Humana 2003 Annual Report Download - page 83

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. MEDICAL AND OTHER EXPENSES PAYABLE
Activity in medical and other expenses payable was as follows 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 ultimately
are 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
incurred 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 incurred 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.
During 2003, claim reserve balances at December 31, 2002 ultimately settled for $76.1 million less than the
amounts originally estimated, representing 0.8% of medical claim expenses incurred 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.
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 claim expenses such as
changes in the number of eligible beneficiaries and changes in the level of usage of military treatment facilities
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