Humana 2004 Annual Report Download - page 24

expected to continue. The focus of these efforts has been directed at participants in federal government health
care programs such as Medicare Advantage, Medicaid, and the Federal Employee Health Benefits Program, or
FEHBP. We participate extensively in these programs and have continued our stringent regulatory compliance
efforts for these programs. The programs are subject to very technical rules. When combined with law
enforcement intolerance for any level of noncompliance, these rules mean that compliance efforts in this area
continue to be challenging.
We are subject to various governmental audits, investigations, and enforcement actions. These include
possible government actions relating to the Employee Retirement Income Security Act, as amended, or ERISA,
FEHBP, federal and state fraud and abuse laws, laws regulating anticompetitive and unfair business activities,
and other laws relating to Medicare Advantage, including adjusted community rating development, special
payment status, risk adjusted premiums and various other areas. The CMS risk adjustment methodology is
described on page 7. Adjusted community rating development is the government-defined rating formula used to
explain the Medicare Advantage benefits we offer individuals eligible for Medicare benefits based on a particular
community and certain other factors. Special payment status refers to, among others, Medicare Advantage
beneficiaries who are institutionalized, Medicaid-eligible, or members who have contracted end-stage renal
disease. The Medicare Advantage plan receives a higher payment for members who qualify for one or more of
these statuses.
On May 31, 2000, we entered into a five-year Corporate Integrity Agreement with the Office of the
Inspector General for the Department of Health and Human Services as part of a settlement of a Medicare
overpayment issue arising from an audit by the Office of the Inspector General. We are also subject to substantial
regulation by the states in which we do business. We regularly are audited and subject to various enforcement
actions by state departments of insurance. These departments enforce laws relating to all aspects of our
operations, including benefit offerings, marketing, claim payments and premium setting, especially with regard
to our small group business. Although any of the pending government actions could result in assessment of
damages, civil or criminal fines or penalties, and other sanctions against us, including exclusion from
participation in government programs, we do not believe the results of any of these actions, individually or in the
aggregate, will have a material adverse effect on our financial position, results of operations, or cash flows.
Of our eight licensed and active HMO subsidiaries as of February 1, 2005, six are qualified under the
Federal Health Maintenance Organization Act of 1973, as amended. To obtain federal qualification, an HMO
must meet certain requirements, including conformance with benefit, rating, and financial reporting standards.
Federal qualification allows us to participate in the FEHBP program. In certain markets, and for certain products,
we operate HMOs that are not federally qualified because this provides greater flexibility with respect to product
design and pricing than is possible for federally qualified HMOs.
As of February 1, 2005, Humana Medical Plan, Inc., Humana Health Plan of Texas, Inc., Humana Health
Benefit Plan of Louisiana, Inc., and Humana Health Plan, Inc. each hold CMS contracts under the Medicare
Advantage program to sell Medicare HMO products in a total of seven states. In addition, Humana Insurance
Company holds CMS contracts under a Medicare Advantage program to sell a private fee-for-service product in
eleven states and PPO plans in many of our existing markets. The PPO and HMO plans are considered
“coordinated care plans” and have similar standards.
CMS conducts audits of plans qualified under its Medicare Advantage program at least biannually and may
perform other reviews more frequently to determine compliance with federal regulations and contractual
obligations. These audits include review of the plans’ administration and management, including management
information and data collection systems, fiscal stability, utilization management and physician incentive
arrangements, health services delivery, quality assurance, marketing, enrollment and disenrollment activity,
claims processing, and complaint systems.
CMS regulations require submission of quarterly and annual financial statements. In addition, CMS requires
certain disclosures to CMS and to Medicare Advantage beneficiaries concerning operations of a health plan
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