Humana 2004 Annual Report Download - page 54

The following table provides a reconciliation of changes in medical and other expenses payable for the years
ended December 31, 2004, 2003 and 2002:
2004 2003 2002
(in thousands)
Balances at January 1 ..................................... $ 1,272,156 $ 1,142,131 $ 1,086,386
Acquisitions ............................................. 71,063 — —
Incurred related to:
Current year ......................................... 10,763,105 9,955,491 9,125,915
Prior years .......................................... (93,458) (76,070) 12,281
Total incurred ................................... 10,669,647 9,879,421 9,138,196
Paid related to:
Current year ......................................... (9,504,331) (8,710,393) (8,002,610)
Prior years .......................................... (1,086,525) (1,039,003) (1,079,841)
Total paid ....................................... (10,590,856) (9,749,396) (9,082,451)
Balances at December 31 .................................. $ 1,422,010 $ 1,272,156 $ 1,142,131
Amounts incurred related to prior years vary from previously estimated liabilities as the claims are
ultimately 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, 2003 ultimately settled during
2004 for $93.5 million less than the amounts originally estimated, representing 0.9% of medical claim expenses
incurred in 2003. 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 recorded in 2002. This
$17.4 million change in the amounts incurred related to prior years resulted primarily from favorable
development in our Medicare line of business as a result of better than expected utilization in the latter half of
2003. The substantial majority of this favorable development in the Medicare business occurred under risk-
sharing arrangements with providers, which resulted in minimizing the impact on our reported 2004 results from
operations.
During 2002, claim reserve balances at December 31, 2001 ultimately settled for $12.3 million more than
the amounts originally recorded, representing 0.1% of medical claim expenses recorded in 2001. The $88.4
million change in the amounts incurred related to prior years during 2003 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 change in TRICARE incurred related to prior years resulted from establishing medical expense reserves
resulting from enhanced benefits enacted for TRICARE beneficiaries as a result of congressional legislation, as
well as lower than originally estimated utilization of medical services by TRICARE beneficiaries in the second
half of 2002.
Revenue Recognition
We generally establish one-year contracts with commercial employer groups, subject to cancellation by the
employer group’s 30-day written notice. Our contracts with federal or state governments are generally multi-year
contracts subject to annual renewal provisions with the exception of our Medicare Advantage contracts with the
federal government which renew annually. Our commercial contracts establish rates on a per member basis for
each month of coverage. Except for TRICARE contracts discussed in the following section, our government
contracts also establish monthly rates per member but may have additional amounts due to us based on items
44