Humana 2004 Annual Report Download - page 75

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
well as estimates of future payments to hospitals and others for medical care provided prior to the balance sheet
date. Capitation payments represent monthly contractual fees disbursed to primary care physicians and other
providers who are responsible for providing medical care to members. Pharmacy costs represent payments for
members’ prescription drug benefits, net of rebates from drug manufacturers. Receivables for such pharmacy
rebates are included in other current assets in the consolidated balance sheet.
We estimate the costs of our future medical claims and other medical expense payments using actuarial
methods and assumptions based upon claim payment patterns, medical cost inflation, historical developments
such as claim inventory levels and claim receipt patterns, and other relevant factors, and 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.
We reassess the profitability of our contracts for providing health insurance coverage to our members when
current operating results or forecasts indicate probable future losses. We establish a premium deficiency liability
in current operations to the extent that the sum of a geographic market’s expected future medical costs, claim
adjustment expenses, and maintenance costs exceeds related future premiums under contract for all lines of
business. Anticipated investment income is not considered for purposes of computing the premium deficiency.
Losses recognized as a premium deficiency result in a beneficial effect in subsequent periods as operating losses
under these contracts are charged to the liability previously established. There were no premium deficiency
liabilities recorded at December 31, 2004 and 2003. Because the majority of our member contracts renew
annually, we do not anticipate recording a premium deficiency liability, except when unanticipated adverse
events or changes in circumstances indicate otherwise.
For our health and life policies sold to individuals and accounted for as long-duration insurance products
under the provisions of Statement 60, medical and other expenses payable include liabilities for future policy
benefits for which some of the premium received in the earlier years is intended to pay anticipated benefits to be
incurred in future years.
We believe our medical and other expenses payable are adequate to cover future claims payments required.
However, such estimates are based on knowledge of current events and anticipated future events. Therefore, the
actual liability could differ materially from the amounts provided.
Book Overdraft
Under our cash management system, checks issued but not yet presented to banks frequently result in
overdraft balances for accounting purposes and are classified as a current liability in the consolidated balance
sheets. Changes in book overdrafts from period to period are reported in the consolidated statement of cash flows
as a financing activity.
Income Taxes
We recognize an asset or liability for the deferred tax consequences of temporary differences between the
tax bases of assets or liabilities and their reported amounts in the financial statements. These temporary
differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or
liabilities are recovered or settled. We also recognize the future tax benefits such as net operating and capital loss
carryforwards as deferred tax assets. A valuation allowance is provided against these deferred tax assets if it is
more likely than not that some portion or all of the deferred tax assets will not be realized. Future years tax
expense may be increased or decreased by adjustments to the valuation allowance or to the estimated accrual for
income taxes.
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