Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
GENERAL
Humana Inc. is a Delaware corporation organized in 1961. Its principal executive offices are located at 500 West Main Street, Louisville, Kentucky 40202 and its telephone number at that address is (502) 580-1000. As used herein, the terms "the Company" or "Humana" include Humana Inc. and its subsidiaries.
On March 1, 1993, Humana separated its managed care health plan and acute-care hospital businesses into two independent publicly-held companies (the "Spinoff"). The Spinoff was effected through the distribution to Humana stockholders of all the outstanding shares of common stock of a new hospital company, Galen Health Care, Inc. ("Galen") (now a part of Columbia/HCA Healthcare Corporation). The Company retained and continues to operate the managed care health plan business.
Since 1983, the Company has offered managed health care products which integrate management with the delivery of health care services through a network of providers who share financial risk or who have incentives to deliver cost-effective medical services. These products are marketed primarily through health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs") that encourage, and in most HMO products require, use of contracting providers. HMOs and PPOs also control health care costs by various means, including utilization controls such as pre-admission approval for hospital inpatient services and pre-authorization of outpatient surgical procedures.
The Company's HMO and PPO products are primarily marketed to employer and other groups ("Commercial") and Medicaid and Medicare-eligible individuals. The Company's Commercial products are marketed in 14 states and the District of Columbia. At December 31, 1994, the Company had a total of 20,700 Commercial customers with an average group size of 35 per customer. Commercial membership at December 31, 1994, includes 27,500 Medicaid-eligible individuals. The products marketed to Medicare-eligible individuals are either HMO products that provide health care services which include all Medicare benefits, and in certain circumstances, additional health care services that are not included in Medicare benefits ("Medicare risk") or indemnity insurance policies that supplement Medicare benefits ("Medicare supplement"). At December 31, 1994, the Company had 287,400 Medicare risk members and 131,700 Medicare supplement members.
COMMERCIAL PRODUCTS
HMOs
An HMO provides prepaid health care services to its members through primary care and specialty physicians employed by the HMO at facilities owned by the HMO, and/or through a network of independent primary care and specialty physicians and other health care providers who contract with the HMO to furnish such services. Primary care physicians include internists, family practitioners and pediatricians. Generally, access to specialty physicians and other health care providers must be approved by the member's primary care physician. These other health care providers include, among others, hospitals, nursing homes, home health agencies, pharmacies, mental health and substance abuse centers, diagnostic centers, optometrists, outpatient surgery centers, dentists, urgent care centers, and durable medical equipment suppliers. Because access to these other health care providers must be approved by the primary care physician, the HMO product is the most restrictive form of managed care.
At December 31, 1994, the Company owned and operated 15 HMOs, which contract with approximately 28,700 physicians (including approximately 6,900 primary care physicians) and 460 hospitals. In addition, the Company has approximately 1,300 contracts with other providers to provide services to HMO members. The Company also employed 370 physicians in its HMOs at December 31, 1994.
An HMO member, typically through the member's employer, pays a monthly fee which generally covers, with minimal co-payments, health care services received from or approved by the member's primary care
physician. For the year ended December 31, 1994, Commercial HMO premium revenues totaled approximately $1.7 billion or 47% of the Company's premium revenues. Approximately $250 million of the Company's Commercial premium revenues for the year ended December 31, 1994, were derived from contracts with the United States Office of Personnel Management ("OPM") under which the Company provides health care benefits to approximately 174,500 federal civilian employees and their dependents. Pursuant to these contracts, payments made by OPM may be retrospectively adjusted downward by OPM if an audit discloses that a comparable product was offered by the Company to a similar size subscriber group using a rating formula which resulted in a lower premium rate than that offered to OPM. The Company has undergone audits in certain markets. Management believes that any retrospective adjustments as a result of OPM audits will not have a material impact on the Company's results of operations, financial position or cash flows.
PPOs
PPO products include many elements of managed health care. PPOs are also similar to traditional health insurance because they provide a member with the freedom to choose a physician or other health care provider. In a PPO, the member is encouraged, through financial incentives, to use participating health care providers which have contracted with the PPO to provide services at favorable rates. In the event a member chooses not to use a participating health care provider, the member may be required to pay a portion of the provider's fees.
At December 31, 1994, approximately 33,100 physicians and 520 hospitals contracted with the Company to provide services to PPO members. In addition, the Company has approximately 1,500 contracts with other providers to provide services to PPO members.
For the year ended December 31, 1994, premium revenues from Commercial PPOs totaled $359 million or 10 percent of the Company's premium revenues.
Over the previous four years, the Company's Commercial premium rate increases have ranged between approximately 11 percent for the year ended December 31, 1992, to approximately 3 percent for the year ended December 31, 1994. Given the competitive environment, the Company expects 1995 Commercial premium rates will remain the same as in 1994.
MEDICAID PRODUCT
Medicaid is a state-operated program which utilizes both state and federal funding to provide health care services to low-income residents. Each state which chooses to do so, develops through a state specific regulatory agency, a Medicaid managed care initiative which must be approved by the federal government's Health Care Financing Administration ("HCFA"). HCFA requires that Medicaid managed care plans meet federal standards and cost no more than the amount that would have been spent on a comparable fee-for-service basis. States currently use either a formal proposal process reviewing many bidders or award individual contracts to qualified bidders which apply for entry to the program. In either case, the contractual relationship with the state is generally for a one-year period. The Company believes that the risks associated with participation in a state Medicaid managed care initiative are similar to the risks associated with the Medicare risk product discussed below. In both instances, the Company receives a fixed monthly payment from a government agency for which it is required to provide managed health care services to a member. During the fourth quarter ended December 31, 1994, the Company received approval in two states (Florida and Illinois) to market a Medicaid product. In December 1994, the Company acquired CareNetwork, Inc. ("CareNetwork"), a federally qualified HMO located in Milwaukee and Southeastern Wisconsin which has 25,900 Medicaid members.
MEDICARE PRODUCTS
Medicare is a federal program that provides persons age 65 and over and some disabled persons certain hospital and medical insurance benefits, which include hospitalization benefits for up to 90 days per incident of illness plus a lifetime reserve aggregating 60 days. Each Medicare eligible individual is entitled to receive
inpatient hospital care (Part A) without the payment of any premium, but is required to pay a premium to the federal government, which is annually adjusted, to be eligible for physician and other services (Part B).
Even though participating in both Part A and Part B of Medicare, beneficiaries are still required to pay certain deductible and co-insurance amounts. They may, if they choose, supplement their Medicare coverage by purchasing policies which pay these deductibles and co-insurance amounts. Many of these policies also cover other services (such as prescription drugs) which are not included in Medicare coverage. These policies are known as Medicare supplement policies.
Certain managed care companies which operate HMOs contract with HCFA to provide medical benefits to Medicare-eligible individuals residing in the geographic areas in which their HMOs operate in exchange for a fixed monthly payment per member from HCFA. Individuals who elect to participate in these Medicare risk programs are relieved of the obligation to pay some or all of the deductible or co-insurance amounts but are required to use exclusively the services provided by the HMO. Other than the Part B premium paid by the member to the Medicare program, the enrollee does not pay the HMO a premium for these services except where the benefits provided by the HMO exceed the benefits provided by the Medicare Program.
Medicare Risk
A Medicare risk product involves a contract between an HMO and HCFA pursuant to which HCFA makes a fixed monthly payment to the HMO on behalf of each Medicare-eligible individual who chooses to enroll for coverage in the HMO. Membership may be terminated by the member upon 30 days' notice. The fixed monthly payment is determined and adjusted annually by HCFA, and takes into account, among other things, the cost of providing medical care in the geographic area where the member resides.
The Company markets a variety of Medicare risk HMO products. All of these products provide an enrolled individual with all of the benefits covered by the Medicare program but relieve the enrolled individual of the obligation to pay deductibles and co-insurance that would otherwise apply. Some of these products also provide additional benefits not covered by Medicare, such as vision and dental care services and prescription drugs.
Where competitive conditions permit, the Company charges a premium to members (in addition to the payment from HCFA) for some of its Medicare risk products. At December 31, 1994, approximately 75,100 members in ten markets were paying premiums which totaled $43 million for the year ended December 31, 1994.
The Company provides Medicare risk services under seven contracts with HCFA ("HCFA Contracts") in ten markets. At December 31, 1994, HCFA Contracts covered approximately 287,400 Medicare risk members for which the Company received HCFA revenues of approximately $1.4 billion or 38 percent of the Company's premium revenues for the year ended December 31, 1994. At December 31, 1994, one such HCFA Contract covered approximately 215,400 members in Florida. For the year ended December 31, 1994, this Florida HCFA Contract accounted for $1.1 billion, which represented 78 percent of the Company's HCFA revenues and 30 percent of the Company's total premium revenues. Each HCFA Contract is renewed each December 31 unless HCFA or the Company terminates it upon at least 90 days' notice prior thereto. Management believes termination of the HCFA Contract covering the members in Florida would have a material adverse effect on the Company's revenues, profitability and business prospects. Moreover, changes in the Medicare risk program as a result of legislative change, such as a reduction in payments by HCFA or mandated increases in benefits without corresponding increases in payments, could also have a material adverse effect on the Company's revenues, profitability and business prospects.
The Company's average rate of increase under the 1995 HCFA Contracts is expected to approximate 6 percent. Over the last five years, annual increases have ranged from as low as 2 percent in January 1991 to as high as 12 percent in January 1993, with an average of 6 percent.
Medicare Supplement
The Company's Medicare supplement product is an insurance policy which pays for hospital deductibles, co-payments and co-insurance for which the Medicare-eligible individual is responsible.
Under the terms of existing Medicare supplement policies, the Company may not reduce or cancel the benefits contracted for by policyholders. These policies are annually renewable by the insured at the Company's prevailing rates, which may increase subject to approval by appropriate state insurance regulators.
At December 31, 1994, the Company provided Medicare supplement benefits to approximately 131,700 members. Premium revenues derived from this product for the year ended December 31, 1994, totaled $114 million.
PROVIDER ARRANGEMENTS
The Company's HMOs contract with individual or groups of primary care physicians, generally for an actuarially determined, fixed, per-member-per-month fee called a "capitation" payment. These contracts typically obligate primary care physicians to provide or arrange for the provision of all covered managed health care services to HMO members, including services provided by specialty physicians and other providers. The capitation payment does not vary with the nature or extent of services arranged for or provided to the member and is generally designed to shift a portion of the HMO's financial risk to the primary care physician. However, the degree to which the Company shifts its risk varies by provider. During the year ended December 31, 1994, approximately 8 percent of the Company's total medical costs were incurred under primary care capitation arrangements. The Company also employs 370 physicians in markets where it operates staff model HMOs. The Company is directly responsible for all services provided by these employed physicians. During the year ended December 31, 1994, approximately 9 percent of the Company's total medical costs represented salary and similar costs incurred in its staff model HMOs. In order to control costs, improve quality and create comprehensive networks, the Company also contracts with medical specialists and other providers to which a primary care physician may refer a member. During the year ended December 31, 1994, approximately 12 percent of the Company's total medical costs were incurred under specialty and other non-primary care capitation arrangements. Typically, payments by the Company to these specialists and other providers reduce the ultimate payment that otherwise would be made to a primary care physician. The Company remains financially responsible for the provision of or payment for such services if a primary care or specialty physician fails to perform his or her obligations under the contract.
The focal point for cost control in the Company's HMOs is the primary care physician, whether employed or under contract, who provides services and controls utilization of services by directing or approving hospitalization and referrals to specialists and other providers. Cost control is further achieved by directly negotiating provider discounts. Cost control in the Company's PPOs is achieved primarily by establishing a cost-effective network of participating health care providers and providing incentives for members to use such providers. With respect to both HMO and PPO products, cost control is further achieved through the use of a utilization review system designed to reduce unnecessary hospital admissions, lengths of stay and unnecessary or inappropriate medical procedures.
The Company's HMOs and PPOs generally contract for hospital services under a per diem arrangement for inpatient hospital services and a discounted fee-for-service arrangement for outpatient services. Effective March 1, 1995, the Company began the third year of a three-year operating agreement with Galen, whereby the Company uses the services of Galen's hospitals guaranteeing certain minimum utilization levels. Rate increases charged for such services are defined under the terms of the agreement. Commercial product rate increases are limited to the lesser of the increase in the hospital Consumer Price Index or the Company's Commercial product premium rate increases, less one percent. Medicare risk product rate increases approximate the percentage adjustment in HCFA's market specific hospital payment rate to the Company. Management believes that the contract rates under the operating agreement are competitive. During the year ended December 31, 1994, 13 percent of the Company's total medical costs were incurred in Galen's hospitals while 25 percent were incurred in other hospitals. Management believes the renegotiation or expiration of the
operating agreement will not have a material adverse affect on the Company's results of operations, financial position or cash flows.
QUALITY ASSESSMENT
Physician participation in the Company's HMOs and PPOs is conditioned upon meeting its HMO and PPO requirements concerning the physician's professional qualifications. When considering whether to contract with a physician, the Company performs certain credentialing procedures including reviewing licensure, status of certification by the governing specialty boards and malpractice claims history.
In addition to ensuring the professional qualifications of its physician and other providers, the Company regularly monitors various critical indicators including network access, and quality and service performance measurements. The Company has also contracted with a third-party vendor to provide software which aggregates treatment protocols into patterns of care for analyzing the appropriateness of care and frequency of services provided by the Company and similar companies. In June 1994, the Company began reporting Health Plan Employer Data Information Sets (HEDIS). HEDIS will be useful to purchasers of managed health care services to measure individual health plan quality and service. Finally, the Company is developing practice guidelines for frequent membership diagnosis in order to reduce the variation in disease management and improve the health outcomes of its membership.
HEALTH MAINTENANCE ORGANIZATION ACCREDITATION
With the increasing significance of managed care in the health care industry, several independent organizations have been formed with the purpose of responding to external demands for accountability over the managed care industry. One such organization utilized by the Company is the National Committee for Quality Assurance ("NCQA"). NCQA performs site reviews of standards established for quality assurance, credentialing, utilization management and medical records, preventive services and member rights and evaluates the mechanisms that the organization has established to ensure continuous quality improvement.
In the states of Kansas and Florida, where the Company operates seven markets, accreditation is mandatory and is generally required for licensure. At December 31, 1994, four of the Company's markets have received various levels of provisional or one year accreditation and three, South Florida, Jacksonville, Florida, and Milwaukee, Wisconsin (prior to purchase in December 1994), were denied accreditation. As a result of the accreditation denials in South Florida and Jacksonville, the Company and the State of Florida have mutually developed a corrective action process, approved by NCQA, which is intended to address the issues identified by NCQA which primarily relate to quality data accumulation. Management believes the Company has substantially corrected all the deficiencies identified in the review. The Company believes these denials will not have a material adverse impact on its results of operations, financial position or cash flows.
MANAGEMENT INFORMATION SYSTEMS
The Company's managed care health plans use integrated information systems developed and/or customized specifically to meet the Company's needs and to allow for aggregation of data and comparison across markets. These information systems support marketing, sales, underwriting, contract administration, billing, financial and other administrative functions as well as customer service, appointment scheduling, authorization and referral management, concurrent review, physician capitation and claims administration, provider management, quality management and utilization review.
Key to the Company's information systems is the decision support database, used by market office and corporate personnel for such items as provider profiling, quality assessment, member satisfaction measurement, employer reporting, and utilization review among many others.
The Company's information systems are continually being upgraded to support new products in an integrated manner as well as to take advantage of the latest advances in technology. For example, the Company is currently implementing: laptop computers for processing information from concurrent reviews at the bedside, interactive voice response for customer service inquiries, claims imaging to improve productivity,
and extensive electronic data interchange between customers, providers and employees. Future information system initiatives include provider practice guidelines and outcomes measurement.
MARKETING
Individuals become members of the Company's Commercial HMOs and PPOs through their employer or other groups which typically offer employees or members a selection of managed health care products, pay for all or part of the premiums and make payroll deductions for any premiums payable by the employees. The Company attempts to become an employer's or group's exclusive source of managed health care benefits by offering HMO and PPO products that provide cost-effective quality care consistent with the needs and expectations of the employees or members. At December 31, 1994, the Company was an exclusive carrier for 43 percent of its Commercial customers.
The Company uses various methods to market its Commercial and Medicare products, including television, radio, telemarketing and mailings. At December 31, 1994, the Company used approximately 2,570 independent licensed brokers and agents and 170 licensed employees to sell its Commercial products. Many of the Company's employer group customers are represented by insurance brokers and consultants who assist these groups in the design and purchase of health care products. The Company generally pays brokers a commission based on premiums, with commissions varying by market and premium volume.
In addition to the above, at December 31, 1994, approximately 300 independent licensed brokers and 370 employed sales representatives, who are each paid a salary and/or per member commission, marketed the Company's Medicaid and Medicare products. The Company also uses 290 telemarketing representatives who assist in the marketing of Medicaid and Medicare products by making appointments for broker/sales representatives with prospective members.
The following table lists the Company's membership at December 31, 1994, by state and product:
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(1) Includes 27,500 Medicaid members at December 31, 1994, located in Wisconsin, Florida and Illinois.
The Company's 25 largest group contracts at December 31, 1994, accounted for approximately 33 percent of total Commercial membership. No one group contract accounted for as much as 5 percent of the Company's Commercial product premium revenues; however, certain employer groups accounted for a significant percentage of Commercial insurance premiums in some markets. The loss of one or more of these contracts in a particular market could have a material adverse effect on the Company's operations in that market.
RISK MANAGEMENT
Through the use of internally developed underwriting criteria, the Company determines the risk it is willing to assume and the amount of premium to charge for its Commercial products. Employer and other groups must meet the Company's underwriting standards in order to qualify to contract with the Company for coverage. Underwriting techniques are not employed in connection with Medicare risk HMO products because of HCFA regulations that require the Company to accept all eligible Medicare applicants regardless of their health or prior medical history. The Company also is not permitted to employ underwriting criteria for the Medicaid product but rather follows HCFA and state requirements.
COMPETITION
The managed health care industry is highly competitive and contracts for the sale of Commercial products are generally bid or renewed annually. The Company's competitors vary by local market and include Blue Cross/Blue Shield (including HMOs and PPOs owned by Blue Cross/Blue Shield plans), national insurance companies and other HMOs and PPOs. Many of the Company's competitors have larger membership in local markets or greater financial resources. The Company's ability to sell its products and to retain customers is or may be influenced by such factors as benefits, pricing, contract terms, number and quality of participating physicians and other managed health care providers, utilization review, claims processing, administrative efficiency and accreditation results.
GOVERNMENT REGULATION
Of the Company's fifteen licensed HMO subsidiaries, nine are qualified under the Federal Health Maintenance Organization Act of 1973, as amended. Four of these federally qualified subsidiaries are parties to HCFA Contracts to provide Medicare risk HMO products.
An HMO which is federally qualified may require employers, with more than 25 employees, that offer health insurance benefits to include federally qualified HMO products as an option available to their employees. To obtain federal qualification, an HMO must meet certain requirements, including conformance with financial criteria, a standard method of rate setting, a comprehensive benefit package, and prohibition of medical underwriting of individuals. In certain markets, and for certain products, the Company operates HMOs that are not federally qualified because this provides greater flexibility with respect to product design and pricing than is possible for federally qualified HMOs.
HCFA audits Medicare risk HMOs at least biannually and may perform other reviews more frequently to determine compliance with federal regulations and contractual obligations. These audits include review of the HMO's administration and management (including management information and data collection systems), fiscal stability, utilization management and incentive arrangements, health services delivery, quality assurance, marketing, enrollment and disenrollment activity, claims processing and complaint systems. HCFA regulations require quarterly and annual submission of financial statements and restrict the number of Medicare risk members to no more than the HMO's Commercial membership in a specified service area. HCFA regulations also require independent review of medical records and quality of care, review and approval by HCFA of all advertising, marketing and communication materials, and independent review of all denied claims and service complaints which are not resolved in favor of a member.
During 1994, HCFA performed an investigation of the Company's South Florida health plan. HCFA's findings, which focused primarily on the collection and use of data, indicated the plan was not fully meeting HCFA requirements in the areas of utilization management, quality assurance and availability/accessibility. The Company and HCFA have agreed upon an implementation plan for a mutually developed corrective action process. The Company believes this investigation will not have a material adverse impact on the results of operations, financial position or cash flows of the Company.
The Company's Medicaid product is regulated by the applicable state agency in the state which the Company sells its Medicaid product and is subject to periodic reviews by these agencies. The reviews are similar in nature to those performed by HCFA.
Laws in each of the states in which the Company operates its HMOs and PPOs regulate its operations, including the scope of benefits, rate formula, delivery systems, utilization review procedures, quality assurance, enrollment requirements, claim payments, marketing and advertising. The PPO products offered by the Company are generally sold under insurance licenses issued by the applicable state insurance regulators. The Company's HMOs and PPOs are required to be in compliance with certain minimum capital requirements. These requirements must be satisfied by investing in approved investments that generally cannot be used for other purposes. Under state laws, the Company's HMOs and PPOs are audited by state departments of insurance for financial and contractual compliance, and its HMOs are audited for compliance with health services standards by respective state departments of health.
Management believes that the Company is in substantial compliance with all governmental laws and regulations affecting its business.
HEALTH CARE REFORM
There has been diverse legislative and regulatory initiatives at both the federal and state levels to address aspects of the nation's health care system.
National
During 1994, Congress debated health care legislation which included proposals covering cost controls, universal coverage and the creation of statewide health alliances that would cover individuals not enrolled in large employer managed care health plans. No material substantive legislation was passed in 1994, nor has any been proposed to date in 1995.
State
Legislation enacted in the states has included, among other things, universal access, employer purchasing pools and statewide purchasing alliances. Other managed care issues being discussed include any willing provider, guaranteed renewal, portability, rating restrictions, and freedom of choice requirements.
The State of Florida has adopted health care reform legislation which, among other things, establishes a mechanism through which small employers and self-employed individuals may acquire health care coverage through state chartered non-profit entities known as Community Health Purchasing Alliances (CHPAs). It is intended the CHPAs will also be used to acquire insurance for state employees and Medicaid beneficiaries in the future. The legislation divides the state into 11 geographic areas and establishes a separate CHPA for each area. The Company is offering products in each of these geographic areas.
The Commonwealth of Kentucky has passed legislation which, among other things, requires standardization of health care policies by July 15, 1995 and establishes a health care policy board to recommend health insurance reform measures to the Kentucky legislature. At this time, neither the standardization of health insurance policies nor any health reform proposals have been finalized and the Company cannot predict what effect, if any, such legislation will have on its operations in Kentucky.
The Company is unable to predict how existing federal or state laws and regulations may be changed or interpreted, what additional laws or regulations affecting its 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 its revenues, profitability and business prospects.
OTHER BUSINESSES
Hospital
The Company owns a 170-bed hospital in Lexington, Kentucky, which provides care primarily to members of the Company's managed care plans in Lexington. The Company has contracted with an independent hospital management company (the "Management Company"), whereby effective March 1, 1995, all operational functions of the hospital are managed by the Management Company.
Captive Insurance Company
The Company insures substantially all of its professional liability risks through a wholly-owned subsidiary (the "Captive Subsidiary") which was incorporated in the State of Vermont. The annual premiums paid to the Captive Subsidiary are determined by independent actuaries. The Captive Subsidiary reinsures levels of coverage for losses in excess of its retained limits with various unrelated insurance carriers.
Centralized Management Services
Centralized management services are provided to each health plan from the Company's headquarters. These services include management information systems, product administration, financing, personnel, development, accounting, legal advice, public relations, marketing, insurance, purchasing, risk management, actuarial, underwriting and claims processing.
EMPLOYEES
As of December 31, 1994, the Company and its subsidiaries had approximately 12,000 employees. Approximately 1,400 employees of the Company are covered by collective bargaining agreements. The Company has not experienced any work stoppages and believes it has good relations with its employees.
ITEM 2.



ITEM 2. PROPERTIES
The Company owns its principal executive office, which is located in the Humana Building, 500 West Main Street, Louisville, Kentucky 40202.
The Company provides medical services in medical centers owned or leased ranging in size from approximately 1,200 to 80,000 square feet. The Company's administrative market offices are generally leased, with square footage ranging from 500 to 75,000. The following chart lists the location of properties used in the operation of the Company at December 31, 1994:
In addition, the Company owns buildings in Louisville, Kentucky, and San Antonio, Texas, and leases a facility in Jacksonville, Florida, all of which are used for customer service and claims processing. The Louisville facility also performs enrollment processing and other corporate functions.
The Company also owns a hospital and medical office building in Lexington, Kentucky.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
1. A class action law suit styled Mary Forsyth, et al v. Humana Inc., et al, Case #CV-5-89-249-PMP (L.R.L.), (now restyled Marietta Cade, et al v. Humana Health Insurance of Nevada, Inc., et al) was filed on March 29, 1989, in the United States District Court for the District of Nevada (the "Forsyth" case). There have been no material changes since those described in the Company's Form 10-Q for the quarterly period ended June 30, 1994.
2. On April 22, 1993, an alleged stockholder of the Company filed a purported shareholder derivative action in the Court of Chancery of the State of Delaware, County of New Castle, styled Lewis v. Austen, et al, Civil Action No. 12937. There have been no changes since those described in the Company's Form 10-K for the fiscal year ended December 31, 1993.
Damages for claims for personal injuries and medical benefit denials are usual in the Company's business. Personal injury claims are covered by insurance from the Captive Subsidiary and excess carriers, except to the extent that claimants seek punitive damages, which may not be covered by insurance if awarded. Punitive damages generally are not paid where claims are settled and generally are awarded only where there has been a willful act or omission to act.
The Company does not believe that any pending actions will have a material adverse effect on its consolidated results of operations, financial position or cash flows.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are names and ages of all of the current executive officers of the Company as of March 1, 1995, their positions, date of election to such position and the date first elected an officer of the Company:
--------------- (1) Elected an officer of a predecessor corporation in 1961.
(2) Mr. Hipwell was initially elected an officer of the Company in 1990 and previously served in this same capacity since July 1992. Effective with the Spinoff, he became Senior Vice President and General Counsel of Galen. Mr. Hipwell returned to the Company in January 1994 and was named Senior Vice President and General Counsel of the Company on June 15, 1994.
Executive officers are elected annually by the Company's Board of Directors and serve until their successors are elected or until resignation or removal. There are no family relationships among any of the directors or executive officers of the Company, except that Mr. Jones is the father of David A. Jones, Jr., a director of the Company. Except for Mr. Hipwell, all of the above-named executive officers have been employees of the Company for more than five consecutive years.
PART II
Information for Items 5 through 8 of this Report, which appears in the 1994 Annual Report to Stockholders as indicated on the following table, is incorporated by reference in this report and filed as an exhibit hereto:
ITEM 9.






ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item other than the information set forth in Part I under the Section entitled "EXECUTIVE OFFICERS OF THE COMPANY," is herein incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 11, 1995, appearing under the caption "ELECTION OF DIRECTORS OF THE COMPANY FOR 1995" of such Proxy Statement.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is herein incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 11, 1995, appearing under the caption "EXECUTIVE COMPENSATION OF THE COMPANY" of such Proxy Statement.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is herein incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 11, 1995, appearing under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMPANY COMMON STOCK" of such Proxy Statement.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is herein incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 11, 1995 appearing under the caption "CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS" of such Proxy Statement.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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* Exhibits 10(a) through and including 10(t) and 10(mm) are compensatory plans or management contracts.
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* Exhibits 10(a) through and including 10(t) and 10(mm) are compensatory plans or management contracts.
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* Exhibits 10(a) through and including 10(t) and 10(mm) are compensatory plans or management contracts.
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* Exhibits 10(a) through and including 10(t) and 10(mm) are compensatory plans or management contracts.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report.
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.
HUMANA INC.
By: /s/ W. ROGER DRURY ------------------------------------ W. Roger Drury Chief Financial Officer
Date: March 30, 1995
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 dates indicated.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors Humana Inc.
Our report on the consolidated financial statements of Humana Inc. dated February 13, 1995, which includes an explanatory paragraph relating to a change in 1993 in the method of accounting for certain investments in debt and equity securities, has been incorporated by reference in this Form 10-K from page 33 of the 1994 Annual Report to Shareholders of Humana Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index in Item 14(a)(2) of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Louisville, Kentucky February 13, 1995
HUMANA INC. SCHEDULE I -- PARENT COMPANY FINANCIAL INFORMATION(A) CONDENSED BALANCE SHEET DECEMBER 31, 1994 AND 1993 (DOLLARS IN MILLIONS)
--------------- (a) Parent company financial information has been derived from the consolidated financial statements of the Company and excludes the accounts of all operating subsidiaries. This information should be read in conjunction with the consolidated financial statements of the Company.
(b) In the normal course of business, the parent company indemnifies certain of its subsidiaries for health plan obligations its subsidiaries may be unable to meet. In addition, the parent remains contingently liable for approximately $55 million of Galen debt.
HUMANA INC. SCHEDULE I -- PARENT COMPANY FINANCIAL INFORMATION(A) CONDENSED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (DOLLARS IN MILLIONS)
--------------- (a) Parent company financial information has been derived from the consolidated financial statements of the Company and excludes the accounts of all operating subsidiaries. This information should be read in conjunction with the consolidated financial statements of the Company.
HUMANA INC. SCHEDULE I -- PARENT COMPANY FINANCIAL INFORMATION(A) CONDENSED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (DOLLARS IN MILLIONS)
--------------- (a) Parent company financial information has been derived from the consolidated financial statements of the Company and excludes the accounts of all operating subsidiaries. This information should be read in conjunction with the consolidated financial statements of the Company.
HUMANA INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (DOLLARS IN MILLIONS)
EXHIBIT INDEX
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* Exhibits 10(a) through and including 10(t) and 10(mm) are compensatory plans or management contracts.