Humana 2004 Annual Report Download - page 59

statements, we are not undertaking to address or update each factor in future filings or communications regarding
our business or results. Our business is highly complicated, regulated and competitive with many different
factors affecting results.
If the premiums we charge are insufficient to cover the cost of health care services delivered to our
members, or if our estimates of medical claim reserves based upon our estimates of future medical claims are
inadequate, our profitability could decline.
We use a significant portion of our revenues to pay the costs of health care services delivered to our
members. These costs include claims payments, capitation payments, allocations of some centralized expenses
and various other costs incurred to provide health insurance coverage to our members. These costs also include
estimates of future payments to hospitals and others for medical care provided to our members. Generally,
premiums in the health care business are fixed for one-year periods. Accordingly, costs we incur in excess of our
medical cost projections generally are not recovered in the contract year through higher premiums. We estimate
the costs of our future medical claims and other expenses using actuarial methods and assumptions based upon
claim payment patterns, medical inflation, historical developments, including claim inventory levels and claim
receipt patterns, and other relevant factors. We also record medical claims reserves for future payments. We
continually review estimates of future payments relating to medical claims costs for services incurred in the
current and prior periods and make necessary adjustments to our reserves. However, increases in the use or cost
of services by our members, competition, government regulations and many other factors may and often do cause
actual health care costs to exceed what was estimated and reflected in premiums.
These factors may include:
• increased use of medical facilities and services, including prescription drugs;
• increased cost of such services;
• the Company’s membership mix;
• variances in actual versus estimated levels of cost associated with new products, benefits or lines of
business, product changes or benefit level changes;
• membership in markets lacking adequate provider networks;
• changes in the demographic characteristics of an account or market;
• termination of capitation arrangements resulting in the transfer of membership to fee-for-service
arrangements;
• changes or reductions of our utilization management functions such as preauthorization of services,
concurrent review or requirements for physician referrals;
• possible changes in our pharmacy rebate program with drug manufacturers;
• catastrophes, including acts of terrorism, epidemics, or severe weather;
• the introduction of new or costly treatments, including new technologies;
• medical cost inflation; and
• new government mandated benefits or other regulatory changes.
Failure to adequately price our products or estimate sufficient medical claim reserves may result in a
material adverse effect on our financial position, results of operations and cash flows.
If we do not design and price our products properly and competitively, our membership and profitability
could decline.
We are in a highly competitive industry. Many of our competitors are more established in the health care
industry and have a larger market share and greater financial resources than we do in some markets. In addition,
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