Humana 2004 Annual Report Download - page 95

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Indemnifications and Guarantees
Our operating lease of an airplane, which expires January 1, 2010, provides for a residual value payment of
no more than $4.8 million at the end of the lease term. At the end of the term we have the right to exercise a
purchase option or the airplane can be sold to a third party. If we decide not to exercise our purchase option, we
must pay the lessor a maximum amount of $4.8 million. This amount will be reduced by the net sales proceeds in
excess of $4.2 million from the sale of the airplane to a third party.
Through indemnity agreements approved by the state regulatory authorities, certain of our regulated
subsidiaries generally are guaranteed by Humana Inc., our parent company, in the event of insolvency for (1),
member coverage for which premium payment has been made prior to insolvency; (2), benefits for members then
hospitalized until discharged; and (3), payment to providers for services rendered prior to insolvency. Our parent
also has guaranteed the obligations of our TRICARE subsidiaries.
In the ordinary course of business, we enter into contractual arrangements under which we may agree to
indemnify a third party to such arrangement from any losses incurred relating to the services they perform on
behalf of us, or for losses arising from certain events as defined within the particular contract, which may
include, for example, litigation or claims relating to past performance. Such indemnification obligations may not
be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been
immaterial.
Government Contracts
Our HMO, PPO and Fee-For-Service products covered under the Medicare Advantage contracts with the
federal government are renewed for a one-year term each December 31 unless notice of termination is received at
least 90 days prior thereto. No termination notices were received in connection with our currently existing
contracts. In December 2003, the Medicare Prescription Drug, Improvement, and Modernization Act, or MMA,
was signed into law. We believe MMA offers new opportunities in our Medicare programs, including our HMO,
PPO, and Private Fee-For-Service products. We have made additional investments in the Medicare Advantage
program to enhance our ability to participate in these expanded programs.
Our TRICARE South Region contract, which we were awarded in 2003, covers 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.
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
Managed Care Industry Purported Class Action Litigation
We have been involved in several purported class action lawsuits that are part of a wave of generally similar
actions that target the health care payer industry and particularly target managed care companies. These include a
lawsuit against us and originally nine of our competitors that purports to be brought on behalf of physicians who
have treated our members. As a result of action by the Judicial Panel on Multidistrict Litigation (“JPML”), the
case was consolidated in the United States District Court for the Southern District of Florida, and has been styled
In re Managed Care Litigation.
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