Humana 2003 Annual Report Download - page 57

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Government Contracts
Our MedicareAdvantage contracts with the federal government are renewed for a one-year term each
December 31 unless notice of termination is received at least 90 days prior thereto. In December 2003, the
Medicare Prescription Drug, Improvement, and Modernization Act, or DIMA, was signed into law. DIMA
includes provisions that require the 2004 stabilization funding to be directed toward increased reimbursement for
providers, increased benefits or access for members, or decreased member premiums. We believe DIMA will
open new opportunities for us. However, we do not believe that the benefit to our 2004 financial position, results
of operations, or cash flows will be material.
Our current TRICARE contract with the Department of Defense will be in effect until April 30, 2004 for
Regions 2 and 5 and until June 30, 2004 for Regions 3 and 4. Each of the contracts is subject to a one-year
renewal at the Government’s option. We believe these contracts will continue until the TRICARE transition
described below.
On August 21, 2003, the Department of Defense notified us that we were awarded the contract for the South
Region, one of three newly-created regions under the government’s revised TRICARE Program. The current
TRICARE Regions 3 and 4 will become part of the new South Region along with Region 6, which is currently
administered by another contractor. The current Regions 2 and 5 will become part of the North Region, which
was awarded to another contractor.
Pursuant to the Department of Defense’s bid process, each of the three awards was subject to protests by
unsuccessful bidders of prime contracts, however, none of the protests were successful.
Under the Department of Defense’s current schedule for implementation of the new TRICARE contracts,
Regions 2 and 5 will transition to the new North Region for the start of healthcare delivery on July 1, 2004.
Regions 3 and 4 will become part of the new South Region for the start of healthcare delivery on August 1, 2004
and Region 6 will become part of our new South Region for the start of healthcare delivery on November 1,
2004. If this schedule is realized, our TRICARE membership is expected to temporarily decline to 1.5 million in
July 2004, and is expected to increase to 2.8 million in November 2004. This will also result in a decline in
revenues during this period.
In addition, retail pharmacy benefits for TRICARE beneficiaries will be administered separately under the
new Department of Defense TRICARE Retail Pharmacy Program. On September 26, 2003, we were notified that
we were not awarded the retail pharmacy contract and, later, that our protest of this award decision was not
upheld.
We currently have Medicaid contracts with the Puerto Rico Health Insurance Administration through
June 30, 2005, subject to each party agreeing upon annual rates. In July 2003, we signed amendments to the
Puerto Rico Medicaid contracts regarding a premium rate increase for the annual period ending June 30, 2004.
Our other Medicaid contracts are in Florida and Illinois, and are annual contracts. As of December 31, 2003,
Puerto Rico accounted for approximately 84% of our total Medicaid membership.
Other than as described herein, the loss of any of our existing or pending government contracts or
significant changes in these programs as a result of legislative 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 financial position, results of operations, and cash flows.
Legal Proceedings
We are party to a variety of legal actions in the ordinary course of business, including employment matters,
breach of contract actions, tort claims, and shareholder suits involving alleged securities fraud. A description
of material legal actions in which we are currently involved is included under “Legal Proceedings” of Item 3 in
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