,	vision,	other supplemental	health,	and	financial	protection	products,	marketed	to	individuals	are	now	included	in	the	Group	and	Specialty	segment.	Specialty	health	insurance	benefits marketed	to	employer	groups	continue	to	be	included	in	the	Group	and	Specialty	segment.	As	a	result	of	this	realignment,	our	reportable	segments	now	include	Retail, Group	and	Specialty,	Healthcare	Services,	and	Individual	Commercial.	Prior	period	segment	financial	information	has	been	recast	to	conform	to	the	2017	presentation. See	Note	17	for	recast	segment	financial	information.

The	Patient	Protection	and	Affordable	Care	Act	and	The	Health	Care	and	Education	Reconciliation	Act	of	2010	(which	we	collectively	refer	to	as	the	Health	Care Reform	Law)	enacted	significant	reforms	to	various	aspects	of	the	U.S.	health	insurance	industry.	Certain	of	these	reforms	became	effective	January	1,	2014,	including an	annual	 insurance	 industry	premium-based	fee	and	 the	establishment	of	federally-facilitated	or	state-based	exchanges	coupled	with	 three	premium	stabilization programs,	as	described	more	fully	below.

The	Health	Care	Reform	Law	imposes	an	annual	premium-based	fee	on	health	insurers	for	each	calendar	year	beginning	on	or	after	January	1,	2014	which	is	not deductible	for	tax	purposes.	We	are	required	to	estimate	a	liability	for	the	health	insurer	fee	and	record	it	in	full	once	qualifying	insurance	coverage	is	provided	in	the applicable	calendar	year	in	which	the	fee	is	payable	with	a	corresponding	deferred	cost	that	is	amortized	ratably	to	expense	over	the	same	calendar	year.	We	record	the liability	for	the	health	insurer	fee	in	trade	accounts	payable	and	accrued	expenses	and	record	the	deferred	cost	in	other	current	assets	in	our	consolidated	financial statements.	We	pay	the	health	insurer	fee	in	September	of	each	year.	The	Consolidated	Appropriations	Act,	2016,	enacted	on	December	18,	2015,	included	a	one-time one	year	suspension	in	2017	of	the	health	insurer	fee.	The	Continuing	Resolution	bill,	H.R.	195,	enacted	on	January	22,	2018,	included	a	one	year	suspension	in	2019	of the	health	insurer	fee,	but	the	fee	is	scheduled	to	resume	in	calendar	year	2020.	See	Note	7	for	detail	regarding	amounts	paid	for	the	annual	health	insurer	fee.

The	Health	Care	Reform	Law	also	established	risk	spreading	premium	stabilization	programs	effective	January	1,	2014,	with	an	annual	open	enrollment	period. The	risk	spreading	programs	are	applicable	to	certain	of	our	commercial	medical	insurance	products.	In	the	aggregate,	our	commercial	medical	insurance	products represented	approximately

13%	of	our	total	premiums	and	services	revenue	for	the	year	ended	December	31,	2017,	a	subset	of	which	is	subject	to	these	programs.	These	programs,	commonly referred	to	as	the	3Rs,	include	a	permanent	risk	adjustment	program,	a	transitional	reinsurance	program,	and	a	temporary	risk	corridors	program	designed	to	more	evenly spread	the	financial	risk	borne	by	issuers	and	to	mitigate	the	risk	that	issuers	would	have	mispriced	products.	The	transitional	reinsurance	and	temporary	risk	corridors programs	were	only	applicable	for	years	2014	through	2016.	Policies	issued	prior	to	March	23,	2010	are	considered	grandfathered	policies	and	are	exempt	from	the	3Rs. Certain	states	have	allowed	non-grandfathered	policies	issued	prior	to	January	1,	2014	to	extend	the	date	of	required	transition	to	policies	compliant	with	the	Health	Care Reform	Law	to	as	late	as	2017.	Accordingly,	such	policies	are	exempt	from	the	3Rs	until	they	transition	to	policies	compliant	with	the	Health	Care	Reform	Law.

The	 permanent	 risk	 adjustment	 program	 adjusts	 the	 premiums	 that	 commercial	 individual	 and	 small	 group	 health	 insurance	 issuers	 receive	 based	 on	 the demographic	factors	and	health	status	of	each	member	as	derived	from	current	year	medical	diagnosis	as	reported	throughout	the	year.	This	program	transfers	funds from	lower	risk	plans	to	higher	risk	plans	within	similar	plans	in	the	same	state.	The	risk	adjustment	program	is	applicable	to	commercial	individual	and	small	group health	plans	(except	certain	exempt	and	grandfathered	plans	as	discussed	above)	operating	both	inside	and	outside	of	the	health	insurance	exchanges	established	under the	Health	Care	Reform	Law.	Effective	January	1,	2018,	we	have	exited	our	Individual	Commercial	medical	business.	Under	the	risk	adjustment	program,	a	risk	score is	assigned	to	each	covered	member	to	determine	an	average	risk	score	at	the	individual	and	small	group	level	by	legal	entity	in	a	particular	market	in	a	state. Additionally,	an	average	risk	score	is	determined	for	the	entire	subject	population	for	each	market	in	each	state.	Settlements	are	determined	on	a	net	basis	by	legal	entity and	state.	Each	health	insurance	issuer's	average	risk	score	is	compared	to	the	state's	average	risk	score.	Plans	with	an	average	risk	score	below	the	state	average	will pay	into	a	pool	and	health	insurance	issuers	with	an	average	risk	score	that	is	greater	than	the	state	average	risk	score	will	receive	money	from	that	pool.	We	generally rely	on	providers,	including	certain	network	providers	who	are	our	employees,	to	appropriately	document	all	medical	data,	including	the	diagnosis	codes	submitted	with claims,	as	the	basis	for	our	risk	scores	under	the	program.	Our	estimate	of	amounts	receivable	and/or	payable	under	the	risk	adjustment	program	is	based	on	our	estimate of	both	our	own	and	the	state	average	risk	scores.	Assumptions	used	in	these	estimates	include	but	are	not	limited	to	published	third	party	studies	and	other	publicly available	data	including	regulatory	plan	filings,	geographic	considerations	including	our	historical	experience	in	markets	we	have	participated	in	over	a	long	period	of time,	member	demographics	(including	age	and	gender	for	our	members	and	other	health	insurance	issuers),	our	pricing	model,	sales	data	for	each	metal	tier	(different metal	tiers	yield	different	risk	scores),	and	the	mix	of	previously	underwritten	membership	as	compared	to	new	members	in	plans	compliant	with	the	Health	Care Reform	Law.	We	refine	our	estimates	as	new	information	becomes	available,	including	additional	data	released	by	the	Department	of	Health	and	Human	Services,	or HHS,	regarding	estimates	of	state	average	risk	scores.	Risk	adjustment	is	subject	to	audit	by	HHS	beginning	with	the	2015	coverage	year,	however,	there	were	no payments	associated	with	these	audits	for	2015	or	2016,	the	pilot	years	for	the	audits.

The	temporary	risk	corridor	program	applied	to	individual	and	small	group	Qualified	Health	Plans	(or	substantially	equivalent	plans),	or	QHPs,	as	defined	by	HHS, operating	both	inside	and	outside	of	the	exchanges.	Accordingly,	plans	subject	to	risk	adjustment	that	are	not	QHPs,	including	our	small	group	health	plans,	were	not subject	to	the	risk	corridor	program.	The	risk	corridor	provisions	were	intended	to	limit	issuer	gains	and	losses	by	comparing	allowable	medical	costs	to	a	target	amount, each	defined/prescribed	by	HHS,	and	sharing	the	risk	for	allowable	costs	with	the	federal	government.	Allowable	medical	costs	are	adjusted	for	risk	adjustment settlements,	transitional	reinsurance	recoveries,	and	cost	sharing	reductions	received	from	HHS.	Variances	from	the	target	exceeding	certain	thresholds	may	result	in HHS	making	additional	payments	to	us	or	require	us	to	refund	HHS	a	portion	of	the	premiums	we	received.

We	estimate	and	recognize	adjustments	to	premiums	revenue	for	the	risk	adjustment	and	risk	corridor	provisions	by	projecting	our	ultimate	premium	for	the calendar	year	separately	for	individual	and	group	plans	by	state	and	legal	entity.	Estimated	calendar	year	settlement	amounts	are	recognized	ratably	during	the	year	and are	revised	each	period	to	reflect	current	experience,	including	changes	in	risk	scores	derived	from	medical	diagnoses	submitted	by	providers.	We	record	receivables	or payables	at	the	individual	or	group	level	within	each	state	and	legal	entity	and	classify	the	amounts	as	current	or	long-term	in	our	consolidated	balance	sheets	based	on the	timing	of	expected	settlement.	On	November	10,	2016,	the	U.S.	Court	of	Federal	Claims	ruled	in	favor	of	the	government	in	one	of	a	series	of	cases	filed	by	insurers, unrelated	to	us,	against	HHS	to	collect	risk	corridor	payments,	rejecting	all	of	the	insurer's	statutory,	contract	and	Constitutional	claims	for	payment.	On	November	18, 2016,	HHS	issued	a	memorandum	indicating	a	significant

funding	shortfall	for	the	2015	coverage	year,	the	second	consecutive	year	of	significant	shortfalls.	Given	the	successful	challenge	of	the	risk	corridor	provisions	in	court, Congressional	inquiries	into	the	funding	of	the	risk	corridor	program,	and	significant	funding	shortfalls	under	the	first	two	years	of	the	program,	during	the	fourth quarter	of	2016	we	wrote-off	$583	million	in	risk	corridor	receivables	outstanding	as	of	September	30,	2016,	and	ceased	recognizing	revenues	under	the	risk	corridor program	as	discussed	further	in	Note	7.

The	transitional	reinsurance	program	required	us	to	make	reinsurance	contributions	for	calendar	years	2014	through	2016	to	a	state	or	HHS	established	reinsurance entity	based	on	a	national	contribution	rate	per	covered	member	as	determined	by	HHS.	While	all	commercial	medical	plans,	including	self-funded	plans,	are	required	to fund	the	reinsurance	entity,	only	fully-insured	non-grandfathered	plans	compliant	with	the	Health	Care	Reform	Law	in	the	individual	commercial	market	were	eligible for	recoveries	if	individual	claims	exceed	a	specified	threshold.	Accordingly,	we	accounted	for	transitional	reinsurance	contributions	associated	with	all	commercial medical	health	plans	other	than	these	non-grandfathered	individual	plans	as	an	assessment	in	operating	costs	in	our	consolidated	statements	of	income.	We	accounted	for contributions	made	by	individual	commercial	plans	compliant	with	the	Health	Care	Reform	Law,	which	were	subject	to	recoveries,	as	ceded	premiums	(a	reduction	of premiums)	and	similarly	we	accounted	for	any	recoveries	as	ceded	benefits	(a	reduction	of	benefits	expense)	in	our	consolidated	statements	of	income.

See	Note	7	for	detail	regarding	amounts	recorded	to	the	consolidated	balance	sheets	related	to	the	3Rs.

In	addition	to	the	provisions	discussed	above,	beginning	in	2014,	HHS	paid	us	a	portion	of	the	health	care	costs	for	low-income	individual	members	for	which	we assume	no	risk	in	accordance	with	the	Health	Care	Reform	Law.	These	cost	subsidy	payments	ceased	effective	October	2017.	We	accounted	for	these	subsidies	as	a deposit	in	our	consolidated	balance	sheets	and	as	a	financing	activity	in	our	consolidated	statements	of	cash	flows.	We	did	not	recognize	premiums	revenue	or	benefits expense	for	these	subsidies.	Receipt	and	payment	activity	was	accumulated	at	the	state	and	legal	entity	level	and	recorded	in	our	consolidated	balance	sheet	in	other current	assets	or	trade	accounts	payable	and	accrued	expenses	depending	on	the	state	and	legal	entity	balance	at	the	end	of	the	reporting	period.	We	will	be	notified	of final	settlement	amounts	by	June	30	of	the	year	following	the	coverage	year.	For	2017,	payments	to	HHS	associated	with	cost	sharing	subsidies	for	which	we	did	not assume	risk	were	approximately	$76	million,	exceeding	receipts	of	$32	million	by	$44	million.	For	2016,	payments	to	HHS	associated	with	cost	sharing	subsidies	for which	we	did	not	assume	risk	were	approximately	$373	million,	exceeding	receipts	of	$345	million	by	$28	million.	For	2015,	receipts	from	HHS	associated	with	cost sharing	subsidies	for	which	we	did	not	assume	risk	were	approximately	$478	million,	exceeding	payments	of	$409	million	by	$69	million.

# 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	entirely	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	products	and	professional	liability funding	requirements,	as	well	as	restricted	statutory	deposits,	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.

Under	the	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	other-than-temporary	impairment	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.

# Receivables	and	Revenue	Recognition

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

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

Premiums	revenue	is	estimated	by	multiplying	the	membership	covered	under	the	various	contracts	by	the	contractual	rates.	Premiums	revenue	is	recognized	as income	in	the	period	members	are	entitled	to	receive	services,	and	is	net	of	estimated	uncollectible	amounts,	retroactive	membership	adjustments,	and	adjustments	to recognize	rebates	under	 the	minimum	benefit	ratios	required	under	 the	 Health	 Care	 Reform	 Law.	We	 estimate	 policyholder	 rebates	 by	 projecting	 calendar	 year minimum	benefit	ratios	for	the	individual,	small	group,	and	large	group	markets,	as	defined	by	the	Health	Care	Reform	Law	using	a	methodology	prescribed	by	HHS, separately	by	state	and	legal	entity.	Medicare	Advantage	products	are	also	subject	to	minimum	benefit	ratio	requirements	under	the	Health	Care	Reform	Law.	Estimated calendar	 year	 rebates	 recognized	 ratably	 during	 the	 year	 are	 revised	 each	 period	 to	 reflect	 current	 experience.	 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,	estimated	rebates,	as	well	as	prevailing	and	anticipated	economic	conditions,	and	reflect	any	required	adjustments	in current	operations.	Premiums	received	prior	to	the	service	period	are	recorded	as	unearned	revenues.

# 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	premiums	revenue	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	as	well	as	receipts	for	certain	discounts	on	brand	name	prescription	drugs	in	the	coverage gap	represent	payments	for	prescription	drug	costs	for	which	we	are	not	at	risk.

The	risk	corridor	provisions	compare	costs	targeted	in	our	bids	to	actual	prescription	drug	costs,	limited	to	actual	costs	that	would	have	been	incurred	under	the standard	coverage	as	defined	by	CMS.	Variances	exceeding	certain	thresholds	may	result	in	CMS	making	additional	payments	to	us	or	require	us	to	refund	to	CMS	a portion	of	the	premiums	we	received.	As	risk	corridor	provisions	are	considered	in	our	overall	annual	bid	process,	we	estimate	and	recognize	an	adjustment	to	premiums revenue	related	to	these	provisions	based	upon	pharmacy	claims	experience.	We	record	a	receivable	or	payable	at	the	contract	level	and	classify	the	amount	as	current	or long-term	in	our	consolidated	balance	sheets	based	on	the	timing	of	expected	settlement.

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.	The	Health	Care	Reform	Law	mandates	consumer	discounts	of	50%	on	brand	name	prescription	drugs	for	Part	D	plan	participants	in	the	coverage	gap.	These discounts	are	funded	by	CMS	and	pharmaceutical	manufacturers	while	we	administer	the	application	of	these	funds.	We	account	for	these	subsidies	and	discounts	as	a deposit	in	our	consolidated	balance	sheets	and	as	a	financing	activity	under	receipts	(withdrawals)	from	contract	deposits	in	our	consolidated	statements	of	cash	flows. For	2017,	subsidy	and	discount	reimbursements	of	$12.1	billion	exceeded	payments	of	$10.2	billion	by	$1.9	billion.	For	2016,	subsidy	and	discount	reimbursements	of $11.1	billion	exceeded	payments	of	$10.0	billion	by	$1.1	billion.	For	2015,	subsidy	and	discount	payments	of	$8.9	billion	exceeded	reimbursements	of	$8.6	billion	by $361	million.	We	do	not	recognize	premiums	revenue	or	benefit	expenses	for	these	subsidies	or	discounts.	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.

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.	Settlement	with	CMS	for	brand	name	prescription	drug	discounts	is	based	on	a	reconciliation	made	approximately	14	to	18	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.	See	Note 6	for	detail	regarding	amounts	recorded	to	our	consolidated	balance	sheets	related	to	the	risk	corridor	settlement	and	subsidies	from	CMS	with	respect	to	the	Medicare Part	D	program.

# Patient	services	revenue

Patient	services	include	injury	and	illness	care	and	related	services	as	well	as	other	healthcare	services	related	to	employer	needs	or	as	required	by	law.	Patient services	revenues	are	recognized	in	the	period	services	are	provided	to	the	customer	when	the	sales	price	is	fixed	or	determinable,	and	are	net	of	contractual	allowances.

# Administrative	services	fees

Administrative	services	fees	cover	the	processing	of	claims,	offering	access	to	our	provider	networks	and	clinical	programs,	and	responding	to	customer	service inquiries	from	members	of	self-funded	groups.	Revenues	from	providing	administration	services,	also	known	as	administrative	services	only,	or	ASO,	are	recognized	in the	period	services	are	performed	and	are	net	of	estimated	uncollectible	amounts.	ASO	fees	are	estimated	by	multiplying	the	membership	covered	under	the	various contracts	by	the	contractual	rates.	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 revenue	and	benefits	expense	related	to	these	stop	loss	insurance	contracts.	We	routinely	monitor	the	collectibility	of	specific	accounts,	the	aging	of	receivables,	as	well as	prevailing	and	anticipated	economic	conditions,	and	reflect	any	required	adjustments	in	current	operations.	ASO	fees	received	prior	to	the	service	period	are	recorded as	unearned	revenues.

Under	our	TRICARE	contracts	with	the	Department	of	Defense	we	provide	administrative	services,	including	offering	access	to	our	provider	networks	and	clinical programs,	claim	processing,	customer	service,	enrollment,	and	other	services,	while	the	federal	government	retains	all	of	the	risk	of	the	cost	of	health	benefits.	We account	for	revenues	under	our	contracts	net	of	estimated	health	care	costs	similar	to	an	administrative	services	fee	only	agreement.	Our	contracts	include	fixed administrative	services	fees	and	incentive	fees	and	penalties.	Administrative	services	fees	are	recognized	as	services	are	performed.

Our	TRICARE	members	are	served	by	both	in-network	and	out-of-network	providers	in	accordance	with	our	contracts.	We	pay	health	care	costs	related	to	these services	to	the	providers	and	are	subsequently	reimbursed	by	the	DoD	for	such	payments.	We	account	for	the	payments	of	the	federal	government's	claims	and	the related	reimbursements	under	deposit	accounting	in	our	consolidated	balance	sheets	and	as	a	financing	activity	under	receipts	(withdrawals)	from	contract	deposits	in our	consolidated	statements	of	cash	flows.	For	2017,	health	care	cost	reimbursements	and	payments	were	each	approximately	$3.4	billion,	 with	 reimbursements exceeding	 payments	 by	$11	million	for	 the	year.	For	2016,	health	care	cost	reimbursements	and	payments	were	each	approximately	$3.3	billion,	 with	 payments exceeding	reimbursements	by	$25	million	for	the	year.	For	2015,	health	care	cost	reimbursements	and	payments	were	each	approximately	$3.3	billion	with	payments exceeding	reimbursements	by	$4	million	for	the	year.

# Receivables

Receivables,	including	premium	receivables,	patient	services	revenue	receivables,	and	ASO	fee	receivables,	are	shown	net	of	allowances	for	estimated	uncollectible accounts,	retroactive	membership	adjustments,	and	contractual	allowances.

# Other	Current	Assets

Other	current	assets	includes	amounts	associated	with	Medicare	Part	D	as	discussed	above	and	in	Note	6,	rebates	due	from	pharmaceutical	manufacturers	and	other amounts	due	within	one	year.	We	accrue	pharmaceutical	rebates	as	they	are	earned	based	on	contractual	terms	and	usage	of	the	product.	The	balance	of	pharmaceutical rebates	receivable	was	$1.2	billion	at	December	31,	2017	and	$889	million	at	December	31,	2016.

# Policy	Acquisition	Costs

Policy	acquisition	costs	are	those	costs	that	relate	directly	to	the	successful	acquisition	of	new	and	renewal	insurance	policies.	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	1-year	term	and	may be	canceled	upon	30	days	notice	by	the	employer	group.

Life	insurance,	annuities,	and	certain	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	and	premium	received	in	the	earlier	years	is	intended	to	pay	anticipated	benefits	to	be	incurred	in future	years.	As

a	result,	we	defer	policy	acquisition	costs,	primarily	consisting	of	commissions,	and	amortize	them	over	the	estimated	life	of	the	policies	in	proportion	to	premiums earned.	Deferred	acquisition	costs	are	reviewed	to	determine	if	they	are	recoverable	from	future	income.	See	Note	18.

Beginning	in	2014,	health	policies	sold	to	individuals	that	conform	to	the	Health	Care	Reform	Law	are	accounted	for	under	a	short-duration	model	and	accordingly policy	acquisition	costs	are	expensed	as	incurred	because	premiums	received	in	the	current	year	are	intended	to	pay	anticipated	benefits	in	that	year.	In	addition,	as previously	underwritten	members	transition	to	plans	compliant	with	the	Health	Care	Reform	Law,	it	results	in	policy	lapses	and	the	recognition	of	previously	deferred acquisition	costs.

# Long-Lived	Assets

Property	and	equipment	is	recorded	at	cost.	Gains	and	losses	on	sales	or	disposals	of	property	and	equipment	are	included	in	operating	costs.	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	5	years	for	computer	software,	and	10	to	20	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	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.

As	discussed	further	below,	we	early	adopted	the	Financial	Accounting	Standards	Board,	or	FASB,	issued	guidance	simplifying	the	accounting	for	goodwill impairment.	We	use	the	one-step	process	to	review	goodwill	for	impairment	to	determine	both	the	existence	and	amount	of	goodwill	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.	We	rely	on	an	evaluation	of future	discounted	cash	flows	to	determine	fair	value	of	our	reporting	units.	Impairment	tests	completed	for	2017,	2016,	and	2015	did	not	result	in	an	impairment	loss.

Other	intangible	assets	primarily	relate	to	acquired	customer	contracts/relationships	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	Benefits	Expense	Recognition

Benefits	expense	includes	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	on	or	prior	to	the	balance	sheet	date.	Capitation payments	represent	monthly	contractual	fees	disbursed	to	primary	care	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	our	consolidated	balance	sheets.	Other	supplemental	benefits	include	dental,	vision,	and	other	supplemental	health	and	financial	protection	products.

We	estimate	the	costs	of	our	benefits	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.

Benefits	expense	is	recognized	in	the	period	in	which	services	are	provided	and	includes	an	estimate	of	the	cost	of	services	which	have	been	incurred	but	not	yet reported,	or	IBNR.	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	two	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	two	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	two	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	two	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	 recoveries	 of	 overpayments,	 receipt	 cycle	 times,	 claim	 inventory	 levels,	 outsourcing,	 system	 conversions,	 and processing	disruptions	due	to	weather	or	other	events	affect	views	regarding	the	reasonable	choice	of	completion	factors.	Claim	payments	to	providers	for	services rendered	are	often	net	of	overpayment	recoveries	for	claims	paid	previously,	as	contractually	allowed.	Claim	overpayment	recoveries	can	result	from	many	different factors,	including	retroactive	enrollment	activity,	audits	of	provider	billings,	and/or	payment	errors.	Changes	in	patterns	of	claim	overpayment	recoveries	can	be unpredictable	and	result	in	completion	factor	volatility,	as	they	often	impact	older	dates	of	service.	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.	Increases	in	electronic	claim	submissions	from	providers	decrease	the	receipt	cycle time.	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,	new	higher	priced	technologies	and	medical	procedures,	and	new	prescription	drugs	and	therapies,	as	well	as	the	inflationary	effect on	the	cost	per	unit	of

each	of	these	expense	components.	Other	external	factors	such	as	government-mandated	benefits	or	other	regulatory	changes,	the	tort	liability	system,	increases	in medical	services	capacity,	direct	to	consumer	advertising	for	prescription	drugs	and	medical	services,	an	aging	population,	lifestyle	changes	including	diet	and	smoking, 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	two	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	two	months.	Each	of	these	factors	requires	significant judgment	by	management.

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	reserve	in	current	operations	to	the	extent	that	the	sum	of	expected	future	costs,	claim	adjustment	expenses,	and	maintenance costs	exceeds	related	future	premiums	under	contracts	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	would	not	record	a	material	premium	deficiency	reserve,	except	when	unanticipated	adverse	events	or	changes	in	circumstances indicate	otherwise.	In	the	fourth	quarter	of	2015,	we	recognized	a	premium	deficiency	reserve	of	$176	million	for	our	individual	commercial	medical	business	compliant with	the	Health	Care	Reform	Law	associated	with	the	2016	coverage	year	and	recorded	a	change	in	estimate	of	$208	million	in	the	second	quarter	of	2016	associated with	the	2016	coverage	year	as	discussed	in	more	detail	in	Note	7.	As	of	December	31,	2016	and	December	31,	2017,	we	had	no	remaining	premium	deficiency	reserve.

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	long-term	care,	life	insurance,	annuities,	and	certain	health	and	other supplemental	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.	At	 policy	 issuance,	 these	 reserves	 are	 recognized	 on	 a	 net	 level	 premium	 method	 based	 on	 interest	 rates,	 mortality,	 morbidity,	 and	 maintenance	 expense assumptions.	Interest	rates	are	based	on	our	expected	net	investment	returns	on	the	investment	portfolio	supporting	the	reserves	for	these	blocks	of	business.	Mortality,	a measure	of	expected	death,	and	morbidity,	a	measure	of	health	status,	assumptions	are	based	on	industry	actuarial	tables,	modified	based	upon	actual	experience. Changes	in	estimates	of	these	reserves	are	recognized	as	an	adjustment	to	benefits	expense	in	the	period	the	changes	occur.	We	perform	loss	recognition	tests	at	least annually	in	the	fourth	quarter,	and	more	frequently	if	adverse	events	or	changes	in	circumstances	indicate	that	the	level	of	the	liability,	together	with	the	present	value	of future	gross	premiums,	may	not	be	adequate	to	provide	for	future	expected	policy	benefits	and	maintenance	costs.	During	2016,	we	recorded	a	loss	for	a	premium deficiency	as	discussed	further	in	Note	18.

We	adjust	future	policy	benefits	payable	for	the	additional	liability	that	would	have	been	recorded	if	investment	securities	backing	the	liability	had	been	sold	at	their stated	aggregate	fair	value	and	the	proceeds	reinvested	at	current	yields.	We	include	the	impact	of	this	adjustment,	if	any,	net	of	applicable	deferred	taxes,	with	the change	in	unrealized	investment	gain	(loss)	in	accumulated	other	comprehensive	income	in	stockholders'	equity.	As	discussed	previously,	beginning	in	2014,	health policies	sold	to	individuals	that	conform	to	the	Health	Care	Reform	Law	are	accounted	for	under	a	short-duration	model	under	which	policy	reserves	are	not	established because	premiums	received	in	the	current	year	are	intended	to	pay	anticipated	benefits	in	that	year.	In	addition,	as	previously	underwritten	members	transition	to	plans compliant	with	the	Health	Care	Reform	Law,	it	results	in	policy	lapses	and	the	release	of	reserves	for	future	policy	benefits.

# Book	Overdraft

Under	our	cash	management	system,	checks	issued	but	not	yet	presented	to	banks	that	would	result	in	negative	bank	balances	when	presented	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.	Deferred	tax	assets	and deferred	tax	liabilities	are	further	adjusted	for	changes	in	the	enacted	tax	rates.

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

On	October	29,	2012,	we	acquired	a	noncontrolling	equity	interest	in	MCCI	Holdings,	LLC,	or	MCCI,	a	privately	held	Medical	Services	Organization,	or	MSO, headquartered	in	Miami,	Florida,	that	primarily	coordinates	medical	care	for	Medicare	Advantage	beneficiaries	in	Florida	and	Texas.	Our	agreement	with	MCCI includes	a	put	option	that	would	allow	the	controlling	interest	holder	to	put	their	interest	to	us	beginning	in	2018	as	well	as	a	call	option	that	would	allow	us	to	purchase the	controlling	interest	beginning	in	2021.	Accordingly,	we	recorded	the	effects	of	the	put	and	call	option	at	fair	value.	Changes	in	the	fair	values	during	the	years	ended December	31,	2017,	2016,	and	2015	were	not	material	to	our	results	of	operations,	financial	condition,	or	cash	flows.

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.	We	were	not	party	to	any interest-rate	swap	agreements	in	2017,	2016,	or	2015.

# Related	Party

As	noted	above,	MCCI	is	a	related	party	to	Humana.	In	December	2015,	we	purchased	a	note	receivable	directly	from	a	third-party	bank	syndicate	related	to	the financing	of	MCCI's	business	and	extended	the	exercise	date	of	the	put	option	to	2018	and	the	call	option	to	2021.	The	note	receivable	balance	was	$349	million	and $314	million	at	December	31,	2017	and	2016,	respectively,	and	was	included	with	other	long-term	assets	in	our	consolidated	balance	sheets.	The	note	receivable	bears interest	at	10%	annually,	payable	in	quarterly	installments,	and	matures	in	December	2020.	We	have	also	entered	into	a	revolving	note	agreement	providing	a	line	of credit	up	to	$55	million	under	which	$18	million	was	outstanding	at	December	31,	2017,	and	we	had	no	balance	outstanding	at	December	31,	2016.	The	2015	note purchase	is	included	with	purchases	of	investment	securities	in	our	consolidated	statements	of	cash	flows.	The	related	interest	income	of	$35	million	and	$30	million	for 2017	and	2016,	respectively,	is	included	in	investment	income	in	our	consolidated	statements	of	income.	The	interest	was	accrued	to	the	loan	balance	during	2017	and 2016	pursuant	to	the	terms	of	the	note.	MCCI	provides	services	to	Humana	Medicare	Advantage	members	under	capitation	contracts	with	our	health	plans.	Under	these capitation	agreements	with	Humana,	MCCI	assumes	the	financial	risk	associated	with	these	Medicare	Advantage	members.	We	also	have	an	outstanding	advance	to MCCI	of	approximately	$3	million	and	$6	million	at	December	31,	2017	and	2016,	respectively,	with	repayment	terms	tied	to	the	performance

under	the	capitation	agreements.	We	recognized	benefits	expense	of	approximately	$1.1	billion in	2017,	$1.1	billion in	2016 and	$1.0	billion in	2015	under	these capitation	agreements	with	MCCI.

# Stock-Based	Compensation

We	generally	recognize	stock-based	compensation	expense,	as	determined	on	the	date	of	grant	at	fair	value,	on	a	straight-line	basis	over	the	period	during	which	an employee	is	required	to	provide	service	in	exchange	for	the	award	(the	vesting	period).	In	addition,	for	awards	with	both	time	and	performance-based	conditions,	we generally	recognize	compensation	expense	on	a	straight	line	basis	over	the	vesting	period	when	it	is	probable	that	the	performance	condition	will	be	achieved.	However, prior	to	July	2,	2015,	for	awards	granted	to	retirement	eligible	employees,	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.	For	awards	granted	on	or	after	July	2,	2015	to	retirement	eligible	employees, we	recognize	expense	on	a	straight-line	basis	over	the	service	period	(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.	Prior	to	2016	we	reported certain	tax	effects	of	stock-based	compensation	as	a	financing	activity	rather	than	an	operating	activity	in	the	consolidated	statement	of	cash	flows.	In	2016,	we prospectively	applied	the	provisions	of	new	guidance	issued	by	the	FASB	related	to	the	presentation	of	windfall	tax	benefits	as	cash	flows	from	operating	activities which	resulted	in	reclassifying	$20	million	of	cash	flows	from	financing	activities	to	operating	activities	for	the	three	months	ended	March	31,	2016.	We	estimate forfeitures	expected	to	occur	to	determine	the	amount	of	compensation	cost	to	be	recognized	in	each	period.

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,	or	units,	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	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	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	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	generally	using	a	market	valuation	approach,	or,	less	frequently,	an	income	valuation	approach	and	are generally

classified	as	Level	2.	We	obtain	at	least	one	price	for	each	security	from	a	third	party	pricing	service.	These	prices	are	generally	derived	from	recently	reported	trades	for identical	or	similar	securities,	including	adjustments	through	the	reporting	date	based	upon	observable	market	information.	When	quoted	prices	are	not	available,	the third	party	pricing	service	may	use	quoted	market	prices	of	comparable	securities	or	discounted	cash	flow	analysis,	incorporating	inputs	that	are	currently	observable	in the	markets	for	similar	securities.	Inputs	that	are	often	used	in	the	valuation	methodologies	include	benchmark	yields,	reported	trades,	credit	spreads,	broker	quotes, default	rates,	and	prepayment	speeds.	We	are	responsible	for	the	determination	of	fair	value	and	as	such	we	perform	analysis	on	the	prices	received	from	the	third	party pricing	service	to	determine	whether	the	prices	are	reasonable	estimates	of	fair	value.	Our	analysis	includes	a	review	of	monthly	price	fluctuations	as	well	as	a	quarterly comparison	of	the	prices	received	from	the	pricing	service	to	prices	reported	by	our	third	party	investment	advisor.	In	addition,	on	a	quarterly	basis	we	examine	the underlying	inputs	and	assumptions	for	a	sample	of	individual	securities	across	asset	classes,	credit	rating	levels,	and	various	durations.

Fair	value	of	privately	held	debt	securities,	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.	Auction	rate	securities	are	debt	instruments	with	interest	rates	that	reset through	periodic	short-term	auctions.	From	time	to	time,	liquidity	issues	in	the	credit	markets	have	led	to	failed	auctions.	Given	the	liquidity	issues,	fair	value	could	not be	estimated	based	on	observable	market	prices,	and	as	such,	unobservable	inputs	were	used.	For	auction	rate	securities,	valuation	methodologies	include	consideration of	the	quality	of	the	sector	and	issuer,	underlying	collateral,	underlying	final	maturity	dates,	and	liquidity.

# Recently	Issued	Accounting	Pronouncements

# Recently	Adopted	Accounting	Pronouncements

In	January	2017,	the	FASB	issued	guidance	which	simplifies	the	accounting	for	goodwill	impairment.	The	new	guidance	eliminates	the	requirement	to	calculate	the implied	fair	value	of	goodwill	to	measure	a	goodwill	impairment	charge.	A	goodwill	impairment	charge	would	be	recognized	if	the	carrying	amount	of	a	reporting	unit exceeds	the	estimated	fair	value	of	the	reporting	unit.	The	new	guidance	is	effective	beginning	with	annual	and	interim	periods	in	2020,	with	early	adoption	permitted, and	is	to	be	applied	prospectively.	We	early	adopted	this	new	guidance	in	the	fourth	quarter	of	2017	and	it	did	not	have	an	impact	on	our	results	of	operations,	financial condition,	or	cash	flows.

# Accounting	Pronouncements	Effective	in	Future	Periods

In	March	2017,	the	FASB	issued	new	guidance	that	amends	the	accounting	for	premium	amortization	on	purchased	callable	debt	securities	by	shortening	the amortization	period.	This	amended	guidance	requires	the	premium	to	be	amortized	to	the	earliest	call	date	instead	of	maturity	date.	The	new	guidance	is	effective	for	us beginning	with	annual	and	interim	periods	in	2019.	We	do	not	expect	adoption	of	this	guidance	will	have	a	material	impact	on	our	results	of	operations,	financial condition	and	cash	flows.

In	June	2016,	the	FASB	issued	guidance	introducing	a	new	model	for	recognizing	credit	losses	on	financial	instruments	based	on	an	estimate	of	current	expected credit	losses.	The	guidance	is	effective	for	us	beginning	January	1,	2020.	The	new	current	expected	credit	losses	(CECL)	model	generally	calls	for	the	immediate recognition	 of	 all	 expected	 credit	 losses	 and	 applies	 to	 loans,	 accounts	 and	 trade	 receivables	 as	 well	 as	 other	 financial	 assets	 measured	 at	 amortized	 cost,	 loan commitments	and	off-balance	sheet	credit	exposures,	debt	securities	and	other	financial	assets	measured	at	fair	value	 through	other	comprehensive	 income,	and beneficial	interests	in	securitized	financial	assets.	The	new	guidance	replaces	the	current	incurred	loss	model	for	measuring	expected	credit	losses,	requires	expected losses	on	available-for-sale	debt	securities	to	be	recognized	through	an	allowance	for	credit	losses	rather	than	as	reductions	in	the	amortized	cost	of	the	securities,	and provides	for	additional	disclosure	requirements.	Our	investment	portfolio	consists	of	available-for-sale	debt	securities.	We	are	currently	evaluating	the	impact	on	our results	of	operations,	financial	condition,	or	cash	flows.

In	February	2016,	the	FASB	issued	new	guidance	related	to	accounting	for	leases	which	requires	lessees	to	record	assets	and	liabilities	reflecting	the	leased	assets and	lease	obligations,	respectively,	while	following	the	dual	model	for	recognition	in	statements	of	income	requiring	leases	to	be	classified	as	either	operating	or	finance. Operating	leases	will	result	in	straight-line	expense	(similar	to	current	operating	leases)	while	finance	leases	will	result	in	a	front-loaded	expense	pattern	(similar	to current	 capital	 leases).	 The	 new	 guidance	 is	 effective	 for	 us	 beginning	 with	 annual	 and	 interim	 periods	 in	 2019,	 with	 earlier	 adoption	 permitted,	 and	 requires retrospective	application	to	previously	issued	annual	and	interim	financial	statements.	We	have	begun	the	process	of	identifying	the	population	of	lease	agreements	and other	arrangements	that	may	contain	embedded	leases	for	purposes	of	adopting	the	new	standard.	While	we	expect	to	record	significant	leased	assets	and	corresponding lease	obligations	based	on	our	existing	population	of	individual	leases,	we	continue	to	evaluate	the	impact	on	our	results	of	operations,	financial	position	and	cash	flows.

In	May	2014,	 the	FASB	 issued	new	guidance	 that	amends	 the	accounting	for	revenue	recognition.	The	amendments	are	 intended	 to	provide	a	more	robust framework	for	addressing	revenue	issues,	improve	comparability	of	revenue	recognition	practices,	and	improve	disclosure	requirements.	Insurance	contracts	are	not included	 in	 the	 scope	 of	 this	 new	 guidance.	 Accordingly,	 our	 premiums	 revenue	 and	 investment	 income,	 collectively	 representing	 approximately	98%	 of	 our consolidated	external	revenues	for	2017,	are	not	included	in	the	scope	of	the	new	guidance.	We	adopted	the	new	standard	effective	January	1,	2018,	as	allowed,	using the	modified	retrospective	approach.	As	the	majority	of	or	revenues	are	not	subject	to	the	new	guidance	and	the	remaining	revenues'	accounting	treatment	did	not materially	differ	from	existing	accounting	treatment,	the	adoption	of	the	new	standard	did	not	have	a	material	impact	on	our	consolidated	results	of	operations,	financial condition,	cash	flows,	and	disclosures.

There	are	no	other	recently	issued	accounting	standards	that	apply	to	us	or	that	are	expected	to	have	a	material	impact	on	our	results	of	operations,	financial condition,	or	cash	flows.

On	June	1,	2015,	we	completed	the	sale	of	our	wholly	owned	subsidiary,	Concentra	Inc.,	or	Concentra,	to	MJ	Acquisition	Corporation,	a	joint	venture	between Select	Medical	Holdings	Corporation	and	Welsh,	Carson,	Anderson	&	Stowe,	a	private	equity	fund,	for	approximately	$1,055	million	in	cash,	excluding	approximately $22	million	of	transaction	costs.	In	connection	with	the	sale,	we	recognized	a	pre-tax	gain,	net	of	transaction	costs,	of	$270	million	which	is	reported	as	gain	on	sale	of business	in	the	accompanying	consolidated	statements	of	income	for	the	year	ended	December	31,	2015.	The	accompanying	consolidated	statements	of	income	include revenues	related	to	Concentra	of	$411	million	in	2015.

During	2017,	2016	and	2015,	we	acquired	health	and	wellness	related	businesses	which,	individually	or	in	the	aggregate,	have	not	had	a	material	impact	on	our results	of	operations,	financial	condition,	or	cash	flows.	The	results	of	operations	and	financial	condition	of	these	businesses	have	been	included	in	our	consolidated statements	of	income	and	consolidated	balance	sheets	from	the	respective	acquisition	dates.	Acquisition-related	costs	recognized	in	each	of	2017,	2016,	and	2015	were not	material	to	our	results	of	operations.	The	pro	forma	financial	information	assuming	the	acquisitions	had	occurred	as	of	the	beginning	of	the	calendar	year	prior	to	the year	of	acquisition,	as	well	as	the	revenues	and	earnings	generated	during	the	year	of	acquisition,	were	not	material	for	disclosure	purposes.

Investment	securities	classified	as	current	and	long-term	were	as	follows	at	December	31,	2017	and	2016,	respectively:

| U.S.	Treasury	and	agency	obligations | $532 | $1 | $(2) | $531 |
| :--- | :--- | :--- | :--- | :--- |
| Mortgage-backed\tsecurities | 1,625 | 4 | (19) | 1,610 |
| Tax-exempt\tmunicipal\tsecurities | 3,884 | 33 | (28) | 3,889 |
| Mortgage-backed\tsecurities: |  |  |  |  |
| Residential | 26 | — | — | 26 |
| Commercial | 455 | 3 | (2) | 456 |
| Asset-backed\tsecurities | 407 | 1 | — | 408 |
| Corporate\tdebt\tsecurities | 5,175 | 244 | (37) | 5,382 |
| Total\tdebt\tsecurities | $12,104 | $286 | $(88) | $12,302 |
| December\t31,\t2016 |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\ncorporations\tand\tagencies: |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | $800 | $1 | $(15) | $786 |
| Mortgage-backed\tsecurities | 1,662 | 6 | (31) | 1,637 |
| Tax-exempt\tmunicipal\tsecurities | 3,358 | 15 | (68) | 3,305 |
| Mortgage-backed\tsecurities: |  |  |  |  |
| Residential | 9 | — | — | 9 |
| Commercial | 307 | 1 | (4) | 304 |
| Asset-backed\tsecurities | 160 | — | — | 160 |
| Corporate\tdebt\tsecurities | 3,530 | 145 | (78) | 3,597 |
| Total\tdebt\tsecurities | $9,826 | $168 | $(196) | $9,798 |

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,	2017	and	2016,	respectively:

|  | Less	than	12	months |  | 12	months	or	more |  | Total |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Fair\nValue | Gross\nUnrealized\nLosses | Fair\nValue | Gross\nUnrealized\nLosses | Fair\nValue | Gross\nUnrealized\nLosses |
|  |  |  | (in\tmillions) |  |  |  |
| \tDecember\t31,\t2017 |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\ncorporations\tand\tagencies: |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | $273 | $(1) | $130 | $(1) | $403 | $(2) |
| Mortgage-backed\tsecurities | 581 | (2) | 672 | (17) | 1,253 | (19) |
| \tTax-exempt\tmunicipal\tsecurities | 1,590 | (16) | 661 | (12) | 2,251 | (28) |
| \tMortgage-backed\tsecurities: |  |  |  |  |  |  |
| Residential | 20 | — | 3 | — | 23 | — |
| Commercial | 131 | (1) | 28 | (1) | 159 | (2) |
| \tAsset-backed\tsecurities | 107 | — | 10 | — | 117 | — |
| \tCorporate\tdebt\tsecurities | 1,297 | (10) | 804 | (27) | 2,101 | (37) |
| Total\tdebt\tsecurities | $3,999 | $(30) | $2,308 | $(58) | $6,307 | $(88) |
| \tDecember\t31,\t2016 |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\ncorporations\tand\tagencies: |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | $697 | $(15) | $3 | $— | $700 | $(15) |
| Mortgage-backed\tsecurities | 1,528 | (31) | 3 | — | 1,531 | (31) |
| \tTax-exempt\tmunicipal\tsecurities | 2,756 | (67) | 43 | (1) | 2,799 | (68) |
| \tMortgage-backed\tsecurities: |  |  |  |  |  |  |
| Residential | — | — | 4 | — | 4 | — |
| Commercial | 182 | (3) | 24 | (1) | 206 | (4) |
| \tAsset-backed\tsecurities | 51 | — | 63 | — | 114 | — |
| \tCorporate\tdebt\tsecurities | 1,544 | (71) | 69 | (7) | 1,613 | (78) |
| Total\tdebt\tsecurities | $6,758 | $(187) | $209 | $(9) | $6,967 | $(196) |

Approximately	98%	of	our	debt	securities	were	investment-grade	quality,	with	a	weighted	average	credit	rating	of	AA	by	S&P	at	December	31,	2017.	Most	of	the debt	securities	that	were	below	investment-grade	were	rated	BB,	the	higher	end	of	the	below	investment-grade	rating	scale.	At	December	31,	2017,	6%	of	our	tax-exempt municipal	securities	were	pre-refunded,	generally	with	U.S.	government	and	agency	securities.	Tax-exempt	municipal	securities	 that	were	not	pre-refunded	were diversified	among	general	obligation	bonds	of	U.S.	states	and	local	municipalities	as	well	as	special	revenue	bonds.	General	obligation	bonds,	which	are	backed	by	the taxing	power	and	full	faith	of	the	issuer,	accounted	for	49%	of	the	tax-exempt	municipals	that	were	not	pre-refunded	in	the	portfolio.	Special	revenue	bonds,	issued	by	a municipality	to	finance	a	specific	public	works	project	such	as	utilities,	water	and	sewer,	transportation,	or	education,	and	supported	by	the	revenues	of	that	project, accounted	for	the	remaining	51%	of	these	municipals.	Our	general	obligation	bonds	are	diversified	across	the	United	States	with	no	individual	state	exceeding	9%.	In addition,	2%	of	our	tax-exempt	securities	were	insured	by	bond	insurers	and	had	an	equivalent	weighted	average	S&P	credit	rating	of	AA	exclusive	of	the	bond	insurers' guarantee.	Our	investment	policy	limits	investments	in	a	single	issuer	and	requires	diversification	among	various	asset	types.

Residential	mortgage	back	securities	comprised	approximately	93%	of	our	agency	mortgage-backed	securities	at	December	31,	2017	 and	99%	 at	December	31,

The	percentage	of	corporate	securities	associated	with	the	financial	services	industry	was	30%	at	December	31,	2017	and	23%	at	December	31,	2016.

Our	unrealized	loss	from	all	securities	was	generated	from	approximately	900	positions	out	of	a	total	of	approximately	2,410	positions	at	December	31,	2017.	All issuers	of	securities	we	own	that	were	trading	at	an	unrealized	loss	at	December	31,	2017	remain	current	on	all	contractual	payments.	After	taking	into	account	these	and other	factors	previously	described,	we	believe	these	unrealized	losses	primarily	were	caused	by	an	increase	in	market	interest	rates	in	the	current	markets	than	when	the securities	were	purchased.	At	December	31,	2017,	we	did	not	intend	to	sell	the	securities	with	an	unrealized	loss	position	in	accumulated	other	comprehensive	income, and	it	is	not	likely	that	we	will	be	required	to	sell	these	securities	before	recovery	of	their	amortized	cost	basis.	As	a	result,	we	believe	that	the	securities	with	an unrealized	loss	were	not	other-than-temporarily	impaired	at	December	31,	2017.

The	detail	of	realized	gains	(losses)	related	to	investment	securities	and	included	within	investment	income	was	as	follows	for	the	years	ended	December	31,	2017, 2016,	and	2015:

| Gross	realized	gains | $35 | $120 | $179 |
| :--- | :--- | :--- | :--- |
| Gross\trealized\tlosses | (21) | (24) | (33) |
| Net\trealized\tcapital\tgains | $14 | \t $96 | \t $146 |

There	were	no	material	other-than-temporary	impairments	in	2017,	2016,	or	2015.

The	contractual	maturities	of	debt	securities	available	for	sale	at	December	31,	2017,	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<br>Cost | Fair<br>Value |
| :--- | :--- | :--- |
|  | (in\tmillions) |  |
| Due\twithin\tone\tyear | $712 | \t $711 |
| Due\tafter\tone\tyear\tthrough\tfive\tyears | 2,872 | 2,867 |
| Due\tafter\tfive\tyears\tthrough\tten\tyears | 2,661 | 2,657 |
| Due\tafter\tten\tyears | 3,346 | 3,567 |
| Mortgage\tand\tasset-backed\tsecurities | 2,513 | 2,500 |
| Total\tdebt\tsecurities | $12,104 | \t $12,302 |

# Financial	Assets

The	following	table	summarizes	our	fair	value	measurements	at	December	31,	2017	and	2016,	respectively,	for	financial	assets	measured	at	fair	value	on	a	recurring basis:

|  |  | Fair	Value	Measurements	Using | Fair	Value	Measurements	Using |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Fair\tValue | Quoted\tPrices\nin\tActive\nMarkets\n(Level\t1) | Other\nObservable\nInputs\n(Level\t2) | Unobservable\nInputs\n(Level\t3) |
|  |  | (in\tmillions) |  |  |
| December\t31,\t2017 |  |  |  |  |
| Cash\tequivalents | $4,564 | $4,564 | $— | $— |
| Debt\tsecurities: |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\tcorporations\tand\nagencies: |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | 531 | — | 531 | — |
| Mortgage-backed\tsecurities | 1,610 | — | 1,610 | — |
| Tax-exempt\tmunicipal\tsecurities | 3,889 | — | 3,889 | — |
| Mortgage-backed\tsecurities: |  |  |  |  |
| Residential | 26 | — | 26 | — |
| Commercial | 456 | — | 456 | — |
| Asset-backed\tsecurities | 408 | — | 408 | — |
| Corporate\tdebt\tsecurities | 5,382 | — | 5,381 | 1 |
| Total\tdebt\tsecurities | 12,302 | — | 12,301 | 1 |
| Total\tinvested\tassets | $16,866 | $4,564 | $12,301 | $1 |
| December\t31,\t2016 |  |  |  |  |
| Cash\tequivalents | $3,654 | $3,654 | $— | $— |
| Debt\tsecurities: |  |  |  |  |
| U.S.\tTreasury\tand\tother\tU.S.\tgovernment\tcorporations\tand\nagencies: |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tobligations | 786 | — | 786 | — |
| Mortgage-backed\tsecurities | 1,637 | — | 1,637 | — |
| Tax-exempt\tmunicipal\tsecurities | 3,305 | — | 3,302 | 3 |
| Mortgage-backed\tsecurities: |  |  |  |  |
| Residential | 9 | — | 9 | — |
| Commercial | 304 | — | 304 | — |
| Asset-backed\tsecurities | 160 | — | 160 | — |
| Corporate\tdebt\tsecurities | 3,597 | — | 3,593 | 4 |
| Total\tdebt\tsecurities | 9,798 | — | 9,791 | 7 |
| Total\tinvested\tassets | $13,452 | $3,654 | $9,791 | $7 |

There	were	no	material	transfers	between	Level	1	and	Level	2	during	2017	or	2016.

Our	Level	3	assets	had	a	fair	value	of	$1	million	at	December	31,	2017,	or	less	than	0.1%	of	our	total	invested	assets.	During	the	years	ended	December	31,	2017, 2016,	and	2015,	the	changes	in	the	fair	value	of	the	assets	measured	using	significant	unobservable	inputs	(Level	3)	were	comprised	of	the	following:

|  |  | 2017 |  |  | 2016 |  |  | 2015 |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Private\nPlacements | Auction\nRate\nSecurities | Total | Private\nPlacements | Auction\nRate\nSecurities | Total | Private\nPlacements | Auction\nRate\nSecurities | Total |
|  |  |  |  |  | (in\tmillions) |  |  |  |  |
| Beginning\tbalance\tat\tJanuary\t1 | $4 | $3 | $7 | $6 | $5 | $11 | $24 | $8 | $32 |
| Total\tgains\tor\tlosses: |  |  |  |  |  |  |  |  |  |
| Realized\tin\tearnings | — | — | — | — | — | — | (1) | — | (1) |
| Unrealized\tin\tother\ncomprehensive\tincome | — | — | — | — | — | — | — | — | — |
| Purchases | — | — | — | — | — | — | — | — | — |
| Sales | (3) | — | (3) | — | — | — | (17) | (3) | (20) |
| Settlements | — | (3) | (3) | (2) | (2) | (4) | — | — | — |
| Balance\tat\tDecember\t31 | $1 | $— | $1 | $4 | $3 | $7 | $6 | $5 | $11 |

# Financial	Liabilities

Our	long-term	debt,	recorded	at	carrying	value	in	our	consolidated	balance	sheets,	was	$4,770	million	at	December	31,	2017	and	$3,792	million	at	December	31, 2016.	The	fair	value	of	our	long-term	debt	was	$5,191	million	at	December	31,	2017	and	$4,004	million	at	December	31,	2016.	The	fair	value	of	our	long-term	debt	is determined	based	on	Level	2	inputs,	including	quoted	market	prices	for	the	same	or	similar	debt,	or	if	no	quoted	market	prices	are	available,	on	the	current	prices estimated	to	be	available	to	us	for	debt	with	similar	terms	and	remaining	maturities.

Due	to	the	short-term	nature,	carrying	value	approximates	fair	value	for	our	commercial	paper	borrowings.	There	were	outstanding	commercial	paper	borrowings of	$150	million	outstanding	at	December	31,	2017,	compared	to	$300	million	outstanding	at	December	31,	2016.

# Assets	and	Liabilities	Measured	at	Fair	Value	on	a	Nonrecurring	Basis

As	disclosed	in	Note	3,	we	completed	our	acquisitions	of	certain	health	and	wellness	related	businesses	during	2017,	2016,	and	2015.	The	values	of	net	tangible assets	acquired	and	the	resulting	goodwill	and	other	intangible	assets	were	recorded	at	fair	value	using	Level	3	inputs.	The	majority	of	the	related	tangible	assets acquired	and	liabilities	assumed	were	recorded	at	their	carrying	values	as	of	the	respective	dates	of	acquisition,	as	their	carrying	values	approximated	their	fair	values due	to	their	short-term	nature.	The	fair	values	of	goodwill	and	other	intangible	assets	acquired	in	these	acquisitions	were	internally	estimated	primarily	based	on	the income	approach.	The	income	approach	estimates	fair	value	based	on	the	present	value	of	the	cash	flows	that	the	assets	are	expected	to	generate	in	the	future.	We developed	internal	estimates	for	the	expected	cash	flows	and	discount	rates	in	the	present	value	calculations.	Other	than	assets	acquired	and	liabilities	assumed	in	these acquisitions,	there	were	no	material	assets	or	liabilities	measured	at	fair	value	on	a	nonrecurring	basis	during	2017,	2016,	or	2015.

As	 discussed	 in	 Note	 2,	 we	 cover	 prescription	 drug	 benefits	 in	 accordance	 with	 Medicare	 Part	 D	 under	 multiple	 contracts	 with	 CMS.	 The	 accompanying consolidated	balance	sheets	include	the	following	amounts	associated	with	Medicare	Part	D	as	of	December	31,	2017	and	2016.	CMS	subsidies/discounts	in	the	table below	include	the	reinsurance	and	low-income	cost	subsidies	funded	by	CMS	for	which	we	assume	no	risk	as	well	as	brand	name	prescription	drug	discounts	for	Part	D plan	participants	in	the	coverage	gap	funded	by	CMS	and	pharmaceutical	manufacturers.

|  | Risk<br>Corridor<br>Settlement | CMS<br>Subsidies/<br>Discounts | Risk<br>Corridor<br>Settlement | CMS<br>Subsidies/<br>Discounts |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions) |  |  |
| Other\tcurrent\tassets | \t $4 | \t $101 | \t $8 | \t $1,001 |
| Trade\taccounts\tpayable\tand\taccrued\texpenses | (255) | (1,085) | (158) | (128) |
| Net\tcurrent\t(liability)\tasset | (251) | (984) | (150) | \t $873 |
| Other\tlong-term\tliabilities | (28) | — | — | — |
| \t\t\t\t\t\t\tTotal\tnet\t(liability)\tasset | \t $(279) | \t $(984) | \t $(150) | \t $873 |

We	have	exited	our	individual	commercial	medical	business	effective	January	1,	2018.	Operating	results	for	our	individual	commercial	medical	business	compliant with	the	Health	Care	Reform	Law	were	challenged	primarily	due	to	unanticipated	modifications	in	the	program	subsequent	to	the	passing	of	the	Health	Care	Reform Law,	resulting	in	higher	covered	population	morbidity	and	the	ensuing	enrollment	and	claims	issues	causing	volatility	in	claims	experience.	We	took	a	number	of	actions in	2015	that	we	believed	would	improve	the	profitability	of	our	individual	commercial	medical	business	in	2016.	Despite	these	actions,	the	deterioration	in	the	second half	of	2015	claims	experience	together	with	2016	open	enrollment	results	that	included	the	retention	of	many	high-utilizing	members	for	2016	resulted	in	a	probable future	loss.	As	a	result	of	our	assessment	in	the	fourth	quarter	of	2015	of	the	profitability	of	our	individual	commercial	medical	policies	compliant	with	the	Health	Care Reform	Law,	we	recorded	in	that	quarter	a	provision	for	probable	future	losses	(premium	deficiency	reserve)	for	the	2016	coverage	year	of	$176	million	in	benefits payable	in	our	consolidated	balance	sheet	with	a	corresponding	increase	in	benefits	expense	in	our	consolidated	statement	of	income.	In	the	second	quarter	of	2016,	we increased	the	premium	deficiency	reserve	for	the	2016	coverage	year	and	recorded	a	change	in	estimate	of	$208	million	with	a	corresponding	increase	in	benefits expense	in	our	consolidated	statement	of	income.	During	2016,	$384	million	current	period	losses	were	applied	to	the	premium	deficiency	reserve	liability	for	the	2016 coverage	year.	At	December	31,	2017	and	2016,	we	had	no	premium	deficiency	reserve.

The	accompanying	consolidated	balance	sheets	include	the	following	amounts	associated	with	the	3Rs	at	December	31,	2017	and	December	31,	2016.

|  |  | 2017 |  |  | 2016 |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Risk\nAdjustment\nSettlement | Reinsurance\nRecoverables | Risk\nCorridor\nSettlement | Risk\nAdjustment\nSettlement | Reinsurance\nRecoverables | Risk\nCorridor\nSettlement |
|  |  |  | (in\tmillions) |  |  |  |
| Prior\tCoverage\tYears |  |  |  |  |  |  |
| Premiums\treceivable | $— | \t $— \t $ | — | $307 | $— \t $ | — |
| Other\tcurrent\tassets | — | 44 | — | — | 260 | — |
| Trade\taccounts\tpayable\tand |  |  |  |  |  |  |
| accrued\texpenses | — | — | — | (117) | — | — |
| Net\tcurrent\tasset | — | 44 | — | 190 | 260 | — |
| Other\tlong-term\tassets | — | — | — | 6 | — | — |
| Total\tprior\tcoverage\tyears'\nnet\tasset | — | 44 | — | 196 | 260 | — |
| Current\tCoverage\tYear |  |  |  |  |  |  |
| Premiums\treceivable | 62 | — | — | — | — | — |
| Trade\taccounts\tpayable\tand\naccrued\texpenses | (80) | — | — | — | — | — |
| Net\tcurrent\tliability | (18) | — | — | — | — | — |
| Other\tlong-term\tassets | 5 | — | — | — | — | — |
| Total\tprior\tcoverage\tyears'\nnet\tliability | (13) | — | — | — | — | — |
| Total\tnet\t(liability)\tasset | $(13) | \t $44 | \t $— | $196 | $260 | \t $— |

Net	collections	under	the	3Rs	associated	with	prior	coverage	years	were	$440	million	during	2017	and	were	$383	million	during	2016.	We	expect	to	collect	the remaining	$44	million	of	reinsurance	recoverables	related	to	prior	coverage	years	in	2018.

The	annual	health	insurance	industry	fee	was	suspended	for	calendar	year	2017,	but	has	resumed	for	calendar	year	2018.	In	2016,	we	paid	the	federal	government $916	million	for	the	annual	health	insurance	industry	fee	attributed	to	calendar	year	2016,	compared	to	$867	million	in	2015,	in	accordance	with	the	Health	Care	Reform Law.	This	fee	is	not	deductible	for	tax	purposes.	The	annual	health	insurance	industry	fee	was	also	suspended	for	the	calendar	year	2019	and	is	scheduled	to	resume	in calendar	year	2020.

# 8.	PROPERTY	AND	EQUIPMENT,	NET

Property	and	equipment	was	comprised	of	the	following	at	December	31,	2017	and	2016.

|  | 2017 | 2016 |
| :--- | :--- | :--- |
|  | (in\tmillions) |  |
| Land | \t $20 | \t $20 |
| Buildings\tand\tleasehold\timprovements | 713 | 681 |
| Equipment | 824 | 750 |
| Computer\tsoftware | 2,003 | 1,744 |
|  | 3,560 | 3,195 |
| Accumulated\tdepreciation | (1,976) | (1,690) |
| Property\tand\tequipment,\tnet | \t $1,584 | \t $1,505 |

The	carrying	amount	of	goodwill	for	our	reportable	segments	has	been	retrospectively	adjusted	to	conform	to	the	2017	segment	reclassification	as	discussed	in	Note 1.	Changes	in	the	carrying	amount	of	goodwill	for	our	reportable	segments	for	the	years	ended	December	31,	2017	and	2016	were	as	follows:

|  | Retail | Group	and	Specialty | Healthcare	Services | Total |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions) |  |  |
| Balance\tat\tJanuary\t1,\t2016 | \t $1,059 | \t $261 | \t $1,945 | \t $3,265 |
| Acquisitions | — | — | 7 | 7 |
| Balance\tat\tDecember\t31,\t2016 | 1,059 | 261 | 1,952 | 3,272 |
| Acquisitions | — | — | 9 | 9 |
| Balance\tat\tDecember\t31,\t2017 | \t $1,059 | \t $261 | \t $1,961 | \t $3,281 |

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,	2017	and	2016.

|  | Weighted<br>Average<br>Life | Cost | 2017<br>Accumulated<br>Amortization | Net | Cost | 2016<br>Accumulated<br>Amortization | Net |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | (in\tmillions) |  |  |  |
| Other\tintangible\tassets: |  |  |  |  |  |  |  |
| Customer\tcontracts/relationships | 9.8\tyears | $566 | $401 | $165 | $566 | $347 | $219 |
| Trade\tnames\tand\ttechnology | 8.2\tyears | 104 | 84 | 20 | 104 | 69 | 35 |
| Provider\tcontracts | 11.9\tyears | 68 | 30 | 38 | 51 | 29 | 22 |
| Noncompetes\tand\tother | 8.1\tyears | 32 | 29 | 3 | 32 | 28 | 4 |
| Total\tother\tintangible\tassets | 9.7\tyears | $770 | $544 | $226 | $753 | $473 | $280 |

Amortization	expense	for	other	intangible	assets	was	approximately	$75	million	in	2017,	$77	million	in	2016,	and	$93	million	in	2015.	The	following	table	presents our	estimate	of	amortization	expense	for	each	of	the	five	next	succeeding	fiscal	years:

# 10.	BENEFITS	PAYABLE

On	a	consolidated	basis,	activity	in	benefits	payable,	excluding	military	services,	was	as	follows	for	the	years	ended	December	31,	2017,	2016	and	2015:

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).

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Retail\tSegment | $(386) | $(429) | $(248) |
| Group\tand\tSpecialty\tSegment | (40) | (46) | (7) |
| Individual\tCommercial\tSegment | (56) | (106) | 20 |
| Other\tBusinesses | (1) | (1) | (1) |
| Total | $(483) | $(582) | $(236) |

The	favorable	medical	claims	reserve	development	for	2017,	2016,	and	2015	primarily	reflects	the	consistent	application	of	trend	and	completion	factors	estimated using	an	assumption	of	moderately	adverse	conditions.	Favorable	prior	period	development	in	2017	and	2016	primarily	resulted	from	our	Medicare	Advantage	and individual	commercial	medical	businesses.	The	favorable	prior	period	development	in	2015	was	impacted	primarily	by	lower	financial	claim	recoveries	due	in	part	to	our gradual	implementation	during	2014	of	inpatient	authorization	review	prior	to	admission

as	opposed	to	post	adjudication,	as	well	as	higher	than	expected	flu	associated	claims	from	the	fourth	quarter	of	2014	and	continued	volatility	in	claims	associated	with individual	commercial	medical	products.

| Premium	deficiency	reserve	for	short-duration	policies | $— | $(176) | $176 |
| :--- | :--- | :--- | :--- |
| Military\tservices | — | 8 | 12 |
| Future\tpolicy\tbenefits | (22) | 439 | (80) |
| Total | $(22) | $271 | $108 |

In	the	fourth	quarter	of	2015,	we	recognized	a	premium	deficiency	reserve	for	our	individual	commercial	medical	business	compliant	with	the	Health	Care	Reform Law	associated	with	the	2016	coverage	year	as	discussed	in	more	detail	in	Note	7.

The	higher	benefits	expense	associated	with	future	policy	benefits	payable	during	2016	primarily	relates	to	reserve	strengthening	for	our	closed	block	of	long-term care	insurance	policies	acquired	in	connection	with	the	2007	KMG	acquisition	as	more	fully	described	in	Note	18.	Benefits	expense	associated	with	future	policy benefits	payable	in	2015	primarily	reflects	the	release	of	reserves	as	individual	commercial	medical	members	transitioned	to	plans	compliant	with	the	Health	Care Reform	Law.

# Incurred	and	Paid	Claims	Development

The	following	discussion	provides	information	about	incurred	and	paid	claims	development	for	our	segments	as	of	December	31,	2017,	net	of	reinsurance,	as	well	as cumulative	claim	frequency	and	the	total	of	IBNR	included	within	the	net	incurred	claims	amounts.	The	information	about	incurred	and	paid	claims	development	for	the years	ended	December	31,	2015	and	2016	is	presented	as	supplementary	information.

Claims	frequency	is	measured	as	medical	fee-for-service	claims	for	each	service	encounter	with	a	unique	provider	identification	number.	Our	claims	frequency measure	includes	claims	covered	by	deductibles	as	well	as	claims	under	capitated	arrangements.	Claim	counts	may	vary	based	on	product	mix	and	the	percentage	of delegated	capitation	arrangements.

Activity	in	benefits	payable	for	our	Retail	segment	was	as	follows	for	the	years	ended	December	31,	2017,	2016	and	2015:

| Balances	at	January	1 | $3,506 | $3,600 | $3,428 |
| :--- | :--- | :--- | :--- |
| Less:\tReinsurance\trecoverables | (76) | (85) | (78) |
| Balances\tat\tJanuary\t1,\tnet | 3,430 | 3,515 | 3,350 |
| Incurred\trelated\tto: |  |  |  |
| Current\tyear | 38,604 | 37,212 | 36,299 |
| Prior\tyears | (386) | (429) | (248) |
| Total\tincurred | 38,218 | 36,783 | 36,051 |
| Paid\trelated\tto: |  |  |  |
| Current\tyear | (34,781) | (33,784) | (32,874) |
| Prior\tyears | (2,974) | (3,084) | (3,012) |
| Total\tpaid | (37,755) | (36,868) | (35,886) |
| Reinsurance\trecoverable | 70 | 76 | 85 |
| Balances\tat\tDecember\t31 | \t $3,963 | \t $3,506 | \t $3,600 |

At	December	31,	2017,	benefits	payable	for	our	Retail	segment	included	IBNR	of	approximately	$2.5	billion,	primarily	associated	with	claims	incurred	in	2017.	The cumulative	number	of	reported	claims	as	of	December	31,	2017	was	approximately	97.8	million	for	claims	incurred	in	2017,	96.0	million	for	claims	incurred	in	2016, and	93.9	million	for	claims	incurred	in	2015.

The	following	tables	provide	information	about	incurred	and	paid	claims	development	for	the	Retail	segment	as	of	December	31,	2017,	net	of	reinsurance.

| 2015 | $36,299 | $35,928 | $35,877 |
| :--- | :--- | :--- | :--- |
| 2016 |  | 37,212 | 36,891 |
| 2017 |  |  | 38,604 |
| \tTotal |  |  | \t $111,372 |

# Cumulative	Paid	Claims,	Net	of	Reinsurance

| 2015 | $32,874 | $35,918 | $35,857 |
| :--- | :--- | :--- | :--- |
| 2016 |  | 33,784 | 36,841 |
| 2017 |  |  | 34,781 |
| \tTotal | \tTotal | \tTotal | $107,479 |
| All\toutstanding\tbenefit\tliabilities\tbefore\t2015,\tnet\tof\treinsurance | All\toutstanding\tbenefit\tliabilities\tbefore\t2015,\tnet\tof\treinsurance |  | N/A |
| Benefits\tpayable,\tnet\tof\treinsurance |  |  | $3,893 |

Activity	in	benefits	payable	for	our	Group	and	Specialty	segment,	excluding	military	services,	was	as	follows	for	the	years	ended	December	31,	2017,	2016	and 2015:

| Balances	at	January	1 | $579 | $616 | $603 |
| :--- | :--- | :--- | :--- |
| Less:\tReinsurance\trecoverables | — | — | — |
| Balances\tat\tJanuary\t1,\tnet | 579 | 616 | 603 |
| Incurred\trelated\tto: |  |  |  |
| Current\tyear | 5,403 | 5,271 | 5,377 |
| Prior\tyears | (40) | (46) | (7) |
| Total\tincurred | 5,363 | 5,225 | 5,370 |
| Paid\trelated\tto: |  |  |  |
| Current\tyear | (4,843) | (4,700) | (4,774) |
| Prior\tyears | (531) | (562) | (583) |
| Total\tpaid | (5,374) | (5,262) | (5,357) |
| Balances\tat\tDecember\t31 | \t $568 | \t $579 | \t $616 |

At	 December	 31,	2017,	benefits	payable	for	our	Group	and	Specialty	segment	included	IBNR	of	approximately	$500	million,	primarily	associated	with	claims incurred	in	2017.	The	cumulative	number	of	reported	claims	as	of	December	31,	2017	was	approximately	10.6	million	for	claims	incurred	in	2017,	12.8	million	for claims	incurred	in	2016,	and	13.4	million	for	claims	incurred	in	2015.

The	following tables	provide information	about incurred	and	paid	claims	development	for the	Group	and	Specialty	segment	as	of	December	31,	2017,	net	of reinsurance.

| 2015 | $5,377 | $5,333 | $5,333 |
| :--- | :--- | :--- | :--- |
| 2016 |  | 5,271 | 5,234 |
| 2017 |  |  | 5,403 |
| \tTotal |  |  | \t $15,970 |

| 2015 | $4,774 | $5,327 | $5,333 |
| :--- | :--- | :--- | :--- |
| 2016 |  | 4,700 | 5,226 |
| 2017 |  |  | 4,843 |
| Total | Total | Total | $15,402 |
| All\toutstanding\tbenefit\tliabilities\tbefore\t2015,\tnet\tof\treinsurance | All\toutstanding\tbenefit\tliabilities\tbefore\t2015,\tnet\tof\treinsurance |  | N/A |
| Benefits\tpayable,\tnet\tof\treinsurance |  |  | $568 |

Activity	in	benefits	payable	for	our	Individual	Commercial	segment,	was	as	follows	for	the	years	ended	December	31,	2017,	2016	and	2015:

| Balances	at	January	1 | $454 | $741 | $424 |
| :--- | :--- | :--- | :--- |
| Less:\tPremium\tdeficiency\treserve | — | (176) | — |
| Balances\tat\tJanuary\t1,\tnet | 454 | 565 | 424 |
| Incurred\trelated\tto: |  |  |  |
| Current\tyear | 669 | 3,677 | 3,512 |
| Prior\tyears | (56) | (106) | 20 |
| Total\tincurred | 613 | 3,571 | 3,532 |
| Paid\trelated\tto: |  |  |  |
| Current\tyear | (583) | (3,233) | (2,966) |
| Prior\tyears | (383) | (449) | (425) |
| Total\tpaid | (966) | (3,682) | (3,391) |
| Premium\tdeficiency\treserve | — | — | 176 |
| Balances\tat\tDecember\t31 | \t $101 | \t $454 | \t $741 |

At	December	31,	2017,	benefits	payable	for	our	Individual	Commercial	segment	included	IBNR	of	approximately	$85	million,	primarily	associated	with	claims	incurred in	2017.	The	cumulative	number	of	reported	claims	as	of	December	31,	2017	was	approximately	2.2	million	for	claims	incurred	in	2017,	9.5	million	for	claims	incurred in	2016,	and	11.0	million	for	claims	incurred	in	2015.

The	 following tables	 provide information	 about incurred	 and	 paid	 claims	 development for the Individual	 Commercial	 segment	 as	 of	 December	 31,	2017,	 net	 of reinsurance.

| Claims	Incurred	Year | 2015<br>Unaudited | For	the	Years	Ended	December	31,<br>2016<br>Unaudited | 2017 |
| :--- | :--- | :--- | :--- |
| 2015 | \t $3,512 | \t $3,412 | \t $3,412 |
| 2016 |  | 3,677 | 3,621 |
| 2017 |  |  | 669 |
| \tTotal |  |  | \t $7,702 |

| 2015 | $2,966 | $3,400 | $3,412 |
| :--- | :--- | :--- | :--- |
| 2016 |  | 3,233 | 3,606 |
| 2017 |  |  | 583 |
| Total | Total | Total | \t $7,601 |
| All\toutstanding\tbenefit\tliabilities\tbefore\t2015,\tnet\tof\treinsurance | All\toutstanding\tbenefit\tliabilities\tbefore\t2015,\tnet\tof\treinsurance | All\toutstanding\tbenefit\tliabilities\tbefore\t2015,\tnet\tof\treinsurance | N/A |
| Benefits\tpayable,\tnet\tof\treinsurance |  |  | \t $101 |

# Reconciliation	to	Consolidated

The	reconciliation	of	the	net	incurred	and	paid	claims	development	tables	to	benefits	payable	in	the	consolidated	statement	of	financial	position	is	as	follows:

|  | December	31,<br>2017 |
| :--- | :--- |
| Net\toutstanding\tliabilities |  |
| Retail | $3,893 |
| Group\tand\tSpecialty | 568 |
| Individual\tCommercial | 101 |
| Other\tinsurance\tlines | 36 |
| \t\t\t\tBenefits\tpayable,\tnet\tof\treinsurance | 4,598 |
| Reinsurance\trecoverable\ton\tunpaid\tclaims |  |
| Retail | 70 |
| Group\tand\tSpecialty | — |
| Individual\tCommercial | — |
| Other\tinsurance\tlines | — |
| \t\t\t\t\tTotal\treinsurance\trecoverable\ton\tunpaid\tclaims | 70 |
| \t\t\t\t\tTotal\tbenefits\tpayable,\tgross | $4,668 |

The	provision	for	income	taxes	consisted	of	the	following	for	the	years	ended	December	31,	2017,	2016	and	2015:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tmillions) |  |
| Current\tprovision: |  |  |  |
| Federal | $1,324 | \t $921 | \t $1,067 |
| States\tand\tPuerto\tRico | 116 | 88 | 90 |
| Total\tcurrent\tprovision | 1,440 | 1,009 | 1,157 |
| Deferred\texpense\t(benefit) | 132 | (71) | (2) |
| Provision\tfor\tincome\ttaxes | $1,572 | \t $938 | \t $1,155 |

The	provision	for	income	taxes	was	different	from	the	amount	computed	using	the	federal	statutory	rate	for	the	years	ended	December	31,	2017,	2016	and	2015	due to	the	following:

| Income	tax	provision	at	federal	statutory	rate | $1,407 | $543 | $851 |
| :--- | :--- | :--- | :--- |
| States,\tnet\tof\tfederal\tbenefit,\tand\tPuerto\tRico | 80 | 41 | 44 |
| Tax\texempt\tinvestment\tincome | (22) | (20) | (24) |
| Health\tinsurer\tfee | — | 336 | 314 |
| Nondeductible\texecutive\tcompensation | 36 | 30 | 18 |
| Tax\treform | 133 | — | — |
| Concentra\tsale | — | — | (67) |
| Other,\tnet | (62) | 8 | 19 |
| Provision\tfor\tincome\ttaxes | $1,572 | \t $938 | \t $1,155 |

The	tax	reform	law	enacted	on	December	22,	2017	(the	"Tax	Reform	Law")	reduced	the	statutory	federal	corporate	income	tax	rate	to	21	percent	from	35	percent, beginning	in	2018,	and	required	a	mandatory	deemed	repatriation	of	undistributed	foreign	earnings.	The	rate	reduction	required	a	remeasurement	of	our	net	deferred	tax asset.	These	 items	resulted	in	an	estimated	increase	in	our	2017	tax	provision	of	approximately	$133	million, including	approximately	$10	million	for	the	deemed repatriation	tax	imposed	on	the	undistributed	earnings	of	our	Puerto	Rico	operations.

The	provision	for	income	taxes	for	2017,	2016,	and	2015	reflects	a	$36	million,	$30	million,	and	$18	million,	respectively,	estimated	impact	from	limitations	on	the deductibility	of	annual	compensation	in	excess	of	$500,000	per	employee	as	mandated	by	the	Health	Care	Reform	Law.	We	do	not	have	material	uncertain	tax	positions reflected	in	our	consolidated	balance	sheets.

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,	2017	and	2016	were	as	follows:

|  | 2017 | 2016 |
| :--- | :--- | :--- |
|  | (in\tmillions) |  |
| Future\tpolicy\tbenefits\tpayable | $231 | $355 |
| Benefits\tpayable | 113 | 196 |
| Compensation\tand\tother\taccrued\texpenses | 138 | 153 |
| Net\toperating\tloss\tcarryforward | 53 | 52 |
| Deferred\tacquisition\tcosts | 48 | 72 |
| Unearned\trevenues | 12 | 18 |
| Investment\tsecurities | — | 12 |
| Other | 1 | 6 |
| Total\tdeferred\tincome\ttax\tassets | 596 | 864 |
| Valuation\tallowance | (49) | (49) |
| Total\tdeferred\tincome\ttax\tassets,\tnet\tof\tvaluation\tallowance | 547 | 815 |
| Depreciable\tproperty\tand\tintangible\tassets | (237) | (363) |
| Prepaid\texpenses | (44) | (53) |
| Investment\tsecurities | (49) | — |
| Total\tdeferred\tincome\ttax\tliabilities | (330) | (416) |
| Total\tnet\tdeferred\tincome\ttax\tassets | $217 | $399 |

In	November	2015,	the	FASB	issued	new	guidance	related	to	accounting	for	income	taxes	which	changes	the	balance	sheet	classification	of	deferred	taxes, requiring	deferred	tax	liabilities	and	assets	be	classified	as	noncurrent	in	a	classified	statement	of	financial	position	effective	for	us	beginning	with	annual	and	interim periods	in	2017.	We	elected	to	early	adopt	the	guidance	in	2015.	All	deferred	tax	liabilities	and	assets	are	classified	as	noncurrent	in	other	long-term	assets	in	our consolidated	balance	sheets	at	December	31,	2017	and	2016	to	simplify	their	presentation.

At	December	31,	2017,	we	had	approximately	$168	million	of	net	operating	losses	to	carry	forward	related	to	prior	acquisitions	and	our	Puerto	Rico	subsidiaries. These	net	operating	loss	carryforwards,	if	not	used	to	offset	future	taxable	income,	will	expire	from	2018	through	2033.	Due	to	limitations	and	uncertainty	regarding	our ability	to	use	some	of	the	loss	carryforwards	and	certain	other	deferred	tax	assets,	a	valuation	allowance	of	$49	million	was	established.	For	the	remainder	of	the	net operating	 loss	carryforwards	and	other	cumulative	 temporary	differences,	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.	The	U.S.	Internal	Revenue	Service,	or	IRS,	has	completed	its	examinations	of	our consolidated	income	tax	returns	for	2015	and	prior	years.	Our	2016	tax	return	is	in	the	post-filing	review	period	under	the	Compliance	Assurance	Process,	or	CAP.	Our 2017	tax	return	is	under	advance	review	by	the	IRS	under	CAP.	With	a	few	exceptions,	which	are	immaterial	in	the	aggregate,	we	no	longer	are	subject	to	state,	local and	foreign	tax	examinations	for	years	before	2014.	We	are	not	aware	of	any	material	adjustments	that	may	be	proposed.

The	carrying	value	of	long-term	debt	outstanding	was	as	follows	at	December	31,	2017	and	2016:

| $500	million,	7.20%	due	June	15,	2018 | $— | $501 |
| :--- | :--- | :--- |
| $300\tmillion,\t6.30%\tdue\tAugust\t1,\t2018 | — | 304 |
| $400\tmillion,\t2.625%\tdue\tOctober\t1,\t2019 | 399 | 398 |
| $400\tmillion,\t2.50%\tdue\tDecember\t15,\t2020 | 397 | — |
| $400\tmillion,\t2.90%\tdue\tDecember\t15,\t2022 | 396 | — |
| $600\tmillion,\t3.15%\tdue\tDecember\t1,\t2022 | 595 | 595 |
| $600\tmillion,\t3.85%\tdue\tOctober\t1,\t2024 | 595 | 595 |
| $600\tmillion,\t3.95%\tdue\tMarch\t15,\t2027 | 594 | — |
| $250\tmillion,\t8.15%\tdue\tJune\t15,\t2038 | 263 | 264 |
| $400\tmillion,\t4.625%\tdue\tDecember\t1,\t2042 | 396 | 396 |
| $750\tmillion,\t4.95%\tdue\tOctober\t1,\t2044 | 739 | 739 |
| $400\tmillion,\t4.80%\tdue\tMarch\t15,\t2047 | 396 | — |
| Total\tlong-term\tdebt | $4,770 | $3,792 |

# Senior	Notes

In	December	2017,	we	issued	$400	million	of	2.50%	senior	notes	due	December	15,	2020	and	$400	million	of	2.90%	senior	notes	due	December	15,	2022.	Our	net proceeds,	reduced	for	the	underwriters'	discount	and	commission	and	offering	expenses	paid	as	of	December	31,	2017,	were	$794	million.	We	used	the	net	proceeds, together	with	available	cash,	to	fund	the	redemption	of	our	$300	million	aggregate	principal	amount	of	6.30%	senior	notes	maturing	in	August	2018	and	our	$500 million	aggregate	principal	amount	of	7.20%	senior	notes	maturing	in	June	2018	at	100%	of	the	principal	amount	plus	applicable	premium	for	early	redemption	and accrued	and	unpaid	interest	to	the	redemption	date,	for	cash	totaling	approximately	$829	million.	We	recognized	a	loss	on	extinguishment	of	debt	of	approximately	$17 million	in	December	2017	for	the	redemption	of	these	senior	notes,	which	is	included	in	interest	expense	in	the	consolidated	statements	of	income.

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	8.15%	senior	notes	are	subject	to	an	interest	rate	adjustment	if	the	debt	ratings	assigned	to	the	notes	are	downgraded	(or	subsequently	upgraded).	In addition,	our	senior	notes	contain	a	change	of	control	provision	that	may	require	us	to	purchase	the	notes	under	certain	circumstances.

# Credit	Agreement

In	May	2017	we	amended	and	restated	our	previous	5-year	$1.0	billion	 unsecured	 revolving	 credit	 agreement	 expiring	 July	 2018	 with	 a	5-year	$2.0	 billion unsecured	revolving	credit	agreement	which	expires	May	2022.	Under	the	credit	agreement,	at	our	option,	we	can	borrow	on	either	a	competitive	advance	basis	or	a revolving	credit	basis.	The	revolving	credit	portion	bears	interest	at	either	LIBOR	plus	a	spread	or	the	base	rate	plus	a	spread.	The	LIBOR	spread,	currently	110	basis points,	varies	depending	on	our	credit	ratings	ranging	from	91	to	150	basis	points.	We	also	pay	an	annual	facility	fee	regardless	of	utilization.	This	facility	fee,	currently 15	basis	points,	may	fluctuate	between	9	and	25	basis	points,	depending	upon	our	credit	ratings.	The	competitive	advance	portion	of	any	borrowings	will	bear	interest	at market	rates	prevailing	at	the	time	of	borrowing	on	either	a	fixed	rate	or	a	floating	rate	based	on	LIBOR,	at	our	option.

The	terms	of	the	credit	agreement	include	standard	provisions	related	to	conditions	of	borrowing,	including	a	customary	material	adverse	effect	clause	which	could limit	our	ability	to	borrow	additional	funds.	In	addition,	the	credit	agreement	contains	customary	restrictive	and	financial	covenants	as	well	as	customary	events	of default,	including	financial	covenants	regarding	the	maintenance	of	a	minimum	level	of	net	worth	of	$9.2	billion	at	December	31,	2017	and	a	maximum	leverage	ratio	of 3.0:1.	We	are	in	compliance	with	the	financial	covenants,	with	actual	net	worth	of	$9.8	billion	and	an	actual	leverage	ratio	of	1.0:1,	as	measured	in	accordance	with	the credit	agreement	as	of	December	31,	2017.	Upon	our	agreement	with	one	or	more	financial	institutions,	we	may	expand	the	aggregate	commitments	under	the	credit agreement	to	a	maximum	of	$2.5	billion,	through	a	$500	million	incremental	loan	facility.

At	December	31,	2017,	we	had	no	borrowings	outstanding	under	the	credit	agreement	and	no	letters	of	credit	outstanding	under	the	credit	agreement.	Accordingly, as	of	December	31,	2017,	we	had	$2	billion	of	remaining	borrowing	capacity	(which	excludes	the	uncommitted	$500	million	incremental	loan	facility	under	the	credit agreement),	none	of	which	would	be	restricted	by	our	financial	covenant	compliance	requirement.	We	have	other	customary,	arms-length	relationships,	including financial	advisory	and	banking,	with	some	parties	to	the	credit	agreement.

# Commercial	Paper

We	previously	entered	into	a	commercial	paper	program	pursuant	to	which	we	may	issue	short-term,	unsecured	commercial	paper	notes	privately	placed	on	a	discount basis	through	certain	broker	dealers.	On	June	15,	2017,	we	increased	the	size	of	the	commercial	paper	program	to	permit	the	issuance	of	the	commercial	notes	with	the aggregate	face	or	principal	amount	outstanding	under	the	program	at	any	time	not	to	exceed	$2	billion.	Amounts	available	under	the	program	may	be	borrowed,	repaid and	re-borrowed	from	time	to	time.	The	net	proceeds	of	issuances	have	been	and	are	expected	to	be	used	for	general	corporate	purposes.	The	maximum	principal	amount outstanding	at	any	one	time	during	the	year	ended	December	31,	2017	was	$500	million,	with	$150	million	outstanding	at	December	31,	2017,	compared	to	$300	million outstanding	at	December	31,	2016.

# 13.	EMPLOYEE	BENEFIT	PLANS

# Employee	Savings	Plan

We	have	defined	contribution	retirement	savings	plans	covering	eligible	employees	which	include	matching	contributions	based	on	the	amount	of	our	employees' contributions	to	the	plans.	The	cost	of	these	plans	amounted	to	approximately	$217	million	in	2017,	$196	million	in	2016,	and	$188	million	in	2015.	The	Company's cash	match	 is	 invested	pursuant	 to	 the	participant's	contribution	direction.	Based	on	 the	closing	price	of	our	common	stock	of	$248.07	 on	 December	 29,	2017, approximately	11%	of	the	retirement	and	savings	plan's	assets	were	invested	in	our	common	stock,	or	approximately	2.0	million	shares,	representing	2%	of	the	shares outstanding	as	of	December	31,	2017.	At	December	31,	2017,	approximately	2.4	million	shares	of	our	common	stock	were	reserved	for	issuance	under	our	defined contribution	retirement	savings	plans.

We	have	plans	under	which	options	to	purchase	our	common	stock	and	restricted	stock	units	have	been	granted	to	executive	officers,	directors	and	key	employees. For	awards	granted	prior	to	July	2,	2015,	our	equity	award	agreements	generally	contain	provisions	whereby	the	awards	automatically	accelerate	and	vest	upon	change in	control,	including	those	granted	to	retirement-eligible	participants	described	below.	Awards	granted	on	or	after	July	2,	2015	would	generally	require	both	a	change	in control	and	termination	of	employment	within	2	years	of	the	date	of	the	change	in	control	to	accelerate	the	vesting,	including	those	granted	to	retirement-eligible participants.

The	terms	and	vesting	schedules	for	stock-based	awards	vary	by	type	of	grant.	Generally,	the	awards	vest	upon	time-based	conditions.	We	have	also	granted	awards to	certain	employees	that	vest	upon	a	combination	of	time	and	performance-based	conditions.	The	stock	awards	of	retirement-eligible	participants	granted	prior	to	July 2,	2015	generally	will	continue	to	fully	vest	on	the	originally	scheduled	vest	date	upon	retirement	from	the	Company.	For	stock	awards	of	retirement-eligible	employees granted	on	or	after	July	2,	2015,	awards	are	generally	earned	ratably	over	the	service	period	for	each	tranche.	Accordingly,	upon	retirement	the	earned	portion	of	the current	tranche	will	continue	to	vest	on	the	originally	scheduled	vest	date	and	any	remaining	unearned	portion	of	the	award	will	be	forfeited.	Our	equity	award	program includes	a	retirement	provision	that	generally	treats	employees	with	a	combination	of	age	and	years	of	services	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	or	treasury	stock.

The	compensation	expense	that	has	been	charged	against	income	for	these	plans	was	as	follows	for	the	years	ended	December	31,	2017,	2016,	and	2015:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tmillions) |  |
| Stock-based\tcompensation\texpense\tby\ttype: |  |  |  |
| Restricted\tstock | $145 | $106 | $99 |
| Stock\toptions | 12 | 9 | 10 |
| Total\tstock-based\tcompensation\texpense | 157 | 115 | 109 |
| Tax\tbenefit\trecognized | (32) | (20) | (26) |
| Stock-based\tcompensation\texpense,\tnet\tof\ttax | $125 | $95 | $83 |

Stock-based	compensation	expense	for	certain	restricted	stock	in	2017	included	a	$29	million	modification	expense	for	certain	awards.

The	tax	benefit	recognized	in	our	consolidated	financial	statements	is	based	on	the	amount	of	compensation	expense	recorded	for	book	purposes,	subject	to limitations	on	the	deductibility	of	annual	compensation	in	excess	of	$500,000	per	employee	as	mandated	by	the	Health	Care	Reform	Law.	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 vested	during	the	period,	subject	to	limitations	on	the	deductibility	of	annual	compensation	in	excess	of	$500,000	per	employee	as	mandated	by	the	Health	Care	Reform Law.	The	actual	tax	benefit	realized	for	the	deductions	taken	on	our	tax	returns	from	option	exercises	and	restricted	stock	vesting	totaled	$68	million	 in	2017,	$53 million	in	2016,	and	$34	million	in	2015.	There	was	no	capitalized	stock-based	compensation	expense	during	these	years.

At	December	31,	2017,	there	were	14.6	million	shares	reserved	for	stock	award	plans.	These	reserved	shares	included	giving	effect	to,	under	the	2011	Plan,	5.4 million	shares	of	common	stock	available	for	future	grants	assuming	all	stock	options	were	granted	or	2.4	million	shares	available	for	future	grants	assuming	all restricted	stock	were	granted.	Shares	may	be	issued	from	authorized	but	unissued	company	stock	or	treasury	stock.

# Restricted	Stock

Restricted	stock	is	granted	with	a	fair	value	equal	to	the	market	price	of	our	common	stock	on	the	date	of	grant	and	generally	vests	three	years	from	the	date	of grant.	Restricted	stock	granted	on	or	after	July	2,	2015,	generally	vests	in	equal	annual	tranches	over	a	three	year	period	from	the	date	of	grant.	Certain	of	our	restricted stock	grants	also	include	performance-based	conditions	generally	associated	with	return	on	invested	capital	and	strategic	membership	growth.	Restricted	stock	units have	forfeitable	dividend	equivalent	rights	equal	to	the	dividend	paid	on	common	stock.	The	weighted-average	grant	date	fair	value	of	our	restricted	stock	was	$222.35 in	2017,	$168.12	in	2016,	and	$165.26	in	2015.	Activity	for	our	restricted	stock	was	as	follows	for	the	year	ended	December	31,	2017:

|  | Shares | Weighted-<br>Average<br>Grant-Date<br>Fair	Value |
| :--- | :--- | :--- |
|  | (shares\tin\tthousands) |  |
| Nonvested\trestricted\tstock\tat\tDecember\t31,\t2016 | 2,492 | \t $121.94 |
| Granted | 731 | 222.35 |
| Vested | (1,386) | 128.08 |
| Forfeited | (184) | 138.99 |
| Nonvested\trestricted\tstock\tat\tDecember\t31,\t2017 | 1,653 | \t $171.68 |

Approximately	19%	of	the	nonvested	restricted	stock	at	December	31,	2017	included	performance-based	conditions.

The	fair	value	of	shares	vested	was	$306	million	 during	2017,	$253	million	 during	2016,	 and	$153	million	 during	2015.	Total	compensation	expense	not	yet recognized	related	to	nonvested	restricted	stock	was	$133	million	at	December	31,	2017.	We	expect	to	recognize	this	compensation	expense	over	a	weighted-average period	of	approximately	1.8	years.	There	are	no	other	contractual	terms	covering	restricted	stock	once	vested.

# Stock	Options

Stock	options	are	granted	with	an	exercise	price	equal	to	the	fair	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	fair	market	value	as	the	average	of	the	highest	and	lowest	stock	prices	reported	on	the	composite	tape	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	years	after	grant.

The	weighted-average	fair	value	of	each	option	granted	during	2017,	2016,	and	2015	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:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Weighted-average\tfair\tvalue\tat\tgrant\tdate | $49.81 | $37.12 | $36.91 |
| Expected\toption\tlife\t(years) | 4.1\tyears | 4.2\tyears | 4.2\tyears |
| Expected\tvolatility | 27.1% | 27.6% | 27.4% |
| Risk-free\tinterest\trate\tat\tgrant\tdate | 2.0% | 1.1% | 1.4% |
| Dividend\tyield | 0.7% | 0.7% | 0.7% |

When	valuing	employee	stock	options,	we	stratify	 the	employee	population	 into	 three	homogeneous	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,	2017:

|  | Shares		Under<br>Option | Weighted-Average<br>Exercise	Price |
| :--- | :--- | :--- |
|  | (shares\tin\tthousands) |  |
| Options\toutstanding\tat\tDecember\t31,\t2016 | 1,022 | \t $143.04 |
| Granted | 358 | 218.06 |
| Exercised | (492) | 128.34 |
| Forfeited | (25) | 182.46 |
| Options\toutstanding\tat\tDecember\t31,\t2017 | 863 | \t $181.44 |
| Options\texercisable\tat\tDecember\t31,\t2017 | 182 | \t $137.54 |

As	of	December	31,	2017,	outstanding	stock	options,	substantially	all	of	which	are	expected	to	vest,	had	an	aggregate	intrinsic	value	of	$57	million,	and	a	weighted- average	remaining	contractual	term	of	5.0	years.	As	of	December	31,	2017,	exercisable	stock	options	had	an	aggregate	intrinsic	value	of	$20	million,	and	a	weighted- average	remaining	contractual	term	of	3.5	years.	The	total	intrinsic	value	of	stock	options	exercised	during	2017	was	$44	million,	compared	with	$18	million	during 2016	and	$28	million	during	2015.	Cash	received	from	stock	option	exercises	totaled	$63	million	in	2017,	$14	million	in	2016,	and	$23	million	in	2015.

Total	compensation	expense	not	yet	recognized	related	to	nonvested	options	was	$18	million	at	December	31,	2017.	We	expect	to	recognize	this	compensation expense	over	a	weighted-average	period	of	approximately	1.8	years.

# 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,	2017,	2016	and	2015:

| Net	income	available	for	common	stockholders | $2,448 | $614 | $1,276 |
| :--- | :--- | :--- | :--- |
| Weighted-average\toutstanding\tshares\tof\tcommon\tstock\tused\tto\ncompute\tbasic\tearnings\tper\tcommon\tshare | 144,493 | 149,375 | 149,455 |
| Dilutive\teffect\tof: |  |  |  |
| Employee\tstock\toptions | 172 | 219 | 192 |
| Restricted\tstock | 920 | 1,323 | 1,495 |
| Shares\tused\tto\tcompute\tdiluted\tearnings\tper\tcommon\tshare | 145,585 | 150,917 | 151,142 |
| Basic\tearnings\tper\tcommon\tshare | $16.94 | $4.11 | $8.54 |
| Diluted\tearnings\tper\tcommon\tshare | $16.81 | $4.07 | $8.44 |
| Number\tof\tantidilutive\tstock\toptions\tand\trestricted\tstock\tawards\nexcluded\tfrom\tcomputation | 539 | 748 | 415 |

# 15.	STOCKHOLDERS'	EQUITY

The	following	table	provides	details	of	dividend	payments,	excluding	dividend	equivalent	rights,	in	2015,	2016,	and	2017	under	our	Board	approved	quarterly	cash dividend	policy:

| Payment<br>Date | Amount<br>per	Share | Total<br>Amount |
| :--- | :--- | :--- |
|  |  | (in\tmillions) |
| 2015 | $1.14 | $170 |
| 2016 | $1.16 | $172 |
| 2017 | $1.49 | $216 |

On	November	2,	2017,	the	Board	declared	a	cash	dividend	of	$0.40	per	share	that	was	paid	on	January	26,	2018	to	stockholders	of	record	on	December	29,	2017,	for an	aggregate	amount	of	$55	million.	Declaration	and	payment	of	future	quarterly	dividends	is	at	the	discretion	of	our	Board	and	may	be	adjusted	as	business	needs	or market	conditions	change.

In	September	2014,	our	Board	of	Directors	replaced	a	previous	share	repurchase	authorization	of	up	to	$1	billion	(of	which	$816	million	remained	unused)	with	an authorization	for	repurchases	of	up	to	$2	billion	of	our	common	shares	exclusive	of	shares	repurchased	in	connection	with	employee	stock	plans,	which	expired	on December	31,	2016.	Under	the	share	repurchase	authorization,	shares	may	have	been	purchased	from	time	to	time	at	prevailing	prices	in	the	open	market,	by	block purchases,	 through	plans	designed	 to	comply	with	Rule	10b5-1	under	 the	 Securities	 Exchange	Act	 of	 1934,	 as	 amended,	 or	 in	 privately-negotiated	 transactions (including	pursuant	to	accelerated	share	repurchase	agreements	with	investment	banks),	subject	to	certain	regulatory	restrictions	on	volume,	pricing,	and	timing.	Pursuant to	the	Merger	Agreement,	after	July	2,	2015,	we	were	prohibited	from	repurchasing	any	of	our	outstanding	securities	without	the	prior	written	consent	of	Aetna,	other than	repurchases	of	shares	of	our	common	stock	in	connection	with	the	exercise	of	outstanding	stock	options	or	the	vesting	or	settlement	of	outstanding	restricted	stock awards.	Accordingly,	as	announced	on	July	3,	2015,	we	suspended	our	share	repurchase	program.

On	February	14,	2017,	we	and	Aetna	agreed	to	mutually	terminate	the	Merger	Agreement.	We	also	announced	that	the	Board	had	approved	a	new	authorization	for share	repurchases	of	up	to	$2.25	billion	of	our	common	stock	exclusive	of	shares	repurchased	in	connection	with	employee	stock	plans,	expiring	on	December	31,	2017.

On	February	16,	2017,	we	entered	into	an	accelerated	share	repurchase	agreement,	the	February	2017	ASR,	with	Goldman,	Sachs	&	Co.	LLC,	or	Goldman	Sachs, to	repurchase	$1.5	billion	of	our	common	stock	as	part	of	the	$2.25	billion	share	repurchase	program	referred	to	above.	On	February	22,	2017,	we	made	a	payment	of $1.5	billion	to	Goldman	Sachs	from	available	cash	on	hand	and	received	an	initial	delivery	of	5.83	million	shares	of	our	common	stock	from	Goldman	Sachs	based	on the	then	current	market	price	of	Humana	common	stock.	The	payment	to	Goldman	Sachs	was	recorded	as	a	reduction	to	stockholders'	equity,	consisting	of	a	$1.2	billion increase	in	treasury	stock,	which	reflected	the	value	of	the	initial	5.83	million	shares	received	upon	initial	settlement,	and	a	$300	million	decrease	in	capital	in	excess	of par	value,	which	reflected	the	value	of	stock	held	back	by	Goldman	Sachs	pending	final	settlement	of	the	February	2017	ASR.	Upon	settlement	of	the	February	2017 ASR	on	August	28,	2017,	we	received	an	additional	0.84	million	shares	as	determined	by	the	average	daily	volume	weighted-average	share	price	of	our	common	stock during	the	term	of	the	agreement	of	$224.81,	bringing	the	total	shares	received	under	this	program	to	6.67	million.	In	addition,	upon	settlement	we	reclassified	the	$300 million	value	of	stock	initially	held	back	by	Goldman	Sachs	from	capital	in	excess	of	par	value	to	treasury	stock.	Subsequent	to	settlement	of	the	February	2017	ASR, we	repurchased	an	additional	3.04	million	shares	in	the	open	market,	utilizing	the	remaining	$750	million	of	the	$2.25	billion	authorization	prior	to	expiration.

On	December	14,	2017,	our	Board	of	Directors	authorized	the	repurchase	of	up	to	$3.0	billion	of	our	common	shares	expiring	on	December	31,	2020,	exclusive	of shares	repurchased	in	connection	with	employee	stock	plans.	Under	the	share	repurchase	authorization,	shares	may	be	purchased	from	time	to	time	at	prevailing	prices	in the	open	market,	by	block	purchases,	through	plans	designed	to	comply	with	Rule	10b5-1	under	the	Securities	Exchange	Act	of	1934,	as	amended,	or	in	privately- negotiated	transactions,	including	pursuant	to	accelerated	share	repurchase	agreements	with	investment	banks,	subject	to	certain	regulatory	restrictions	on	volume, pricing,	and	timing.

On	December	21,	2017,	we	entered	into	an	accelerated	stock	repurchase	agreement,	the	December	2017	ASR,	with	Bank	of	America,	N.A.,	or	BofA,	to	repurchase $1.0	billion	of	our	common	stock	as	part	of	the	$3.0	billion	share	repurchase	program	authorized	on	December	14,	2017.	On	December	22,	2017,	we	made	a	payment	of $1.0	billion	to	BofA	from	available	cash	on	hand	and	received	an	initial	delivery	of	3.28	million	shares	of	our	common	stock	from	BofA	based	on	the	then	current market	price	of	Humana	common	stock.	The	payment	to	BofA	was	recorded	as	a	reduction	to	stockholders'	equity,	consisting	of	an	 $800	million	increase	in	treasury stock,	which	reflects	the	value	of	the	initial	3.28	million	shares	received	upon	initial	settlement,	and	a	$200	million	decrease	in	capital	in	excess	of	par	value,	which reflected	the	value	of	stock	held	back	by	BofA	pending	final	settlement	of	the	December	2017	ASR.	The	final	number	of	shares	that	we	may	receive,	or	be	required	to remit,	under	the	agreement	will	be	determined	based	on	the	daily	volume-weighted	average	share	price	of	our	common	stock	over	the	term	of	the	agreement,	less	a discount	and	subject	to	adjustments	pursuant	to	the	terms	and	conditions	of	the	agreement.	Final	settlement	under	the	December	2017	ASR	is	expected	to	occur	by	the end	of	the	first	quarter	of	2018.	The	agreement	contains	provisions	customary	for	agreements	of	this	type,	including	provisions	for	adjustments	to	the	transaction	terms upon	certain	specified	events,	the	circumstances	generally	under	which	final	settlement	may	be	accelerated	or	extended	or	the	agreement	may	be	terminated	early	by BofA	or	Humana,	and	various	acknowledgements	and	representations	made	by	the	parties	to	each	other.	At	final	settlement,	under	certain	circumstances,	we	may	be entitled	to	receive	additional	shares	of	our	common	stock	from	BofA	or	we	may	be	required	to	make	a	payment.	If	we	are	obligated	to	make	payment,	we	may	elect	to satisfy	such	obligation	in	cash	or	shares	of	our	common	stock.

Our	remaining	repurchase	authorization	was	approximately	$2.0	billion	as	of	February	16,	2018,	excluding	the	$200	million	pending	final	settlement	of	our December	22,	2017	ASR.

Excluding	shares	acquired	in	connection	with	employee	stock	plans	as	well	as	0.36	million	shares	received	in	March	2015	upon	final	settlement	of	our	2014 accelerated	share	repurchase	agreement,	for	which	no	cash	was	paid	during	the	period,	share	repurchases	were	as	follows	during	the	years	ended	December	31,	2017, 2016	and	2015.	Excluding	shares	acquired	in	connection	with	employee	stock	plans,	there	were	no	share	repurchases	in	2016.

|  |  | 2017 |  | 2016 |  | 2015 |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Authorization\tDate | Purchase\tNot\nto\tExceed | Shares | Cost | Shares | Cost | Shares | Cost |
|  |  |  | (in\tmillions) |  |  |  |  |
| September\t2014 | \t $2,000 | — \t $ | — | — \t $ | — | 1.85 | \t $329 |
| February\t2017 | 2,250 | 9.71 | 2,250 | — | — | — | — |
| December\t2017 | 3,000 | 3.28 | 800 | — | — | — | — |
| Total\trepurchases |  | 12.99 | \t $3,050 | — \t $ | — | 1.85 | \t $329 |

In	connection	with	employee	stock	plans,	we	acquired	0.5	million	common	shares	for	$115	million	in	2017,	0.6	million	common	shares	for	$104	million	in	2016, and	0.3	million	common	shares	for	$56	million	in	2015.

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

Although	minimum	required	levels	of	equity	are	largely	based	on	premium	volume,	product	mix,	and	the	quality	of	assets	held,	minimum	requirements	vary significantly	at	the	state	level.	Our	state	regulated	insurances	subsidiaries	had	aggregate	statutory	capital	and	surplus	of	approximately	$8.0	billion	and	$7.7	billion	as	of December	31,	2017	and	2016,	respectively,	which	exceeded	aggregate	minimum	regulatory	requirements	of	$4.8	billion	in	both	years.	Subsidiary	dividends	are	subject to	state	regulatory	approval,	the	amount	and	timing	of	which	could	be	reduced	or	delayed.	Excluding	Puerto	Rico	subsidiaries,	the	amount	of	ordinary	dividends	that may	be	paid	to	our	parent	company	in	2018	is	approximately	$1.1	billion	in	the	aggregate.	This	compares	to	dividends	that	were	paid	to	our	parent	company	in	2017	of approximately	$1.4	billion.	Actual	dividends	paid	may	vary	due	to	consideration	of	excess	statutory	capital	and	surplus	and	expected	future	surplus	requirements	related to,	for	example,	premium	volume	and	product	mix.

# 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	2046.	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	operating	cost,	for	all	operating	leases	were	as	follows for	the	years	ended	December	31,	2017,	2016	and	2015:

| Rent	expense | $204 | $179 | $201 |
| :--- | :--- | :--- | :--- |
| Sublease\trental\tincome | (33) | (26) | (25) |
| Net\trent\texpense | $171 | \t $153 | \t $176 |

Future	annual	minimum	payments	due	subsequent	to	December	31,	2017	under	all	of	our	noncancelable	operating	leases	with	initial	terms	in	excess	of	one	year	are as	follows:

|  | Minimum<br>Lease<br>Payments | Sublease<br>Rental<br>Receipts | Net		Lease<br>Commitments |
| :--- | :--- | :--- | :--- |
|  |  | (in\tmillions) |  |
| For\tthe\tyears\tending\tDecember\t31,: |  |  |  |
| 2018 | $152 | \t $(14) | \t $138 |
| 2019 | 129 | (13) | 116 |
| 2020 | 89 | (10) | 79 |
| 2021 | 58 | (8) | 50 |
| 2022 | 39 | (7) | 32 |
| Thereafter | 52 | (51) | 1 |
| Total | $519 | \t $(103) | \t $416 |

# 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	$226	million	in	2018,	$150	million	in	2019,	$38	million	in 2020,	$8	million	in	2021,	and	$7	million	thereafter.	Purchase	obligations	exclude	agreements	that	are	cancelable	without	penalty.

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,	or	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,	2017,	we	were	not	involved	in	any	SPE	transactions.

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.

Our	Medicare	products,	which	accounted	for	approximately	78%	of	our	total	premiums	and	services	revenue	for	the	year	ended	December	31,	2017,	primarily consisted	of	products	covered	under	the	Medicare	Advantage	and	Medicare	Part	D	Prescription	Drug	Plan	contracts	with	the	federal	government.	These	contracts	are renewed	generally	for	a	calendar	year	term	unless	CMS	notifies	us	of	its	decision	not	to	renew	by	May	1	of	the	calendar	year	in	which	the	contract	would	end,	or	we notify	CMS	of	our	decision	not	to	renew	by	the	first	Monday	in	June	of	the	calendar	year	in	which	the	contract	would	end.	All	material	contracts	between	Humana	and CMS	relating	to	our	Medicare	products	have	been	renewed	for	2018,	and	all	of	our	product	offerings	filed	with	CMS	for	2018	have	been	approved.

CMS	uses	a	risk-adjustment	model	which	adjusts	premiums	paid	to	Medicare	Advantage,	or	MA,	plans	according	to	health	status	of	covered	members.	The	risk- adjustment	model,	which	CMS	implemented	pursuant	to	the	Balanced	Budget	Act	of	1997	(BBA)	and	the	Benefits	Improvement	and	Protection	Act	of	2000	(BIPA), generally	pays	more	where	a	plan's	membership	has	higher	expected	costs.	Under	this	model,	rates	paid	to	MA	plans	are	based	on	actuarially	determined	bids,	which include	a	process	whereby	our	prospective	payments	are	based	on	our	estimated	cost	of	providing	standard	Medicare-covered	benefits	to	an	enrollee	with	a	"national average	risk	profile."	That	baseline	payment	amount	is	adjusted	to	reflect	the	health	status	of	our	enrolled	membership.	Under	the	risk-adjustment	methodology,	all	MA plans	must	collect	and	submit	the	necessary	diagnosis	code	information	from	hospital	inpatient,	hospital	outpatient,	and	physician	providers	to	CMS	within	prescribed deadlines.	The	CMS	risk-adjustment	model	uses	the	diagnosis	data	to	calculate	the	risk-adjusted	premium	payment	to	MA	plans,	which	CMS	adjusts	for	coding	pattern differences	between	the	health	plans	and	the	government	fee-for-service	program.	We	generally	rely	on	providers,	including	certain	providers	in	our	network	who	are our	employees,	to	code	their	claim	submissions	with	appropriate	diagnoses,	which	we	send	to	CMS	as	the	basis	for	our	payment	received	from	CMS	under	the	actuarial risk-adjustment	model.	We	also	rely	on	these	providers	to	document	appropriately	all	medical	data,	including	the	diagnosis	data	submitted	with	claims.	In	addition,

we	conduct	medical	record	reviews	as	part	of	our	data	and	payment	accuracy	compliance	efforts,	 to	more	accurately	reflect	diagnosis	conditions	under	 the	risk adjustment	model.	These	compliance	efforts	include	the	internal	contract	level	audits	described	in	more	detail	below,	as	well	as	ordinary	course	reviews	of	our	internal business	processes.

The	final	RADV	extrapolation	methodology,	including	the	first	application	of	extrapolated	audit	results	to	determine	audit	settlements,	is	expected	to	be	applied	to RADV	contract	level	audits	conducted	for	contract	year	2011	and	subsequent	years.	CMS	is	currently	conducting	RADV	contract	level	audits	for	contract	years	2011, 2012,	and	2013	in	which	two,	five	and	five	of	our	Medicare	Advantage	plans	are	being	audited,	respectively.	Per	CMS	guidance,	selected	MA	contracts	will	be	notified of	an	audit	at	some	point	after	the	close	of	the	final	reconciliation	for	the	payment	year	being	audited.

Our	military	services	business,	which	accounted	for	approximately	1%	of	our	total	premiums	and	services	revenue	for	the	year	ended	December	31,	2017,	primarily consisted	of	the	T3	TRICARE	South	Region	contract.	The	5-year	T3	South	Region	contract	expired	on	December	31,	2017.	On	July	21,	2016,	we	were	notified	by	the Defense	Health	Agency,	or	DHA,	that	we	were	awarded	the	contract	for	the	new	TRICARE	T2017	East	Region.	The	T2017	East	Region	contract	is	a	consolidation	of the	former	T3	North	and	South	Regions,	comprising	thirty-two	states	and	approximately	six	million	TRICARE	beneficiaries,	with	delivery	of	health	care	services commencing	on	January	1,	2018.	The	T2017	East	contract	is	a	5-year	contract	set	to	expire	on	December	31,	2022	and	is	subject	to	renewals	on	January	1	of	each	year during	its	term	at	the	government's	option.

Our	state-based	Medicaid	business	accounted	for	approximately	5%	of	our	total	premiums	and	services	revenue	for	the	year	ended	December	31,	2017.	In	addition to	our	state-based	Temporary	Assistance	for	Needy	Families,	or	TANF,	Medicaid	contracts	in	Florida	and	Kentucky,	we	have	contracts	in	Florida	for	Long	Term Support	Services	(LTSS),	and	in	Illinois	for	stand-alone	dual	eligible	demonstration	programs	serving	individuals	dually	eligible	for	both	the	federal	Medicare	program and	 the	 applicable	 state-based	 Medicaid	 program.	We	 previously	 had	 an	 Integrated	 Care	 Program	 Medicaid	 contract	 in	 Illinois,	 and	 a	 stand-alone	 dual	 eligible demonstration	program	in	Virginia,	both	of	which	terminated	at	December	31,	2017.

The	loss	of	any	of	the	contracts	above	or	significant	changes	in	these	programs	as	a	result	of	legislative	or	regulatory	action,	including	reductions	in	premium payments	to	us,	regulatory	restrictions	on	profitability,	including	by	comparison	of	our	Medicare	Advantage	profitability	to	our	non-Medicare	Advantage	business profitability	and	a	requirement	that	they	remain	within	certain	ranges	of	each	other,	or	increases	in	member	benefits	without	corresponding	increases	in	premium payments	to	us,	may	have	a	material	adverse	effect	on	our	results	of	operations,	financial	position,	and	cash	flows.

# Legal	Proceedings	and	Certain	Regulatory	Matters

# Florida	Matters

On	January	6,	2012,	the	Civil	Division	of	the	United	States	Attorney's	Office	for	the	Southern	District	of	Florida	advised	us	that	it	is	seeking	documents	and information	from	us	and	several	of	our	affiliates	relating	to	several	matters	including	the	coding	of	medical	claims	by	one	or	more	South	Florida	medical	providers,	and loans	to	physician	practices.	On	May	1,	2014,	the	U.S.	Attorney's	Office	filed	a	Notice	of	Non-Intervention	in	connection	with	a	civil	qui	tam	suit	related	to	one	of	these matters	captioned	United	States	of	America	ex	rel.	Olivia	Graves	v.	Plaza	Medical	Centers,	et	al.,	and	the	Court	ordered	the	complaint	unsealed.	All	parties	to	the lawsuit	and	the	United	States	have	executed	a	settlement	agreement	to	settle	the	plaintiff's	claims	for	damages	and	penalties,	with	Humana	paying	an	amount	that	is	not material	to	our	results	of	operations,	and	the	court	has	closed	the	case.

As	previously	disclosed,	the	Civil	Division	of	the	United	States	Department	of	Justice	provided	us	with	an	information	request	in	December	2014,	separate	from but	related	to	the	Plaza	Medical	matter,	concerning	our	Medicare	Part	C	risk	adjustment	practices.	The	request	relates	to	our	oversight	and	submission	of	risk	adjustment data	generated	by	providers	in	our	Medicare	Advantage	network,	including	the	providers	identified	in	the	now	settled	Plaza	Medical	matter,	as	well	as	to	our	business and	compliance	practices	related	to	risk	adjustment	data	generated	by	our	providers	and	by	us,	including	medical	record	reviews	conducted	as	part	of	our	data	and payment	accuracy	compliance	efforts,	the	use	of	health	and	well-being	assessments,	and	our	fraud	detection	efforts.	We	believe	that	this	request	for	information	is	in connection	with	a	wider	review	of	Medicare	Risk	Adjustment	generally	that	includes	a	number	of	Medicare	Advantage	plans,	providers	and	vendors.	We	continue	to cooperate	with	and	voluntarily	respond	to	the	information

requests	from	the	Department	of	Justice	and	the	U.S.	Attorney's	Office.	These	matters	are	expected	to	result	in	additional	qui	tam	litigation.

On	January	19,	2016,	an	individual	filed	a	qui	tam	suit	captioned	United	States	of	America	ex	rel.	Steven	Scott	v.	Humana,	Inc.,	in	United	States	District	Court, Central	District	of	California,	Western	Division.	The	complaint	alleges	certain	civil	violations	by	us	in	connection	with	the	actuarial	equivalence	of	the	plan	benefits under	Humana's	Basic	PDP	plan,	a	prescription	drug	plan	offered	by	us	under	Medicare	Part	D,	as	compared	to	required	benefit	levels	under	applicable	bid	rules.	The action	seeks	damages	and	penalties	on	behalf	of	the	United	States	under	the	False	Claims	Act.	The	court	ordered	the	qui	tam	action	unsealed	on	September	13,	2017,	so that	the	relator	can	proceed,	following	notice	from	the	U.S.	Government	that	it	is	not	intervening	at	this	time.	We	take	seriously	our	obligations	to	comply	with applicable	CMS	requirements	and	actuarial	best	principles,	and	we	intend	to	vigorously	defend	against	these	allegations.

On	November	2,	2017,	we	filed	suit	against	the	United	States	of	America	in	the	United	States	Court	of	Federal	Claims,	on	behalf	of	our	health	plans	seeking recovery	from	the	federal	government	of	approximately	$611	million	in	payments	under	the	risk	corridor	premium	stabilization	program	established	under	the	Health Care	Reform	Law,	for	years	2014,	2015	and	2016.	We	have	not	recognized	revenue,	nor	have	we	recorded	a	receivable,	for	any	amount	due	from	 the	federal government	for	unpaid	risk	corridor	payments	as	of	December	31,	2017.	We	have	fully	recognized	all	liabilities	due	to	the	federal	government	that	we	have	incurred under	the	risk	corridor	program,	and	have	paid	all	amounts	due	to	the	federal	government	as	required.	There	is	no	assurance	that	we	will	prevail	in	the	lawsuit.

# Other	Lawsuits	and	Regulatory	Matters

Our	current	and	past	business	practices	are	subject	to	review	or	other	investigations	by	various	state	insurance	and	health	care	regulatory	authorities	and	other	state and	federal	regulatory	authorities.	These	authorities	regularly	scrutinize	the	business	practices	of	health	insurance,	health	care	delivery	and	benefits	companies.	These reviews	focus	on	numerous	facets	of	our	business,	including	claims	payment	practices,	statutory	capital	requirements,	provider	contracting,	risk	adjustment,	competitive practices,	commission	payments,	privacy	issues,	utilization	management	practices,	pharmacy	benefits,	access	to	care,	and	sales	practices,	among	others.	Some	of	these reviews	have	historically	resulted	in	fines	imposed	on	us	and	some	have	required	changes	to	some	of	our	practices.	We	continue	to	be	subject	to	these	reviews,	which could	result	in	additional	fines	or	other	sanctions	being	imposed	on	us	or	additional	changes	in	some	of	our	practices.

We	also	are	involved	in	various	other	lawsuits	that	arise,	for	the	most	part,	in	the	ordinary	course	of	our	business operations,	 certain	 of	 which	 may	 be	 styled	 as	 class-action	 lawsuits.	Among	 other	 matters,	 this	 litigation	 may	 include	 employment	 matters,	 claims	 of	 medical malpractice,	 bad	 faith,	 nonacceptance	 or	 termination	 of	 providers,	 anticompetitive	 practices,	 improper	 rate	 setting,	 provider	 contract	 rate	 and	 payment	 disputes, including	disputes	over	reimbursement	rates	required	by	statute,	general	contractual	matters,	intellectual	property	matters,	and	challenges	to	subrogation	practices.	For example,	a	number	of	hospitals	and	other	providers	have	asserted	that,	under	their	network	provider	contracts,	we	are	not	entitled	to	reduce	Medicare	Advantage payments	to	these	providers	in	connection	with	changes	in	Medicare	payment	systems	and	in	accordance	with	the	Balanced	Budget	and	Emergency	Deficit	Control	Act of	1985,	as	amended	(commonly	referred	to	as	"sequestration").	Those	challenges	have	led	and	could	lead	to	arbitration	demands	or	other	litigation.	Also,	under	state guaranty	assessment	laws,	including	those	related	to	state	cooperative	failures	in	the	industry,	we	may	be	assessed	(up	to	prescribed	limits)	for	certain	obligations	to	the policyholders	and	claimants	of	insolvent	insurance	companies	that	write	the	same	line	or	lines	of	business	as	we	do.

As	a	government	contractor,	we	may	also	be	subject	to	qui	tam	litigation	brought	by	individuals	who	seek	to	sue	on	behalf	of	the	government,	alleging	that	the government	contractor	submitted	false	claims	 to	 the	government	 including,	among	other	allegations,	 those	resulting	from	coding	and	review	practices	under	 the Medicare	risk	adjustment	model.	Qui	tam	litigation	is	filed	under	seal	to	allow	the	government	an	opportunity	to	investigate	and	to	decide	if	it	wishes	to	intervene	and assume	control	of	the	litigation.	If	the	government	does	not	intervene,	the	lawsuit	is	unsealed,	and	the

individual	may	continue	to	prosecute	the	action	on	his	or	her	own,	on	behalf	of	the	government.	We	also	are	subject	to	other	allegations	of	non-performance	of contractual	obligations	to	providers,	members,	and	others,	including	failure	to	properly	pay	claims,	improper	policy	terminations,	challenges	to	our	implementation	of the	Medicare	Part	D	prescription	drug	program	and	other	litigation.

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

We	record	accruals	for	the	contingencies	discussed	in	the	sections	above	to	the	extent	that	we	conclude	it	is	probable	that	a	liability	has	been	incurred	and	the amount	of	the	loss	can	be	reasonably	estimated.	No	estimate	of	the	possible	loss	or	range	of	loss	in	excess	of	amounts	accrued,	if	any,	can	be	made	at	this	time	regarding the	matters	specifically	described	above	because	of	 the	 inherently	unpredictable	nature	of	 legal	proceedings,	which	also	may	be	exacerbated	by	various	factors, including:	(i)	the	damages	sought	in	the	proceedings	are	unsubstantiated	or	indeterminate;	(ii)	discovery	is	not	complete;	(iii)	the	proceeding	is	in	its	early	stages;	(iv)	the matters	present	legal	uncertainties;	(v)	there	are	significant	facts	in	dispute;	(vi)	there	are	a	large	number	of	parties	(including	where	it	is	uncertain	how	liability,	if	any, will	be	shared	among	multiple	defendants);	or	(vii)	there	is	a	wide	range	of	potential	outcomes.

The	outcome	of	any	current	or	future	litigation	or	governmental	or	internal	investigations,	including	the	matters	described	above	and	other	ordinary	course	reviews of	our	internal	business	processes,	cannot	be	accurately	predicted,	nor	can	we	predict	any	resulting	judgments,	penalties,	fines	or	other	sanctions	that	may	be	imposed	at the	discretion	of	federal	or	state	regulatory	authorities	or	as	a	result	of	actions	by	third	parties.	Nevertheless,	it	is	reasonably	possible	that	any	such	outcome	of	litigation, investigations,	internal	reviews,	judgments,	penalties,	fines	or	other	sanctions	could	be	substantial,	and	the	outcome	of	these	matters	may	have	a	material	adverse	effect on	our	results	of	operations,	financial	position,	and	cash	flows,	and	may	also	affect	our	reputation.

# 17.	SEGMENT	INFORMATION

During	the	first	quarter	of	2017,	we	realigned	certain	of	our	businesses	among	our	reportable	segments	to	correspond	with	internal	management	reporting	changes corresponding	to	those	used	by	our	chief	operating	decision	maker	to	evaluate	results	of	operations	and	our	previously	announced	planned	exit	from	the	Individual Commercial	medical	business	on	January	1,	2018.	Additionally,	we	renamed	our	Group	segment	 to	 the	Group	and	Specialty	segment,	and	began	presenting	 the Individual	Commercial	business	results	as	a	separate	segment	rather	than	as	part	of	the	Retail	segment.	Specialty	health	insurance	benefits,	including	dental,	vision,	other supplemental	health,	and	financial	protection	products,	marketed	to	individuals	are	now	included	in	the	Group	and	Specialty	segment.	Specialty	health	insurance	benefits marketed	to	employer	groups	continue	to	be	included	in	the	Group	and	Specialty	segment.	As	a	result	of	this	realignment,	our	reportable	segments	now	include	Retail, Group	and	Specialty,	Healthcare	Services,	and	Individual	Commercial.	Prior	period	segment	financial	information	has	been	recast	to	conform	to	the	2017	presentation.

The	Retail	segment	consists	of	Medicare	benefits,	marketed	to	individuals	or	directly	via	group	accounts.	In	addition,	the	Retail	segment	also	includes	our	contract with	CMS	 to	administer	 the	Limited	Income	Newly	Eligible	Transition,	or	LI-NET,	prescription	drug	plan	program	and	contracts	with	various	states	 to	provide Medicaid,	dual	eligible,	and	Long-Term	Support	Services	benefits,	which	we	refer	to	collectively	as	our	state-based	contracts.	The	Group	and	Specialty	segment	consists of	employer	group	commercial	fully-insured	medical	and	specialty	health	insurance	benefits	marketed	to	individuals	and	employer	groups,	including	dental,	vision,	and other	supplemental	health	and	voluntary	insurance	benefits,	and	financial	protection	products,	as	well	as	administrative	services	only,	or	ASO	products.	In	addition,	our Group	and	Specialty	segment	includes	military	services	business,	primarily	our	TRICARE	contract.	The	Healthcare	Services	segment	includes	services	offered	to	our health	plan	members	as	well	as	to	third	parties,	including	pharmacy	solutions,	provider	services,	and	clinical	care	service,	such	as	home	health	and	other	services

and	capabilities	to	promote	wellness	and	advance	population	health.	The	Individual	Commercial	segment	consists	of	our	individual	commercial	fully-insured	medical health	insurance	benefits.	We	report	under	the	category	of	Other	Businesses	those	businesses	that	do	not	align	with	the	reportable	segments	described	above,	primarily our	closed-block	long-term	care	insurance	policies.

Our	Healthcare	Services	intersegment	revenues	primarily	relate	to	managing	prescription	drug	coverage	for	members	of	our	other	segments	through	Humana Pharmacy	Solutions®,	or	HPS,	and	includes	the	operations	of	Humana	Pharmacy,	Inc.,	our	mail	order	pharmacy	business.	These	revenues	consist	of	the	prescription price	(ingredient	cost	plus	dispensing	fee),	including	the	portion	to	be	settled	with	the	member	(co-share)	or	with	the	government	(subsidies),	plus	any	associated administrative	fees.	Services	revenues	related	to	the	distribution	of	prescriptions	by	third	party	retail	pharmacies	in	our	networks	are	recognized	when	the	claim	is processed	and	product	revenues	from	dispensing	prescriptions	from	our	mail	order	pharmacies	are	recorded	when	the	prescription	or	product	is	shipped.	Our	pharmacy operations,	which	are	responsible	for	designing	pharmacy	benefits,	including	defining	member	co-share	responsibilities,	determining	formulary	listings,	contracting	with retail	pharmacies,	confirming	member	eligibility,	reviewing	drug	utilization,	and	processing	claims,	act	as	a	principal	in	the	arrangement	on	behalf	of	members	in	our other	segments.	As	principal,	our	Healthcare	Services	segment	reports	revenues	on	a	gross	basis,	including	co-share	amounts	from	members	collected	by	third	party retail	pharmacies	at	the	point	of	service.

In	addition,	our	Healthcare	Services	 intersegment	revenues	 include	revenues	earned	by	certain	owned	providers	derived	from	risk-based	and	non-risk-based managed	care	agreements	with	our	health	plans.	Under	risk	based	agreements,	the	provider	receives	a	monthly	capitated	fee	that	varies	depending	on	the	demographics and	health	status	of	the	member,	for	each	member	assigned	to	these	owned	providers	by	our	health	plans.	The	owned	provider	assumes	the	economic	risk	of	funding	the assigned	members'	healthcare	services.	Under	non	risk-based	agreements,	our	health	plans	retain	the	economic	risk	of	funding	the	assigned	members'	healthcare services.	Our	Healthcare	Services	segment	reports	provider	services	revenues	associated	with	risk-based	agreements	on	a	gross	basis,	whereby	capitation	fee	revenue	is recognized	in	the	period	in	which	the	assigned	members	are	entitled	to	receive	healthcare	services.	Provider	services	revenues	associated	with	non-risk-based	agreements are	presented	net	of	associated	healthcare	costs.

We	present	our	consolidated	results	of	operations	from	the	perspective	of	the	health	plans.	As	a	result,	the	cost	of	providing	benefits	to	our	members,	whether provided	via	a	third	party	provider	or	internally	through	a	stand-alone	subsidiary,	is	classified	as	benefits	expense	and	excludes	the	portion	of	the	cost	for	which	the health	plans	do	not	bear	responsibility,	including	member	co-share	amounts	and	government	subsidies	of	$13.5	billion	in	2017,	$13.4	billion	in	2016,	and	$12.3	billion	in 2015.	In	addition,	depreciation	and	amortization	expense	associated	with	certain	businesses	in	our	Healthcare	Services	segment	delivering	benefits	to	our	members, primarily	associated	with	our	provider	services	and	pharmacy	operations,	are	included	with	benefits	expense.	The	amount	of	this	expense	was	$107	million	in	2017,	$111 million	in	2016,	and	$92	million	in	2015.

Other	than	those	described	previously,	the	accounting	policies	of	each	segment	are	the	same	and	are	described	in	Note	2.	Transactions	between	reportable	segments primarily	consist	of	sales	of	services	rendered	by	our	Healthcare	Services	segment,	primarily	pharmacy,	provider,	and	clinical	care	services,	to	our	Retail,	Group	and Specialty,	and	Individual	Commercial	segment	customers.	Intersegment	sales	and	expenses	are	recorded	at	fair	value	and	eliminated	in	consolidation.	Members	served by	our	segments	often	use	the	same	provider	networks,	enabling	us	in	some	instances	to	obtain	more	favorable	contract	terms	with	providers.	Our	segments	also	share indirect	costs	and	assets.	As	a	result,	the	profitability	of	each	segment	is	interdependent.	We	allocate	most	operating	expenses	to	our	segments.	Assets	and	certain corporate	income	and	expenses	are	not	allocated	to	the	segments,	including	the	portion	of	investment	income	not	supporting	segment	operations,	interest	expense	on corporate	debt,	and	certain	other	corporate	expenses.	These	items	are	managed	at	a	corporate	level.	These	corporate	amounts	are	reported	separately	from	our	reportable segments	and	are	included	with	intersegment	eliminations	in	the	tables	presenting	segment	results	below.

|  | Retail | Group	and<br>Specialty | Healthcare<br>Services | Individual<br>Commercial | Other	Businesses | Eliminations/<br>Corporate | Consolidated |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | (in\tmillions) |  |  |  |
| 2017 |  |  |  |  |  |  |  |
| Revenues—external\tcustomers |  |  |  |  |  |  |  |
| Premiums: |  |  |  |  |  |  |  |
| Individual\tMedicare\tAdvantage | $32,720 | $— | $— | $— | $— | $— | $32,720 |
| Group\tMedicare\tAdvantage | 5,155 | — | — | — | — | — | 5,155 |
| Medicare\tstand-alone\tPDP | 3,702 | — | — | — | — | — | 3,702 |
| Total\tMedicare | 41,577 | — | — | — | — | — | 41,577 |
| Fully-insured | 478 | 5,462 | — | 947 | — | — | 6,887 |
| Specialty | — | 1,310 | — | — | — | — | 1,310 |
| Medicaid\tand\tother | 2,571 | — | — | — | 35 | — | 2,606 |
| Total\tpremiums | 44,626 | 6,772 | — | 947 | 35 | — | 52,380 |
| Services\trevenue: |  |  |  |  |  |  |  |
| Provider | — | — | 258 | — | — | — | 258 |
| ASO\tand\tother | 10 | 626 | — | — | 8 | — | 644 |
| Pharmacy | — | — | 80 | — | — | — | 80 |
| Total\tservices\trevenue | 10 | 626 | 338 | — | 8 | — | 982 |
| Total\trevenues—external\tcustomers | 44,636 | 7,398 | 338 | 947 | 43 | — | 53,362 |
| Intersegment\trevenues |  |  |  |  |  |  |  |
| Services | — | 20 | 17,293 | — | — | (17,313) | — |
| Products | — | — | 6,292 | — | — | (6,292) | — |
| Total\tintersegment\trevenues | — | 20 | 23,585 | — | — | (23,605) | — |
| Investment\tincome | 90 | 31 | 35 | 4 | 87 | 158 | 405 |
| Total\trevenues | 44,726 | 7,449 | 23,958 | 951 | 130 | (23,447) | 53,767 |
| Operating\texpenses: |  |  |  |  |  |  |  |
| Benefits | 38,218 | 5,363 | — | 544 | 131 | (760) | 43,496 |
| Operating\tcosts | 4,292 | 1,590 | 22,848 | 201 | 12 | (22,376) | 6,567 |
| Merger\ttermination\tfee\tand\trelated\ncosts,\tnet | — | — | — | — | — | (936) | (936) |
| Depreciation\tand\tamortization | 238 | 84 | 143 | 13 | — | (100) | 378 |
| Total\toperating\texpenses | 42,748 | 7,037 | 22,991 | 758 | 143 | (24,172) | 49,505 |
| Income\t(loss)\tfrom\toperations | 1,978 | 412 | 967 | 193 | (13) | 725 | 4,262 |
| Interest\texpense | — | — | — | — | — | 242 | 242 |
| Income\t(loss)\tbefore\tincome\ttaxes | $1,978 | $412 | $967 | $193 | $(13) | $483 | $4,020 |

Premium	 and	 services	 revenues	 derived	 from	 our	 contracts	 with the	 federal	 government,	 as	 a	 percentage	 of	 our total	 premium	 and	 services	 revenues,	 was approximately	79%	for	2017,	compared	to	75%	for	2016,	and	73%	for	2015.

|  | Retail | Group	and<br>Specialty | Healthcare<br>Services | Individual<br>Commercial | Other<br>Businesses | Eliminations/<br>Corporate | Consolidated |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | (in\tmillions) |  |  |  |
| 2016 |  |  |  |  |  |  |  |
| Revenues—external\tcustomers |  |  |  |  |  |  |  |
| Premiums: |  |  |  |  |  |  |  |
| Individual\tMedicare\tAdvantage | $31,863 | $— | $— | $— | $— | $— | $31,863 |
| Group\tMedicare\tAdvantage | 4,283 | — | — | — | — | — | 4,283 |
| Medicare\tstand-alone\tPDP | 4,009 | — | — | — | — | — | 4,009 |
| Total\tMedicare | 40,155 | — | — | — | — | — | 40,155 |
| Fully-insured | 428 | 5,405 | — | 3,064 | — | — | 8,897 |
| Specialty | — | 1,279 | — | — | — | — | 1,279 |
| Medicaid\tand\tother | 2,640 | 12 | — | — | 38 | — | 2,690 |
| Total\tpremiums | 43,223 | 6,696 | — | 3,064 | 38 | — | 53,021 |
| Services\trevenue: |  |  |  |  |  |  |  |
| Provider | — | — | 278 | — | — | — | 278 |
| ASO\tand\tother | 6 | 643 | 1 | — | 10 | — | 660 |
| Pharmacy | — | — | 31 | — | — | — | 31 |
| Total\tservices\trevenue | 6 | 643 | 310 | — | 10 | — | 969 |
| Total\trevenues—external\tcustomers | 43,229 | 7,339 | 310 | 3,064 | 48 | — | 53,990 |
| Intersegment\trevenues |  |  |  |  |  |  |  |
| Services | — | 22 | 18,979 | — | — | (19,001) | — |
| Products | — | — | 5,993 | — | — | (5,993) | — |
| Total\tintersegment\trevenues | — | 22 | 24,972 | — | — | (24,994) | — |
| Investment\tincome | 90 | 25 | 30 | 5 | 66 | 173 | 389 |
| Total\trevenues | 43,319 | 7,386 | 25,312 | 3,069 | 114 | (24,821) | 54,379 |
| Operating\texpenses: |  |  |  |  |  |  |  |
| Benefits | 36,783 | 5,233 | — | 3,301 | 617 | (927) | 45,007 |
| Operating\tcosts | 4,650 | 1,727 | 24,073 | 601 | 16 | (23,894) | 7,173 |
| Merger\ttermination\tfee\tand\trelated\ncosts,\tnet | — | — | — | — | — | 104 | 104 |
| Depreciation\tand\tamortization | 196 | 82 | 143 | 36 | 1 | (104) | 354 |
| Total\toperating\texpenses | 41,629 | 7,042 | 24,216 | 3,938 | 634 | (24,821) | 52,638 |
| Income\t(loss)\tfrom\toperations | 1,690 | 344 | 1,096 | (869) | (520) | — | 1,741 |
| Interest\texpense | — | — | — | — | — | 189 | 189 |
| Income\t(loss)\tbefore\tincome\ttaxes | $1,690 | $344 | $1,096 | $(869) | $(520) | $(189) | $1,552 |

Premiums	revenue	for	our	Individual	Commercial	segment	for	2016	includes	a	reduction	of	$583	million	associated	with	the	write-off	of	commercial	risk	corridor receivables	as	discussed	more	fully	in	Note	7.

Benefits	expense	for	Other	Businesses	for	2016	includes	$505	million	for	reserve	strengthening	associated	with	our	closed	block	of	long-term	care	insurance policies	as	discussed	more	fully	in	Note	18.

|  | Retail | Group	and<br>Specialty | Healthcare<br>Services | Individual<br>Commercial | Other	Businesses | Eliminations/<br>Corporate | Consolidated |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | (in\tmillions) |  |  |  |
| 2015 |  |  |  |  |  |  |  |
| Revenues—external\tcustomers |  |  |  |  |  |  |  |
| Premiums: |  |  |  |  |  |  |  |
| Individual\tMedicare\tAdvantage | $29,526 | $— | $— | $— | $— | $— | $29,526 |
| Group\tMedicare\tAdvantage | 5,588 | — | — | — | — | — | 5,588 |
| Medicare\tstand-alone\tPDP | 3,846 | — | — | — | — | — | 3,846 |
| Total\tMedicare | 38,960 | — | — | — | — | — | 38,960 |
| Fully-insured | 304 | 5,493 | — | 3,939 | — | — | 9,736 |
| Specialty | — | 1,316 | — | — | — | — | 1,316 |
| Medicaid\tand\tother | 2,341 | 21 | — | — | 35 | — | 2,397 |
| Total\tpremiums | 41,605 | 6,830 | — | 3,939 | 35 | — | 52,409 |
| Services\trevenue: |  |  |  |  |  |  |  |
| Provider | — | — | 695 | — | — | — | 695 |
| ASO\tand\tother | 8 | 658 | 1 | — | 14 | — | 681 |
| Pharmacy | — | — | 30 | — | — | — | 30 |
| Total\tservices\trevenue | 8 | 658 | 726 | — | 14 | — | 1,406 |
| Total\trevenues—external\tcustomers | 41,613 | 7,488 | 726 | 3,939 | 49 | — | 53,815 |
| Intersegment\trevenues |  |  |  |  |  |  |  |
| Services | — | 20 | 18,127 | — | — | (18,147) | — |
| Products | — | — | 4,923 | — | — | (4,923) | — |
| Total\tintersegment\trevenues | — | 20 | 23,050 | — | — | (23,070) | — |
| Investment\tincome | 122 | 34 | — | 4 | 76 | 238 | 474 |
| Total\trevenues | 41,735 | 7,542 | 23,776 | 3,943 | 125 | (22,832) | 54,289 |
| Operating\texpenses: |  |  |  |  |  |  |  |
| Benefits | 36,052 | 5,382 | — | 3,589 | 87 | (841) | 44,269 |
| Operating\tcosts | 4,267 | 1,755 | 22,598 | 756 | 14 | (22,095) | 7,295 |
| Merger\ttermination\tfee\tand\trelated\ncosts,\tnet | — | — | — | — | — | 23 | 23 |
| Depreciation\tand\tamortization | 157 | 84 | 156 | 31 | — | (73) | 355 |
| Total\toperating\texpenses | 40,476 | 7,221 | 22,754 | 4,376 | 101 | (22,986) | 51,942 |
| Income\t(loss)\tfrom\toperations | 1,259 | 321 | 1,022 | (433) | 24 | 154 | 2,347 |
| Gain\ton\tsale\tof\tbusiness | — | — | — | — | — | 270 | 270 |
| Interest\texpense | — | — | — | — | — | 186 | 186 |
| Income\t(loss)\tbefore\tincome\ttaxes | $1,259 | $321 | $1,022 | $(433) | $24 | $238 | $2,431 |

Benefits	expense	for the	Individual	Commercial	segment	for	2015 includes	$176	million	for	a	provision	for	probable	future losses	(premium	deficiency)	for individual	commercial	medical	business	compliant	with	the	Health	Care	Reform	Law	for	the	2016	coverage	year	as	discussed	more	fully	in	Note	7.

# 18.	EXPENSES	ASSOCIATED	WITH	LONG-DURATION	INSURANCE	PRODUCTS

Premiums	associated	with	our	long-duration	insurance	products	accounted	for	less	than	1%	of	our	consolidated	premiums	and	services	revenue	for	the	year	ended December	31,	2017.	We	use	long-duration	accounting	for	products	such	as	long-term	care,	life	insurance,	annuities,	and	certain	health	and	other	supplemental	policies sold	to	individuals	because	they	are	expected	to	remain	in	force	for	an	extended	period	beyond	one	year	and	because	premium	received	in	the	earlier	years	is	intended	to pay	anticipated	benefits	to	be	incurred	in	future	years.	As	a	result,	we	defer	policy	acquisition	costs,	primarily	consisting	of	commissions,	and	amortize	them	over	the estimated	life	of	the	policies	in	proportion	to	premiums	earned.

In	addition,	we	establish	reserves	for	future	policy	benefits	in	recognition	of	the	fact	that	some	of	the	premium	received	in	the	earlier	years	is	intended	to	pay anticipated	benefits	to	be	incurred	in	future	years.	At	policy	issuance,	these	reserves	are	recognized	on	a	net	level	premium	method	based	on	premium	rate	increase, interest	rate,	mortality,	morbidity,	persistency	(the	percentage	of	policies	remaining	in-force),	and	maintenance	expense	assumptions.	The	assumptions	used	to	determine the	liability	for	future	policy	benefits	are	established	and	locked	in	at	the	time	each	contract	is	issued	and	only	change	if	our	expected	future	experience	deteriorates	to the	point	that	the	level	of	the	liability,	together	with	the	present	value	of	future	gross	premiums,	are	not	adequate	to	provide	for	future	expected	policy	benefits	and maintenance	costs	(i.e.	the	loss	recognition	date).	As	discussed	in	Note	2,	beginning	in	2014,	health	policies	sold	to	individuals	that	conform	to	the	Health	Care	Reform Law	are	accounted	for	under	a	short-duration	model	because	premiums	received	in	the	current	year	are	intended	to	pay	anticipated	benefits	in	that	year.

The	table	below	presents	deferred	acquisition	costs	and	future	policy	benefits	payable	associated	with	our	long-duration	insurance	products	for	the	years	ended December	31,	2017	and	2016.

|  | 2017 |  | 2016 |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Deferred\nacquisition\ncosts | Future\tpolicy\nbenefits\npayable | Deferred\nacquisition\ncosts | Future\tpolicy\nbenefits\npayable |
|  |  | (in\tmillions) |  |  |
| Other\tlong-term\tassets | $103 | $— | $119 | $— |
| Trade\taccounts\tpayable\tand\taccrued\texpenses | — | (56) | — | (62) |
| Long-term\tliabilities | — | (2,923) | — | (2,834) |
| Total\tasset\t(liability) | $103 | $(2,979) | $119 | $(2,896) |

In	addition,	future	policy	benefits	payable	include	amounts	of	$199	million	at	December	31,	2017	and	$201	million	at	December	31,	2016	which	are	subject	to 100%	coinsurance	agreements	as	more	fully	described	in	Note	19.

Benefit	expense	reflects	a	net	reduction	of	$22	million	in	2017,	a	net	increase	of	$439	million	in	2016	and	a	net	reduction	of	$80	million	in	2015.	All	three	years include	the	effect	of	the	release	of	reserves	as	Individual	Commercial	medical	members	transitioned	to	plans	compliant	with	the	Health	Care	Reform	Law.	In	addition, 2016	reflects	the	net	change	of	$505	million	associated	with	our	closed	block	of	long-term	care	insurance	policies	discussed	further	below.	Amortization	of	deferred acquisition	costs	included	in	operating	costs	was	$71	million	in	2017,	$67	million	in	2016,	and	$63	million	in	2015,	which	includes	the	effect	of	accelerating	deferred acquisition	amortization	costs	of	existing	previously	underwritten	members	transitioning	to	policies	compliant	with	the	Health	Care	Reform	Law	with	us	and	other carriers.

Future	policy	benefits	payable	include	$2.3	billion	at	December	31,	2017	 and	$2.2	billion	at	December	31,	2016	associated	with	a	non-strategic	closed	block	of long-term	care	insurance	policies	acquired	in	connection	with	the	2007	acquisition	of	KMG.	Future	policy	benefits	payable	includes	amounts	charged	to	accumulated other	comprehensive	income	for	an	additional	liability	that	would	exist	on	our	closed-block	of	long-term	care	insurance	policies	if	unrealized	gains	on	the	sale	of	the investments	backing	such	products	had	been	realized	and	the	proceeds	reinvested	at	then	current	yields.	There	was	a	$168	million	additional	liability	at	December	31, 2017	and	$77	million	additional	liability	at	December	31,	2016.	Amounts	charged	to	accumulated	other	comprehensive	income	are	net	of	applicable	deferred	taxes.

Long-term	care	insurance	policies	provide	nursing	home	and	home	health	coverage	for	which	premiums	are	collected	many	years	in	advance	of	benefits	paid,	if	any. Therefore,	our	actual	claims	experience	will	emerge	many	years	after	assumptions	have	been	established.	The	risk	of	a	deviation	of	the	actual	premium	rate	increase, interest,	morbidity,	mortality,	persistency,	and	maintenance	expense	assumptions	from	those	assumed	in	our	reserves	are	particularly	significant	to	our	closed	block	of long-term	care	insurance	policies.	We	monitor	the	loss	experience	of	these	long-term	care	insurance	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.	To	the	extent	premium	rate	increases,	interest	rates,	and/or	loss experience	vary	from	our	loss	recognition	date	assumptions,	material	future	adjustments	to	reserves	could	be	required.

During	2016,	we	recorded	a	loss	for	a	premium	deficiency.	The	premium	deficiency	was	based	on	current	and	anticipated	experience	that	had	deteriorated	from	our locked-in	assumptions	from	the	previous	December	31,	2013	loss	recognition	date,	particularly	as	they	related	to	emerging	experience	indicating	longer	claims	duration, a	prolonged	lower	interest	rate	environment,	and	an	increase	in	policyholder	life	expectancies.	Based	on	this	deterioration,	we	determined	that	our	existing	future	policy benefits	payable,	together	with	the	present	value	of	future	gross	premiums,	associated	with	our	closed	block	of	long-term	care	insurance	policies	were	not	adequate	to provide	for	future	policy	benefits	and	maintenance	costs	under	these	policies;	therefore	we	unlocked	and	modified	our	assumptions	based	on	current	expectations. Accordingly,	during	2016	we	recorded	$505	million	of	additional	benefits	expense,	with	a	corresponding	increase	in	future	policy	benefits	payable	of	$659	million partially	offset	by	a	related	reinsurance	recoverable	of	$154	million	included	in	other	long-term	assets.	During	2017,	we	performed	loss	recognition	testing	comparing our	existing	future	policy	benefits	payable	with	the	present	value	of	future	gross	premiums	associated	with	our	closed	block	of	long-term	care	insurance	policies	and determined	that	no	premium	deficiency	existed	at	December	31,	2017.

Deferred	acquisition	costs	included	$3	million	and	$16	million	associated	with	our	individual	commercial	medical	policies	at	December	31,	2017	and	December	31, 2016,	respectively.	Future	policy	benefits	payable	associated	with	our	individual	commercial	medical	policies	were	$19	million	at	December	31,	2017	and	$86	million at	December	31,	2016.	The	decline	in	deferred	acquisition	costs	and	future	policy	benefits	payable	primarily	reflects	the	effect	of	existing	previously	underwritten members	transitioning	to	policies	compliant	with	the	Health	Care	Reform	Law	with	us	and	other	carriers.

On	November	6,	2017,	we	entered	into	a	definitive	agreement	to	sell	the	stock	of	our	wholly-owned	subsidiary,	KMG	to	CGIC,	a	Texas-based	insurance	company wholly	owned	by	HC2	Holdings,	Inc.,	a	diversified	holding	company.	KMG's	subsidiary,	KIC,	includes	our	closed	block	of	non-strategic	commercial	long-term	care insurance	policies.	For	a	detailed	discussion	refer	to	Note	2.

# 19.	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	and	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.	Excluding	reinsurance	associated	with	the	Health	Care	Reform	Law	discussed	in	Note	2, reinsurance	recoverables,	 included	 in	other	current	and	 long-term	assets,	were	$824	million	 at	 December	 31,	2017	 and	$822	million	 at	 December	 31,	2016.	 The percentage	of	these	reinsurance	recoverables	resulting	from	100%	coinsurance	agreements	was	approximately	33%	at	December	31,	2017	and	approximately	34%	at December	 31,	2016.	Premiums	ceded	were	$969	million	 in	2017,	$842	million	 in	2016	 and	$821	million	 in	2015.	 Benefits	 ceded	 were	$844	million	 in	2017,	$767 million	in	2016,	and	$666	million	in	2015.	Ceded	premium	and	benefits	reflect	a	July	1,	2014	amendment	ceding	all	risk	under	a	Medicaid	contract	to	a	third	party reinsurer.

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,	2017	presented	below:

The	all	other	category	represents	18	reinsurers	with	individual	balances	less	than	$71	million.	Three	of	these	reinsurers	with	recoverables	of	$87	million	are	subject to	trust	or	funds	withheld	accounts,	requiring	amounts	at	least	equal	to	the	total	recoverable	from	each	of	these	reinsurers.

# Report	of	Independent	Registered	Public	Accounting	Firm

# To	the	Board	of	Directors	and	Stockholders	of	Humana	Inc.:

We	have	audited	the	accompanying	consolidated	balance	sheets	of	Humana	Inc.	and	its	subsidiaries	as	of	December	31,	2017	and	2016,	and	the	related	consolidated statements	of	income,	comprehensive	income,	stockholders'	equity	and	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2017,	including	the related	notes	and	financial	statement	schedules	listed	in	the	index	appearing	under	Item	15(a)(2)	(collectively	referred	to	as	the	"consolidated	financial	statements").	We also	have	audited	the	Company's	internal	control	over	financial	reporting	as	of	December	31,	2017,	based	on	criteria	established	in	Internal	Control	-	Integrated Framework	(2013)	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO).

In	our	opinion,	the	consolidated	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	financial	position	of	the	Company	as	of	December	31, 2017	and	2016,	and	the	results	of	its	operations	and	its	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2017	in	conformity	with	accounting principles	generally	accepted	in	the	United	States	of	America.	Also	in	our	opinion,	the	Company	maintained,	in	all	material	respects,	effective	internal	control	over financial	reporting	as	of	December	31,	2017,	based	on	criteria	established	in	Internal	Control	-	Integrated	Framework	(2013)	issued	by	the	COSO.

# Basis	for	Opinions

The	Company's	management	is	responsible	for	these	consolidated	financial	statements,	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	the	Company's	consolidated	financial	statements	and	on	the	Company's	internal	control	over	financial reporting	based	on	our	audits.	We	are	a	public	accounting	firm	registered	with	the	Public	Company	Accounting	Oversight	Board	(United	States)	("PCAOB")	and	are required	to	be	independent	with	respect	to	the	Company	in	accordance	with	the	U.S.	federal	securities	laws	and	the	applicable	rules	and	regulations	of	the	Securities	and Exchange	Commission	and	the	PCAOB.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	PCAOB.	Those	standards	require	that	we	plan	and	perform	the	audits	to	obtain	reasonable	assurance about	whether	the	consolidated	financial	statements	are	free	of	material	misstatement,	whether	due	to	error	or	fraud,	and	whether	effective	internal	control	over	financial reporting	was	maintained	in	all	material	respects.

Our	audits	of	the	consolidated	financial	statements	included	performing	procedures	to	assess	the	risks	of	material	misstatement	of	the	consolidated	financial	statements, whether	due	to	error	or	fraud,	and	performing	procedures	that	respond	to	those	risks.	Such	procedures	included	examining,	on	a	test	basis,	evidence	regarding	the amounts	and	disclosures	in	the	consolidated	financial	statements.	Our	audits	also	included	evaluating	the	accounting	principles	used	and	significant	estimates	made	by management,	as	well	as	evaluating	the	overall	presentation	of	the	consolidated	financial	statements.	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.

# Definition	and	Limitations	of	Internal	Control	over	Financial	Reporting

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.

# PricewaterhouseCoopers	LLP	(signed)

Louisville,	Kentucky

We	have	served	as	the	Company's	auditor	since	1968.

# QUARTERLY	FINANCIAL	INFORMATION

# (Unaudited)

A	summary	of	our	quarterly	unaudited	results	of	operations	for	the	years	ended	December	31,	2017	and	2016	follows:

|  | First | Second | Third | Fourth |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions,\texcept\tper\tshare\tresults) | (in\tmillions,\texcept\tper\tshare\tresults) |  |
| Total\trevenues | $13,762 | $13,534 | $13,282 | $13,189 |
| Income\tbefore\tincome\ttaxes | 1,689 | 1,042 | 799 | 490 |
| Net\tincome | 1,115 | 650 | 499 | 184 |
| Basic\tearnings\tper\tcommon\tshare\t(1) | $7.54 | $4.49 | $3.46 | $1.30 |
| Diluted\tearnings\tper\tcommon\tshare\t(1) | $7.49 | $4.46 | $3.44 | $1.29 |

|  | First | Second | Third | Fourth	(2)(3) |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions,\texcept\tper\tshare\tresults) | (in\tmillions,\texcept\tper\tshare\tresults) |  |
| Total\trevenues | $13,800 | $14,007 | $13,694 | $12,878 |
| Income\t(loss)\tbefore\tincome\ttaxes | 500 | 636 | 902 | (486) |
| Net\tincome\t(loss) | 254 | 311 | 450 | (401) |
| Basic\tearnings\t(loss)\tper\tcommon\tshare | $1.70 | $2.08 | $3.01 | $(2.68) |
| Diluted\tearnings\t(loss)\tper\tcommon\tshare\t(1) | $1.68 | $2.06 | $2.98 | $(2.68) |

(1) The	calculation	of	earnings	per	common	share	is	based	on	the	weighted	average	shares	outstanding	during	each	quarter	and,	accordingly,	the	sum	may	not	equal	the total	for	 the	year.	For	2017,	the	sum	of	quarterly	amounts	do	not	equal	full	year	results	due	to	share	repurchases	throughout	the	year	including	two	different accelerated	share	repurchase	programs.	In	addition,	for	2016,	the	sum	of	quarterly	amounts	do	not	equal	full	year	results	due	to	the	anti-dilutive	impact	of	a	loss	in the	fourth	quarter.	The	loss	position	in	the	fourth	quarter	required	the	use	of	basic	weighted-average	common	shares	outstanding	in	the	calculation	of	diluted	loss	per share.

(2) The	fourth	quarter	of	2016	includes	an	expense	of	$505	million	($318	million	after	tax,	or	$2.11	per	diluted	common	share)	for	reserve	strengthening	associated with	our	closed	block	of	long-term	care	insurance	policies.

(3) Total	revenue	for	2016	includes	a	reduction	of	$583	million	($367	million	after-tax,	or	$2.43	per	diluted	common	share)	in	premiums	associated	with	the	write-off	of risk	corridor	receivables.

# 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	Code	of	Ethics	and	Business	Conduct, which	we	currently	refer	to	as	the	Humana	Inc.	Ethics	Every	Day.	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,	2017,	we	as	the	principal	executive	officer	and	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,	2017.	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	(2013).	Based	on	our assessment,	we	determined	that,	as	of	December	31,	2017,	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,	2017	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	138.

# 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,	2017	that	have	materially	affected, or	are	reasonably	likely	to	materially	affect,	the	Company's	internal	control	over	financial	reporting.

# Bruce	D.	Broussard

President	and	Chief	Executive	Officer	(Principal	Executive	Officer)

Brian	A.	Kane

Chief	Financial	Officer	(Principal	Financial	Officer)

Cynthia	H.	Zipperle

Senior	Vice	President	and	Chief	Accounting	Officer	(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	19,	2018	appearing	under	the	caption	"Proposal	One:	Election	of	Directors"	in	such	Proxy	Statement.

# Executive	Officers	of	the	Registrant

Set	forth	below	are	names	and	ages	of	all	of	our	current	executive	officers	as	of	February	1,	2018,	their	positions,	and	the	date	first	elected	an	officer:

(1) Mr.	Broussard	currently	serves	as	Director,	President	and	Chief	Executive	Officer	(Principal	Executive	Officer),	having	held	these	positions	since	January	1, 2013.	Mr.	Broussard	was	elected	President	upon	joining	the	Company	in	December	2011	and	served	in	that	capacity	through	December	2012.	Prior	to	joining	the Company,	Mr.	Broussard	was	Chief	Executive	Officer	of	McKesson	Specialty/US	Oncology,	Inc.	US	Oncology	was	purchased	by	McKesson	in	December 2010.	At	US	Oncology,	Mr.	Broussard	served	in	a	number	of	senior	executive	roles,	including	Chief	Financial	Officer,	Chief	Executive	Officer,	and	Chairman	of the	Board.

(2) Dr.	Beveridge	currently	serves	as	Chief	Medical	Officer,	having	held	this	position	since	joining	the	Company	in	June	2013.	Prior	to	joining	the	Company,	Dr. Beveridge	served	as	Chief	Medical	Officer	for	McKesson	Specialty	Health	from	December	2010	until	June	2013.	Prior	to	McKesson's	acquisition	of	US Oncology,	Dr.	Beveridge	served	as	the	Executive	Vice	President	and	Medical	Director	at	US	Oncology	from	September	2009	through	December	2010.

(3) Ms.	Bierbower	currently	serves	as	Segment	President,	Group	Business,	having	held	this	position	since	March	2017.	Prior	to	that,	she	served	as	the	Segment President,	Employer	Group,	and	also	previously	led	the	Company's	Specialty	Benefits	area,	including	dental,	vision,	life,	disability	and	workplace	voluntary benefits.	Ms.	Bierbower	joined	the	Company	in	2001.

(4) Ms.	Bilney	currently	serves	as	Chief	Consumer	Officer,	having	held	this	position	since	joining	the	Company	in	April	2013.	Prior	to	joining	the	Company,	Ms. Bilney	served	as	Executive	Vice	President	and	Chief	Brand	Officer	for	Bloomin'	Brands,	Inc.	from	2006	until	April	2013.

(5) Mr.	 Deshpande	 currently	 serves	 as	 Chief	 Risk	 Officer,	 having	 held	 this	 position	 since	 joining	 the	 Company	 in	 July	 2017.	Before	 joining	 Humana,	 Mr. Deshpande	spent	17	years	at	Capital	One	in	key	leadership	positions,	most	recently	as	Business	Chief	Risk	Officer	for	the	U.S.	and	international	card	business. He	previously	served	as	the	Business	Chief	Risk	Officer	and	Head	of	Enterprise	Services	for	the	Financial	Services	Division,	responsible	for	Business	Risk,	Data Science,	Data	Quality,	Process	Excellence	and	Project	Management.	He	also	led	marketing	and	analysis	for	the	Home	Loans,	Auto	Finance,	and	Credit	Card businesses,	with	responsibilities	for	business	strategy,	credit,	product	and	marketing.

(6) Mr.	Fleming	currently	serves	as	Segment	President,	Healthcare	Services,	where	he	is	responsible	for	Humana's	clinical	and	pharmacy	businesses	that	service	all Humana	segments,	having	held	this	position	since	March	of	2017.	Prior	to	that,	he	served	as	President	of	the	Company's	pharmacy	business.	Mr.	Fleming	joined the	Company	in	1994.

(7) Mr.	Hunter	currently	serves	as	Chief	Strategy	Officer,	having	held	this	position	since	joining	the	Company	in	January	2014.	Prior	to	joining	the	Company,	Mr. Hunter	served	as	President	of	Provider	Markets	at	The	TriZetto	Group,	Inc.	from	July	2012	until	December	2013,	and	as	Senior	Vice	President,	Emerging Markets	at	BlueCross	BlueShield	of	Tennessee	from	2009	through	July	2012.	While	at	BlueCross	BlueShield	of	Tennessee,	Mr.	Hunter	was	simultaneously President	and	Chief	Executive	Officer	of	Onlife	Health,	a	national	health	and	wellness	subsidiary	of	BlueCross	BlueShield	of	Tennessee.

(8) Mr.	Huval	currently	serves	as	Chief	Human	Resources	Officer,	having	been	elected	to	this	position	in	December	2012.	Prior	to	joining	the	Company,	Mr.	Huval spent	10	years	at	Bank	of	America	in	multiple	senior-level	roles,	including	Human	Resources	executive	and	Chief	Information	Officer	for	Global	Wealth	& Investment	Management,	as	well	as	Human	Resources	executive	for	both	Global	Treasury	Services	and	Technology	&	Global	Operations.

(9) Mr.	Kane	currently	serves	as	Chief	Financial	Officer,	having	been	elected	to	this	position	in	June	2014.	Prior	to	joining	the	Company,	Mr.	Kane	spent	nearly	17 years	at	Goldman,	Sachs	&	Co.	As	a	managing	director,	he	was	responsible	for	client	relationships	as	well	as	for	leading	strategic	and	financing	transactions	for a	number	of	companies	in	multiple	industries.

(10)Mr.	LeClaire	currently	serves	as	Chief	Information	Officer,	having	held	this	position	since	January	2014.	Prior	to	that,	he	served	as	Senior	Vice	President	and Chief	Service	and	Information	Officer	from	August	2011	to	January	2014,	and	as	Chief	Technology	Officer	from	2002	to	August	2011.	Mr.	LeClaire	joined	the Company	in	August	1999.

(11)Ms.	Margulis	currently	serves	as	Chief	Corporate	Affairs	Officer,	leading	strategy	development	and	execution	for	Humana's	state	and	federal	government relations,	advocacy	and	public	policy	initiatives,	including	strategic	alliance	relationships	in	national	and	key	local	markets.	Ms.	Margulis	joined	the	Company	in November	1985,	and	has	held	her	current	position	since	December	2014.

(12)Mr.	Todoroff	currently	serves	as	Chief	Legal	Officer,	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.

(13)Mr.	Wheatley	currently	serves	as	Segment	President,	Retail,	having	held	this	position	since	March	2017.	During	his	25-year	career	with	the	Company,	Mr. Wheatley	has	served	in	a	number	of	key	leadership	roles,	including	Vice	President	of	Medicare	Service	Operations	and	President	of	the	East	Region,	one	of	the Company's	key	Medicare	geographies.

(14)Mrs.	Zipperle	currently	serves	as	Senior	Vice	President,	Chief	Accounting	Officer,	having	held	this	position	since	December	2014.	 Mrs.	Zipperle	previously served	as	the	Vice	President	-	Finance	from	January	2013	until	her	election	to	her	current	role,	and	as	the	Assistant	Controller	from	January	1998	until	January 2013.

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	19,	2018	appearing	under	the	caption	"Section	16(a)	Beneficial	Ownership	Reporting	Compliance"	of	such	Proxy	Statement.

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

We	have	adopted	a	Code	of	Conduct	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 Conduct	 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,	currently	known	as	the	Humana	Inc.	Ethics	Every	Day.	All	employees	and directors	are	required	to	annually	affirm	in	writing	their	acceptance	of	the	code.	The	Humana	Inc.	Ethics	Every	Day	was	adopted	by	our	Board	of	Directors	in	June	2014, replacing	a	previous	iteration	of	our	Code	of	Ethics	and	Business	Conduct	–	the	Humana	Inc.	Principles	of	Business	Ethics	–	as	the	document	to	comply	with	the	New York	Stock	Exchange	Corporate	Governance	Standard	303A.10.	The	Humana	Inc.	Ethics	Every	Day	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	corporate	governance,	including:

•a	determination	of	independence	for	each	member	of	our	Board	of Directors;

•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	responsibility	of	the	Company's	Lead	Independent	Director,	if	applicable,	to	convene,	set	the	agenda	for,	and	lead	executive	sessions	of	the	non- management	directors;

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

# •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	Policy	Regarding	Transactions	in	Company	Securities,	Inside	Information	and Confidentiality;

•Stock	Ownership	Guidelines	for	directors	and	for	executive officers;

•the	Humana	Inc.	Ethics	Every	Day	and	any	waivers	thereto;

•the	Code	of	Conduct	for	the	Chief	Executive	Officer	and	Senior	Financial	Officers	and	any	waivers

thereto.

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	19,	2018.

# 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	19,	2018	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	19,	2018	appearing	under	the	caption	"Corporate	Governance	–	Committee	Membership	and	Attendance"	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	19,	2018	appearing	under	the	captions	"Corporate	Governance	–	Organization	&	Compensation	Committee	–	Compensation	Committee	Interlocks	and Insider	 Participation,"	 "Director	 Compensation,"	 "Compensation	 Discussion	 and	Analysis,"	 "Organization	 &	 Compensation	 Committee	 Report,"	 and	 "Executive Compensation"	of	such	Proxy	Statement.

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

# Equity	compensation	plan	information

We	maintain	plans	under	which	options	to	purchase	our	common	stock	and	awards	of	restricted	stock	may	be	made	to	officers,	directors,	key	employees,	and consultants.	Stock	options	are	granted	with	an	exercise	price	equal	to	the	fair	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	fair	market	value	as	the	average	of	the	highest	and	lowest	stock	prices	reported	on	the	composite	tape	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	up	to	7	years	after grant.

Information	concerning	stock	option	awards	and	the	number	of	securities	remaining	available	for	future	issuance	under	our	equity	compensation	plans	in	effect	as	of December	31,	2017	follows:

| Plan	category | (a)<br>Number	of		securities<br>to	be	issued	upon<br>exercise	of	outstanding<br>options,	warrants<br>and	rights | (b)<br>Weighted-average<br>exercise	price	of<br>outstanding<br>options,	warrants<br>and	rights | (c)<br>Number	of		securities<br>remaining	available	for<br>future	issuance	under<br>equity	compensation	plans<br>(excluding	securities<br>reflected	in	column(a)) |  |
| :--- | :--- | :--- | :--- | :--- |
| Equity\tcompensation\tplans\tapproved\tby\n\t\t\t\tsecurity\tholders\t(1) | 863,128 | $181.436 | 5,467,598 | (2)(3) |
| Equity\tcompensation\tplans\tnot\tapproved\n\t\t\t\tby\tsecurity\tholders | — | — | — |  |
| Total | 863,128 | $181.436 | 5,467,598 |  |

(1) The	above	table	does	not	include	awards	of	shares	of	restricted	stock	or	restricted	stock	units.	For	information	concerning	these	awards,	see	Note 13.

(2) The	Humana	Inc.	2011	Stock	Incentive	Plan	was	approved	by	stockholders	at	the	Annual	Meeting	held	on	April	21,	2011.	On	July	5,	2011,	18.5	million	shares were	registered	with	the	Securities	and	Exchange	Commission	on	Form	S-8.

(3) Of	 the	 number	 listed	 above,	2,387,597	 can	 be	 issued	 as	 restricted	 stock	 at	December	31,	2017	(giving	effect to the	provision that	one	restricted	share is equivalent	to	2.29	stock	options	in	the	2011	Plan).

The	information	under	the	captions	"Security	Ownership	of	Certain	Beneficial	Owners	of	Company	Common	Stock"	and	"Security	Ownership	of	Directors	and Executive	Officers"	in	our	Proxy	Statement	for	the	Annual	Meeting	of	Stockholders	scheduled	to	be	held	on	April	19,	2018,	is	herein	incorporated	by	reference.

# 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	19,	2018	appearing	under	the	captions	"Certain	Transactions	with	Management	and	Others"	and	"Corporate	Governance	–	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	19,	2018	appearing	under	the	caption	"Audit	Committee	Report"	of	such	Proxy	Statement.

# PART	IV

# ITEM	15.	EXHIBITS,	FINANCIAL	STATEMENT	SCHEDULES

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

2.1 Agreement	and	Plan	of	Merger,	dated	as	of	July	2,	2015	among	Aetna	Inc.,	Echo	Merger	Sub,	Inc.,	Echo	Merger	Sub,	LLC	and	Humana	Inc.	(incorporated herein	by	reference	to	Exhibit	2.1	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	July	7,	2015).

2.2 Letter	Agreement,	dated	as	of	December	21,	2016,	between	Aetna	Inc.,	Echo	Merger	Sub,	Inc.,	Echo	Merger	Sub,	LLC	and	Humana	Inc.	(incorporated herein	by	reference	to	Exhibit	10.1	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	December	22,	2016).

2.3 Termination	letter	dated	as	of	February	14,	2017,	by	and	among	Humana	Inc.,	Aetna	Inc.,	Echo	Merger	Sub,	Inc.	and	Echo	Merger	Sub	LLC	(incorporated herein	by	reference	to	Exhibit	10.1	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	February	15,	2017).

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) Humana	Inc.	Amended	and	Restated	By-Laws	of	Humana	Inc.,	effective	as	of	December	14,	2017	(incorporated	herein	by	reference	to	Exhibit	3(b)	to Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	December	14,	2017).

4(a) Indenture,	dates	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,	File	No.	001-05975).

(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,	File	No.	001-05975).

(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,	File	No.001-05975).

(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,	Req.	No.	333-132878).

(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	12	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.

(h) Fifth	Supplemental	Indenture,	dated	as	of	December	10,	2012,	by	and	between	Humana	Inc.	and	The	Bank	of	New	York	Mellon	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	December	10,	2012).

(i) Sixth	Supplemental	Indenture,	dated	as	of	December	10,	2012,	by	and	between	Humana	Inc.	and	The	Bank	of	New	York	Mellon	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	December	10,	2012).

(j) Seventh	Supplemental	Indenture,	dated	as	of	September	19,	2014,	by	and	between	Humana	Inc.	and	The	Bank	of	New	York,	Mellon	Trust	Company, N.A.,	as	trustee	(incorporated	herein	by	reference	to	Exhibit	4.2	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	September	19,	2014).

(k) Eighth	Supplemental	Indenture,	dated	as	of	September	19,	2014,	by	and	between	Humana	Inc.	and	The	Bank	of	New	York	Mellon	Trust	Company,	N.A., as	trustee	(incorporated	herein	by	reference	to	Exhibit	4.4	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	September	19,	2014).

(l) Ninth	Supplemental	Indenture,	dated	as	of	September	19,	2014,	by	and	between	Humana	Inc.	and	The	Bank	of	New	York	Mellon	Trust	Company,	N.A., as	trustee	(incorporated	herein	by	reference	to	Exhibit	4.6	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	September	19,	2014).

(m) Tenth	Supplemental	Indenture,	dated	March	16,	2017,	between	Humana	Inc.	and	The	Bank	of	New	York	Mellon	Trust	Company,	N.A.,	as	trustee (incorporated	herein	by	reference	to	Exhibit	4.2	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	March	16,	2017.

(n) Eleventh	Supplemental	Indenture,	dated	March	16,	2017,	between	Humana	Inc.	and	The	Bank	of	New	York	Mellon	Trust	Company,	N.A.,	as	trustee (incorporated	herein	by	reference	to	Exhibit	4.4	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	March	16,	2017.

(o) Twelfth	Supplemental	Indenture,	dated	December	21,	2017,	between	Humana	Inc.	and	The	Bank	of	New	York	Mellon	Trust	Company,	N.A.,	as	trustee (incorporated	herein	by	reference	to	Exhibit	4.2	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	December	21,	2017.

(p) Thirteenth	Supplemental	Indenture,	dated	December	21,	2017,	between	Humana	Inc.	and	The	Bank	of	New	York	Mellon	Trust	Company,	N.A.,	as	trustee (incorporated	herein	by	reference	to	Exhibit	4.4	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	December	21,	2017.

10(a)* Form	of	Company's	Restricted	Stock	Unit	Agreement	and	Agreement	not	to	Compete	or	Solicit	under	the	2011	Stock	Incentive	Plan	(with	retirement provisions)	(incorporated	herein	by	reference	to	Exhibit	10(a)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31, 2015).

(b)* Form	of	Company's	Restricted	Stock	Unit	Agreement	and	Agreement	not	to	Compete	or	Solicit	under	the	2011	Stock	Incentive	Plan	(without	retirement provisions)	(incorporated	herein	by	reference	to	Exhibit	10(b)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31, 2015).

(c)* Humana	Inc.	Executive	Management	Incentive	Compensation	Plan,	as	amended	and	restated	February	21,	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).

Form	of	Change	of	Control	Agreement	(incorporated	herein	by	reference	to	Exhibit	10.2	to	Humana	Inc.'s	current	report	on	Form	8-K	filed	on	February 24,	2014).

(e)* 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,	File	No.	001-05975).

(f)* The	Humana	Inc.	Deferred	Compensation	Plan	for	Non-Employee	Directors	(as	amended	on	October	18,	2012)	(incorporated	herein	by	reference	to Exhibit	10(m)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	2012).

(g)* Humana	Inc.	Executive	Severance	Policy	(incorporated	herein	by	reference to	Exhibit	10.2 to	Humana	Inc.'s	current	report	on	Form	8-K	filed	on November	22,	2017).

(h)* Humana	Inc.	Deferred	Compensation	Plan	(incorporated	herein	by	reference	to	Exhibit	4.1	to	the	Company's	Registration	Statement	on	Form	S-8	(Reg. No.	333-171616),	filed	on	January	7,	2011).

(i)* Humana	Retirement	Equalization	Plan,	as	amended	and	restated	as	of	January	1,	2011	(incorporated	herein	by	reference	to	Exhibit	10(p)	to	Humana	Inc.'s Annual	Report	on	Form	10-K	filed	on	February	18,	2011).

(j)* 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,	File	No.	001-05975).

(k)* 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).

(l)* 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).

(m)*	** Form	of	Company's	Restricted	Stock	Unit	Agreement	with	Time/Performance	Vesting	and	Agreement	not	to	Compete	or	Solicit,	under	the	2011	Stock Incentive	Plan	(incorporated	herein	by	reference	to	Exhibit	10(t)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K/A	filed	on	January	30,	2014).

(n)* Form	of	Company's	Restricted	Stock	Unit	Agreement	and	Agreement	not	to	Solicit	under	the	2011	Stock	Incentive	Plan	(with	retirement	provisions) (incorporated	herein	by	reference	to	Exhibit	10(o)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	2015).

(o)* Summary	of	the	Company's	Financial	Planning	Program	for	our	executive	officers	(incorporated	herein	by	reference	to	Exhibit	10(v)	to	Humana's	Inc.'s Annual	Report	on	Form	10-K	filed	on	February	22,	2013.

(p)* Form	of	Company's	Restricted	Stock	Unit	Agreement	and	Agreement	not	to	Solicit	under	the	2011	Stock	Incentive	Plan	(without	retirement	provisions) (incorporated	herein	by	reference	to	Exhibit	10(q)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	2015).

(q) Five-Year	$2	Billion	Amended	and	Restated	Credit	Agreement	,	dated	as	of	May	22,	2017,	among	Humana	Inc.,	and	JPMorgan	Chase	Bank,	N.A.	as Agent	and	as	CAF	Loan	Agent,	Bank	of	America,	N.A.	as	Syndication	Agent,	Citibank,	N.A.,	PNC	Bank,	National	Association,	U.S.	Bank	National Association,	and	Wells	Fargo	Bank,	National	Association,	as	Documentation	Agents,	and	J.P.	Morgan	Chase	Bank,	N.A.,	Merrill	Lynch,	Pierce,	Fenner	& Smith	Incorporated,	Citigroup	Global	Markets,	Inc.,	PNC	Capital	Markets	LLC,	U.S.	Bank	National	Association,	and	Wells	Fargo	Securities,	LLC,	as Joint-Lead	Arrangers	and	Joint	Bookrunners	(incorporated	herein	by	reference	to	Exhibit	10	to	Humana	Inc.'s	Current	Report	on	Form	8-K	filed	on	May 22,	2017).

(r) 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,	File	No.	001-05975).

(s) 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,	File	No.	001-05975).

(t) 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,	File	No.	001-05975).

(u) 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,	File	No.	001-05975).

(v) 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,	File	No.	001-05975).

(w) 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,	File	No.	001-05975).

(x) 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,	File	No.	001-05975).

(y)* Humana	Inc.	2011	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	21,	2011).

(z)* Form	 of	 Company's	 Stock	 Option	Agreement	 under	 the	 2011	 Stock	 Incentive	 Plan	 (Non-Qualified	 Stock	 Options	 with	 Non-Compete/Non-Solicit) (incorporated	herein	by	reference	to	Exhibit	10(oo)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	filed	on	February	24,	2012).

(aa)* Form	 of	 Company's	 Stock	 Option	 Agreement	 under	 the	 2011	 Stock	 Incentive	 Plan	 (Incentive	 Stock	 Options	 with	 Non-Compete/Non-Solicit) (incorporated	herein	by	reference	to	Exhibit	10(pp)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	filed	on	February	24,	2012).

(bb)* Form	of	Company's	Restricted	Stock	Unit	Agreement	and	Agreement	not	to	Compete	or	Solicit	under	the	2011	Stock	Incentive	Plan	(incorporated	herein by	reference	to	Exhibit	10(rr)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	filed	on	February	24,	2012).

(cc)* Amended	and	Restated	Employment	Agreement,	dated	as	of	February	27,	2014,	by	and	between	Humana	Inc.	and	Bruce	D.	Broussard	(incorporated herein	by	reference	to	Exhibit	10.1	to	Humana	Inc.'s	current	report	on	Form	8-K	filed	on	February	28,	2014).

(dd)* Amendment	to	the	Amended	and	Restated	Employment	Agreement	between	Humana	Inc.	and	Bruce	D.	Broussard,	dated	July	2,	2015	(incorporated herein	by	reference	to	Exhibit	10.1	to	Humana	Inc.'s	current	report	on	Form	8-K	filed	on	July	9,	2015).

(ee)* Agreement	between	the	United	States	Department	of	Defense	and	Humana	Military	Healthcare	Services,	Inc.,	a	wholly	owned	subsidiary	of	Humana	Inc., dated	as	March	3,	2011	(incorporated	herein	by	reference	to	Exhibit	10(mm)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	filed	on	February	24,	2012).

(ff)** Form	of	Amendment	to	Change	of	Control	Agreement	between	Humana	Inc.	and	various	executive	officers	(incorporated	herein	by	reference	to	Exhibit 10.1	to	Humana	Inc.'s	current	report	on	Form	8-K	filed	on	February	24,	2014).

(gg)* Humana	Inc.	Change	in	Control	Policy	(incorporated	herein	by	reference	to	Exhibit	10.1	to	Humana	Inc.'s	current	report	on	Form	8-K	filed	on	November 22,	2017).

(hh)* Form	of	Commercial	Paper	Dealer	Agreement	between	Humana	Inc.,	as	Issuer,	and	the	Dealer	party	thereto	(incorporated	herein	by	reference	to	Exhibit 10.1	to	Humana	Inc.'s	current	report	on	Form	8-K	filed	on	October	7,	2014).

(ii) Master	Confirmation	by	and	between	Humana	Inc.	and	Goldman,	Sachs	&	Co.,	dated	February	22,	2017	(incorporated	herein	by	reference	to	Humana Inc.'s	current	report	on	Form	8-K	filed	on	February	27,	2017).

(jj) Master	Confirmation	by	and	between	Humana	Inc.	and	Bank	of	America,	N.A.,	dated	December	21,	2017	(incorporated	herein	by	reference	to	Humana Inc.'s	current	report	on	Form	8-K	filed	on	December	22,	2017).

(kk) Form	of	Company's	Stock	Option	Agreement	under	the	2011	Stock	Incentive	Plan	(Incentive	Stock	Options)	(incorporated	herein	by	reference	to	Exhibit 10(jj)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	2015).

(ll)* Form	 of	 Company's	 Stock	 Option	Agreement	 under	 the	 2011	 Stock	 Incentive	 Plan	 (Non-Qualified	 Stock	 Options	 with	 Non-Compete/Non-Solicit) (incorporated	herein	by	reference	to	Exhibit	10(kk)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	2015).

(mm)* Voluntary	Release	and	Separation	Agreement,	dated	as	of	April	1,	2017,	by	and	between	Humana	Inc.	and	James	E.	Murray	(incorporated	herein	by reference	to	Humana	Inc.'s	current	report	on	Form	8-K	filed	on	April	3,	2017).

(nn)† Form	of	Company's	Restricted	Stock	Unit	Agreement	with	Performance	Vesting	and	Agreement	not	to	Compete	or	Solicit	under	the	2011	Stock	Incentive Plan	(incorporated	herein	by	reference	to	Exhibit	10(nn)	to	Humana	Inc.'s	Annual	Report	on	Form	10-K	filed	on	February	16,	2018).

14 Code	of	Conduct	for	Chief	Executive	Officer	&	Senior	Financial	Officers	(incorporated	herein	by	reference	to	Exhibit	14	to	Humana	Inc.'s	Annual	Report on	Form	10-K	for	the	fiscal	year	ended	December	31,	2003).

# 21	† List	of	subsidiaries.

32	† Certification	pursuant	to	18	U.S.C.	Section	1350,	as	adopted	pursuant	to	Section	906	of	the	Sarbanes	–	Oxley	Act	of	2002.

101 The	following	materials	from	Humana	Inc.'s	Annual	Report	on	Form	10-K	formatted	in	XBRL	(Extensible	Business	Reporting	Language):	(i)	the	Consolidated Balance	Sheets	at	December	31,	2017	and	2016;	(ii)	the	Consolidated	Statements	of	Income	for	the	years	ended	December	31,	2017,	2016	and	2015;	(iii)	the Consolidated	Statements	of	Comprehensive	Income	for	the	years	ended	December	31,	2017,	2016	and	2015;	(iv)	the	Consolidated	Statements	of	Stockholders' Equity	as	of	December	31,	2017,	2016,	and	2015;	(v)	the	Consolidated	Statements	of	Cash	Flows	for	the	years	ended	December	31,	2017,	2016	and	2015;	and (vi)	Notes	to	Consolidated	Financial	Statements.

**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.

# SCHEDULE	I—PARENT	COMPANY	FINANCIAL	INFORMATION

# CONDENSED	BALANCE	SHEETS

| Cash	and	cash	equivalents | $383 | $1,710 |
| :--- | :--- | :--- |
| Investment\tsecurities | 305 | 300 |
| Receivable\tfrom\toperating\tsubsidiaries | 1,042 | 1,136 |
| Other\tcurrent\tassets | 245 | 122 |
| Total\tcurrent\tassets | 1,975 | 3,268 |
| Property\tand\tequipment,\tnet | 1,091 | 1,086 |
| Investments\tin\tsubsidiaries | 16,810 | 15,276 |
| Other\tlong-term\tassets | 426 | 374 |
| Total\tassets | $20,302 | $20,004 |
| LIABILITIES\tAND\tSTOCKHOLDERS'\tEQUITY |  |  |
| Current\tliabilities: |  |  |
| Payable\tto\toperating\tsubsidiaries | $4,311 | $4,107 |
| Current\tportion\tof\tnotes\tpayable\tto\toperating\tsubsidiaries | 28 | 28 |
| Book\toverdraft | 41 | 38 |
| Short-term\tborrowings | 150 | 300 |
| Other\tcurrent\tliabilities | 896 | 708 |
| Total\tcurrent\tliabilities | 5,426 | 5,181 |
| Long-term\tdebt | 4,770 | 3,792 |
| Notes\tpayable\tto\toperating\tsubsidiaries | 9 | 9 |
| Other\tlong-term\tliabilities | 255 | 337 |
| Total\tliabilities | 10,460 | 9,319 |
| Commitments\tand\tcontingencies |  |  |
| Stockholders'\tequity: |  |  |
| Preferred\tstock,\t$1\tpar;\t10,000,000\tshares\tauthorized;\tnone\tissued | — | — |
| Common\tstock,\t$0.16\t2/3\tpar;\t300,000,000\tshares\tauthorized; |  |  |
| 198,572,458\tshares\tissued\tat\tDecember\t31,\t2017\tand\t198,495,007 |  |  |
| shares\tissued\tat\tDecember\t31,\t2016 | 33 | 33 |
| Capital\tin\texcess\tof\tpar\tvalue | 2,445 | 2,562 |
| Retained\tearnings | 13,670 | 11,454 |
| Accumulated\tother\tcomprehensive\tincome\t(loss) | 19 | (66) |
| Treasury\tstock,\tat\tcost,\t60,893,762\tshares\tat\tDecember\t31,\t2017\nand\t49,189,811\tshares\tat\tDecember\t31,\t2016 | (6,325) | (3,298) |
| Total\tstockholders'\tequity | 9,842 | 10,685 |
| Total\tliabilities\tand\tstockholders'\tequity | $20,302 | $20,004 |

See	accompanying	notes	to	the	parent	company	financial	statements.

# CONDENSED	STATEMENTS	OF	INCOME

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
|  |  | (in\tmillions) |  |
| Revenues: |  |  |  |
| Management\tfees\tcharged\tto\toperating\tsubsidiaries | $1,864 | $1,683 | $1,469 |
| Investment\tand\tother\tincome,\tnet | 57 | 42 | 5 |
|  | 1,921 | 1,725 | 1,474 |
| Expenses: |  |  |  |
| Operating\tcosts | 1,801 | 1,519 | 1,347 |
| Merger\ttermination\tfee\tand\trelated\tcosts,\tnet | (936) | 104 | 23 |
| Depreciation | 332 | 302 | 252 |
| Interest | 243 | 189 | 186 |
|  | 1,440 | 2,114 | 1,808 |
| Income\t(loss)\tbefore\tgain\ton\tsale\tof\tbusiness,\tincome\ttaxes\tand\tequity\tin\tnet\tearnings\tof\nsubsidiaries | 481 | (389) | (334) |
| Gain\ton\tsale\tof\tbusiness | — | — | 270 |
| Income\t(loss)\tbefore\tincome\ttaxes\tand\tequity\tin\tnet\tearnings\tof\tsubsidiaries | 481 | (389) | (64) |
| Provision\t(benefit)\tfor\tincome\ttaxes | 61 | (107) | (70) |
| Income\t(loss)\tbefore\tequity\tin\tnet\tearnings\tof\tsubsidiaries | 420 | (282) | 6 |
| Equity\tin\tnet\tearnings\tof\tsubsidiaries | 2,028 | 896 | 1,270 |
| Net\tincome | $2,448 | $614 | $1,276 |

# CONDENSED	STATEMENTS	OF	COMPREHENSIVE	INCOME

# CONDENSED	STATEMENTS	OF	CASH	FLOWS

| Net	cash	provided	by	operating	activities | $2,423 | $1,848 | $953 |
| :--- | :--- | :--- | :--- |
| Cash\tflows\tfrom\tinvesting\tactivities: |  |  |  |
| Proceeds\tfrom\tsale\tof\tbusiness | — | — | 1,055 |
| Capital\tcontributions\tto\toperating\tsubsidiaries | (695) | (895) | (833) |
| Purchases\tof\tinvestment\tsecurities | (53) | (151) | (507) |
| Proceeds\tfrom\tsale\tof\tinvestment\tsecurities | — | 25 | 18 |
| Maturities\tof\tinvestment\tsecurities | 51 | 143 | 108 |
| Purchases\tof\tproperty\tand\tequipment,\tnet | (359) | (382) | (378) |
| Net\tcash\tused\tin\tinvesting\tactivities | (1,056) | (1,260) | (537) |
| Cash\tflows\tfrom\tfinancing\tactivities: |  |  |  |
| Proceeds\tfrom\tissuance\tof\tsenior\tnotes,\tnet | 1,779 | — | — |
| (Repayments)\tproceeds\tfrom\tissuance\tof\tcommercial\tpaper,\tnet | (153) | (2) | 298 |
| Repayment\tof\tlong-term\tdebt | (800) | — | — |
| Change\tin\tbook\toverdraft | 3 | 5 | (16) |
| Common\tstock\trepurchases | (3,365) | (104) | (385) |
| Dividends\tpaid | (220) | (177) | (172) |
| Tax\tbenefit\tfrom\tstock-based\tcompensation | — | — | 15 |
| Proceeds\tfrom\tstock\toption\texercises\tand\tother | 62 | 11 | 22 |
| Net\tcash\tused\tin\tfinancing\tactivities | (2,694) | (267) | (238) |
| (Decrease)\tincrease\tin\tcash\tand\tcash\tequivalents | (1,327) | 321 | 178 |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | 1,710 | 1,389 | 1,211 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $383 | $1,710 | $1,389 |

# 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.

Refer	to	Note	2	of	the	notes	to	consolidated	financial	statements	in	this	Annual	Report	on	Form	10-K	for	a	description	of	our	related	party	transactions.	A	related party	note	receivable	is	included	with	other	long-term	assets	in	our	condensed	balance	sheet	at	December	31,	2017	and	December	31,	2016	in	the	amount	of	$349 million	and	$314	million,	respectively.	We	have	also	entered	into	a	revolving	note	agreement	providing	a	line	of	credit	up	to	$55	million	under	which	$18	million	was outstanding	at	December	31,	2017,	and	we	had	no	balance	outstanding	at	December	31,	2016.	The	related	interest	income	of	$35	million	and	$30	million	for	2017	and 2016,	respectively,	is	included	in	investment	and	other	income	in	our	condensed	statements	of	income.

# 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.

Cash	dividends	received	from	subsidiaries	and	included	as	a	component	of	net	cash	provided	by	operating	activities	were	$1.4	billion	in	2017,	$763	million	in	2016, and	$493	million	in	2015.

# 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	or	other	state	regulatory	authorities.

# 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	2.14%	to	6.65%	and	are	payable	in	2018	and	2019.	We	recorded	interest	expense	of	$1	million	related	to	these	notes	for	each	of	the	years	ended December	31,	2017,	2016	and	2015.

# NOTES	TO	CONDENSED	FINANCIAL	STATEMENTS—(Continued)

Our	parent	company	funded	a	subsidiary	capital	contribution	of	approximately	$535	million	in	the	first	quarter	of	2017	for	reserve	strengthening	associated	with our	closed	block	of	long-term	care	insurance	policies	discussed	further	in	Note	18	of	the	notes	to	consolidated	financial	statements	in	this	Annual	Report	on	Form	10-K.

Our	use	of	operating	cash	flows	derived	from	our	non-insurance	subsidiaries,	such	as	in	our	Healthcare	Services	segment,	is	generally	not	restricted	by	state departments	of	insurance	(or	comparable	state	regulators).

Refer	to	Note	3	of	the	notes	to	consolidated	financial	statements	in	this	Annual	Report	on	Form	10-K	for	a	description	of	certain	acquisitions	and	divestitures.	On June	 1,	 2015,	 we	 completed	 the	 sale	 of	 our	 wholly	 owned	 subsidiary,	 Concentra	 Inc.	During	2017,	2016	 and	2015,	 we	 funded	 certain	 non-regulated	 subsidiary acquisitions	with	contributions	from	Humana	Inc.,	our	parent	company,	included	in	capital	contributions	in	the	condensed	statement	of	cash	flows.

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

Refer	to	Note	12	of	the	notes	to	consolidated	financial	statements	included	in	this	Annual	Report	on	Form	10-K	for	a	description	of	debt.

Refer	to	Note	15	of	the	notes	to	consolidated	financial	statements	included	in	this	Annual	Report	on	Form	10-K	for	a	description	of	stockholders'	equity,	including stock	repurchases	and	stockholder	dividends.

# SCHEDULE	II—VALUATION	AND	QUALIFYING	ACCOUNTS

# (in	millions)

|  | Balance		at<br>Beginning<br>of	Period | Acquired/(Disposed)<br>Balances | (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: |  |  |  |  |  |  |
| 2017 | $118 | $— | $20 | $(10) | $(32) | $96 |
| 2016 | 101 | — | 39 | 19 | (41) | 118 |
| 2015 | 137 | (39) | 61 | (7) | (51) | 101 |
| Deferred\ttax\tasset\tvaluation\tallowance: |  |  |  |  |  |  |
| 2017 | (49) | — | — | — | — | (49) |
| 2016 | (42) | — | (7) | — | — | (49) |
| 2015 | (48) | — | 6 | — | — | (42) |

(1) Represents	changes	in	retroactive	membership	adjustments	to	premiums	revenue	and	contractual	allowances	adjustments	to	services	revenue	as	more	fully described	in	Note	2	to	the	consolidated	financial	statements	included	in	this	annual	report	on	Form	10-K.

# 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.

	(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.



Question: what was the average amortization expense between 2015 and 2017
Calculation:   amortization_expense_2015 = 93
 amortization_expense_2016 = 77
 amortization_expense_2017 = 75
 total_amortization_expense = amortization_expense_2015 + amortization_expense_2016 + amortization_expense_2017
 average_amortization_expense = total_amortization_expense / 3
 answer = average_amortization_expense
Answer: 81.6