Humana 2003 Annual Report Download - page 37

During 2003, claim reserve balances at December 31, 2002 ultimately settled for $76.1 million less than the
amounts originally recorded, representing 0.8% of medical claim expenses recorded in 2002. This $88.4 million
decline in the amounts incurred related to prior years consists of $68.3 million attributable to our TRICARE
operations with the remaining $20.1 million primarily resulting from fourth quarter 2002 utilization in our
commercial medical products ultimately being lower than originally estimated. The $68.3 million increase in
TRICARE incurred related to prior years resulted from establishing the reserves resulting from the enhanced
benefits for TRICARE beneficiaries as discussed above as well as lower than originally estimated utilization of
medical services by TRICARE beneficiaries in the second half of 2002.
Revenue Recognition
We generally establish one-year contracts with commercial employer groups, subject to cancellation by the
employer group’s 30-day written notice. Our contracts with federal or state governments are generally multi-year
contracts subject to annual renewal provisions with the exception of our Medicare+Choice contracts with the
federal government which renew annually. Our commercial contracts establish rates on a per member basis for
each month of coverage. Except for TRICARE contracts discussed in the following section, our government
contracts also establish monthly rates per member but may have additional amounts due to us based on items
such as age, working status, or specific health issues of the member.
Premium revenues and ASO fees are estimated by multiplying the membership covered under the various
contracts by the contractual rates. In addition, we adjust revenues for, estimated changes in an employer’s
enrollment and customers that ultimately may fail to pay. Enrollment changes not yet reported by an employer
group, an individual, or the government, also known as retroactive membership adjustments, are based on
historical trends. We monitor the collectibility of specific accounts, the aging of receivables, as well as prevailing
and anticipated economic conditions, and reflect any required adjustments in the current period’s revenue.
We bill and collect premium and ASO fee remittances from employer groups, the federal and state
governments, and individual Medicare+Choice members monthly. Premium and ASO fee receivables are
presented net of allowances for estimated uncollectible accounts and retroactive membership adjustments.
Premiums and ASO fees received prior to the period members are entitled to receive services are recorded as
unearned revenues.
TRICARE Revenues
Base premium revenues as originally specified in our TRICARE contracts are recognized ratably throughout
each contract year as eligible beneficiaries are entitled to receive services. TRICARE revenues also include
amounts recoverable from the federal government as a result of BPAs and change orders.
Under our TRICARE contracts, we retain the financial risk of contractual discounts in the provider
networks, same-store utilization of services, and administrative overhead. However, the federal government
retains the financial risk associated with changes in usage levels at military treatment facilities, or MTFs, changes
in the number of persons eligible for TRICARE benefits, and medical unit cost inflation. BPAs are utilized to
retroactively adjust premium revenues for the impact of the items for which the federal government retains risk.
We work closely with the federal government to obtain and review eligibility and MTF workload data, and to
quantify and negotiate amounts recoverable or payable under our contractual BPA requirements. We record
revenues applicable to BPAs when these amounts are determinable and the collectibility is reasonably assured.
Because final settlement of BPAs occurs only at specified intervals, typically in excess of 6 months after the end
of a contract year for our largest regions, cumulative amounts receivable or payable under BPAs may be
outstanding in excess of a year. Amounts receivable or payable within a year are classified as premiums
receivable or trade accounts payable and accrued expenses, respectively, in our consolidated balance sheets.
Amounts receivable or payable for longer than one year are classified as other long-term assets or other long-
term liabilities, respectively. The increase in activity and deployments surrounding military conflicts in the
Middle East has significantly impacted BPA activity in recent years.
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