Humana 2002 Annual Report Download - page 81

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
5-year leases and January 1, 2010 for the 7-year lease. We have the right to exercise a purchase option with
respect to the leased equipment or the equipment can be sold to a third party. If we decide not to exercise our
purchase option at the end of the lease, we must pay the lessor a maximum amount of $13.1 million related to the
5-year leases and $4.8 million related to the 7-year lease. The amount will be reduced by the net sales proceeds
of the airplanes to a third party. A $3.5 million gain in connection with a 1999 sale/leaseback transaction is being
deferred until the residual value guarantee is resolved at the end of the lease term. We do not believe that we will
have any payment obligation at the end of the lease because we will exercise the purchase obligation, or the net
proceeds from the sale of the airplanes will exceed the maximum amount payable to the lessor.
We have $23.8 million in undrawn letters of credit outstanding at December 31, 2002. Letters of credit
totaling $10.9 million have been issued to ensure our payment to a beneficiary for assumed obligations of our
wholly owned captive insurance subsidiary related to pre-1993 professional liability risks for which the
beneficiary remains directly liable. Other letters of credit totaling $12.9 million were issued to ensure our
payment to various beneficiaries for miscellaneous contractual obligations. These letters of credit renew
automatically on an annual basis unless the beneficiary otherwise notifies us. In February 2003, a $5.0 million
letter of credit supporting miscellaneous contractual obligations of ours expired without renewal. Over the past
10 years, we have not had to fund any letters of credit.
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.
Government Contracts
Our Medicare+Choice contracts with the federal government are renewed for a one-year term each
December 31 unless terminated 90 days prior thereto. Legislative proposals are being considered which may
revise the Medicare+Choice program’s current reimbursement rates. We are unable to predict the outcome of
these proposals or the impact they may have on our financial position, results of operations, or cash flows.
We currently are in negotiations with the Department of Defense to extend our TRICARE contracts that
expire on April 30, 2003 for Regions 2 and 5 and June 30, 2003 for Regions 3 and 4. We believe we will be able
to successfully extend our TRICARE contracts under substantially the same terms for one additional year plus a
one year renewal option which should continue our contracts through the new TRICARE Next Generation, or
T-Nex, transition described below.
The Department of Defense recently announced a plan to consolidate the total number of prime contracts
from seven to three under the new T-Nex program. The Department of Defense has stated that a bidder can be
awarded only one prime contract, although a bidder would be allowed to secondarily participate in another
contract. We submitted a bid in January 2003 to participate as a prime contractor for the South region.
Additionally, we partnered with Aetna Government Health Plans, LLC, a subsidiary of Aetna, Inc. to participate
as a subcontractor should Aetna Government Health Plans, LLC be awarded the North region. An announcement
of the awards is expected in mid to late 2003 with transition to the new regions not expected until mid to late
2004. At this time we are unable to predict whether we will be awarded a contract, or the effective date of the
contract.
Effective July 1, 2002, we signed two contracts in Puerto Rico covering beneficiaries in two of the eight
regions in Puerto Rico’s Medicaid program, which represents 86% of our total Medicaid membership as of
December 31, 2002. The term of each of these contracts is three years, subject to annual renewal options with the
Health Insurance Administration in Puerto Rico. Our Medicaid contracts in Florida and Illinois generally are
annual contracts.
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