Humana 2003 Annual Report Download - page 73

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Premiums Receivable and Revenue Recognition
We generally establish one-year commercial membership contracts with employer groups, subject to
cancellation by a 30 day written notice. Our TRICARE contracts with the federal government and our contracts
with various state Medicaid programs generally are multi-year contracts subject to annual renewal provisions.
Our Medicare+Choice contracts with the federal government renew annually. We bill and collect premium and
administrative fee remittances from employer groups and some individual Medicare+Choice members monthly.
We receive monthly premiums and administrative fees from the federal government and various states according
to government specified reimbursement rates and various contractual terms.
Premium revenues are recognized as income in the period members are entitled to receive services, and are
net of estimated uncollectible amounts and retroactive membership adjustments. Retroactive membership
adjustments result from enrollment changes not yet processed, or not yet reported by an employer group or the
government. We routinely monitor the collectibility of specific accounts, the aging of receivables, historical
retroactivity trends, as well as prevailing and anticipated economic conditions, and reflect any required
adjustments in current operations. Revenues also may include change orders and bid price adjustments
attributable to our TRICARE contracts. Change orders represent equitable adjustments for services not originally
specified in the contracts. Bid price adjustments, or BPAs, represent adjustments defined in our contracts subject
to negotiations with the federal government. Revenues for these adjustments are recognized when a settlement
amount becomes determinable and the collectibility is reasonably assured.
Administrative services only fees, or ASO, are earned as services are performed. Administrative services
fees cover the processing of claims, offering access to our provider networks and clinical programs, and
responding to customer service inquiries from members of self-funded employers. Under ASO contracts, self-
funded employers and, for TRICARE ASO, the Department of Defense, retain the risk of financing the cost of
health benefits.
Premium and ASO receivables are shown 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.
Policy Acquisition Costs
Policy acquisition costs are those costs that vary with and primarily are related to the acquisition of new and
renewal business. Such costs include broker commissions, costs of policy issuance and underwriting, and other
costs we incur to acquire new business or renew existing business. We expense policy acquisition costs related to
our employer-group prepaid health services policies as incurred in accordance with the Health Care
Organization Audit and Accounting Guide. Our short-duration employer-group prepaid health services policies
typically have a one-year term and may be cancelled upon 30 days notice.
Our health and life policies sold to individuals, when aggregated as a block of policies, are expected to
remain in force for an extended period beyond one year. We defer policy acquisition costs related to our
individual health and life insurance policies in accordance with the accounting for long-duration insurance
products under Statement of Financial Accounting Standards No. 60, Accounting and Reporting by Insurance
Enterprises. Deferred policy acquisition costs are amortized over the estimated life of the policies in proportion
to premiums earned and are reviewed annually to determine if they are recoverable from future income.
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