Humana 2003 Annual Report Download - page 36

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.
IBNR established in connection with our TRICARE contracts is typically more difficult to estimate than
with our other operations, as a result of having more variables which impact the estimate. Such variables include
continual changes in the number of eligible beneficiaries, changes in the utilization of military treatment facilities
and changes in levels of benefits versus the original contract provisions. Many of these variables are impacted
significantly by an increase or decrease in military activity involving the United States armed forces.
Our TRICARE contracts contain risk-sharing provisions with the Department of Defense and with
subcontractors, which effectively limit profits and losses when actual claim experience varies from the medical
claim amounts included in our annual bids. Additionally, other factors impacting medical claims expenses such
as changes in the number of eligible beneficiaries and changes in the level of usage of military treatment facilities
result in equitable revenue adjustments through the change order and bid price adjustment process. As a result of
the above contract provisions, the impact of changes in estimates for prior year TRICARE medical claims
payable on our results of operations is reduced substantially, whether positive or negative.
The following table provides a reconciliation of changes in medical and other expenses payable for the years
ended December 31, 2003, 2002 and 2001:
2003 2002 2001
(in thousands)
Balances at January 1 ................... $1,142,131 $ 1,086,386 $ 1,181,027
Acquisitions ........................... — — 85,052
Incurred related to:
Current year ....................... 9,955,491 9,125,915 8,303,256
Prior years ........................ (76,070) 12,281 (23,412)
Total incurred ................. 9,879,421 9,138,196 8,279,844
Paid related to:
Current year ....................... (8,710,393) (8,002,610) (7,291,541)
Prior years ........................ (1,039,003) (1,079,841) (1,167,996)
Total paid ..................... (9,749,396) (9,082,451) (8,459,537)
Balances at December 31 ................ $1,272,156 $ 1,142,131 $ 1,086,386
Amounts incurred related to prior years vary from previously estimated liabilities as the claims are
ultimately settled. Negative amounts reported for incurred related to prior years result from claims being
ultimately settled for amounts less than originally estimated (favorable development). Positive amounts reported
for incurred related to prior years result from claims ultimately being settled for amounts greater than originally
estimated (unfavorable development).
As summarized in the previous table, claim reserve balances at December 31, 2000 ultimately settled during
2001 for $23.4 million less than the amounts originally estimated, representing 0.3% of medical claim expenses
recorded in 2000. During 2002, claim reserve balances at December 31, 2001 ultimately settled for $12.3 million
more than the amounts originally estimated, representing 0.1% of medical claim expenses recorded in 2001. This
$35.7 million increase in the amounts incurred related to prior years was substantially all attributable to our
TRICARE operations and resulted primarily from enhanced benefits enacted for TRICARE beneficiaries as a
result of Congressional legislation, the impact of which was not fully determinable at December 31, 2001. As
these additional medical expenses were recognized during 2002, we also recognized and received commensurate
revenues from the Department of Defense as a result of change orders and bid price adjustments, or BPAs.
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