Humana 2004 Annual Report Download - page 51

Our TRICARE South Region contract, which we were awarded in 2003, covers approximately 2.9 million
beneficiaries. The South Region is one of the three regions in the United States as defined by the Department of
Defense. The contract is for a five-year period subject to annual renewals at the federal government’s option with
the second option period scheduled to begin April 1, 2005.
We currently have Medicaid contracts with the Puerto Rico Health Insurance Administration through June
30, 2005. Our other Medicaid contracts are in Florida and Illinois, and are annual contracts. As of December 31,
2004, Puerto Rico accounted for approximately 83% of our total Medicaid membership.
The loss of any of the contracts above 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 Part
1. We cannot predict the outcome of these suits with certainty, and we are incurring expenses in defense of these
matters. In addition, recent court decisions and legislative activity may increase our exposure for any of these
types of claims. Therefore, these legal actions could have a material adverse effect on our financial position,
results of operations and cash flows.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our
consolidated financial statements and accompanying notes, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these financial
statements and accompanying notes requires us to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. We continuously evaluate our estimates and those
critical accounting policies related primarily to medical cost and revenue recognition as well as accounting for
impairments related to our investment securities, goodwill, and long-lived assets. These estimates are based on
knowledge of current events and anticipated future events, and accordingly, actual results ultimately may differ
from those estimates. We believe the following critical accounting policies involve the most significant
judgments and estimates used in the preparation of our consolidated financial statements.
Medical Expense Recognition
Medical expenses are recognized in the period in which services are provided and include an estimate of the
cost of services which have been incurred but not yet reported, or IBNR. IBNR represents a substantial portion of
our medical and other expenses payable as follows:
December 31,
2004
Percentage
of Total
December 31,
2003
Percentage
of Total
(dollars in thousands)
IBNR ............................................ $1,164,518 81.9% $1,043,360 82.0%
Reported claims in process ........................... 97,801 6.9% 74,262 5.8%
Other medical expenses payable ....................... 159,691 11.2% 154,534 12.2%
Total medical and other expenses payable ............... $1,422,010 100.0% $1,272,156 100.0%
Estimating IBNR is complex and involves a significant amount of judgment. Accordingly, it represents a
critical accounting estimate. Changes in this estimate can materially affect, either favorably or unfavorably, our
results from operations and overall financial position. For example, a 100 basis point, or 1 percent, change in the
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