Humana 2005 Annual Report Download - page 26

Laws in each of the states (including Puerto Rico) in which we operate our HMOs, PPOs and other health
insurance-related services regulate our operations, including the scope of benefits, rate formulas, delivery
systems, utilization review procedures, quality assurance, complaint systems, enrollment requirements, claim
payments, marketing, and advertising. The HMO, PPO, and other health insurance-related products we offer are
sold under licenses issued by the applicable insurance regulators. Under state laws, our HMOs and health
insurance companies are audited by state departments of insurance for financial and contractual compliance, and
our HMOs are audited for compliance with health services standards by respective state departments of health.
Most states’ laws require such audits to be performed at least once every three years.
Our licensed subsidiaries are subject to regulation under state insurance holding company and Puerto Rico
regulations. Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other
cash transfers to Humana Inc., our parent company, and require minimum levels of equity as well as limit
investments to approved securities. The amount of dividends that may be paid to Humana Inc. by these
subsidiaries, without prior approval by state regulatory authorities, is limited based on the entity’s level of
statutory income and statutory capital and surplus. For additional information regarding our regulated
subsidiaries’ statutory capital requirements see page 22 in Item 1A.—Risk Factors.
Audits and investigations
We are subject to various governmental audits, investigations, and enforcement actions as more fully
described on page 24 in Item 1A.—Risk Factors.
Pending federal and state legislation
Diverse legislative and regulatory initiatives continue at both the federal and state levels to affect aspects of
the nation’s health care system.
Our management works proactively to ensure compliance with all governmental laws and regulations
affecting our business. We are unable to predict how existing federal or state laws and regulations may be
changed or interpreted, what additional laws or regulations affecting our businesses may be enacted or proposed,
when and which of the proposed laws will be adopted or what effect any such new laws and regulations will have
on our financial position, results of operations or cash flows.
Other
Captive Insurance Company
We bear general business risks associated with operating our Company such as professional and general
liability, employee workers’ compensation, and officer and director errors and omissions risks. Professional and
general liability risks may include, for example, medical malpractice claims and disputes with members
regarding benefit coverage. We retain certain of these risks through our wholly-owned, captive insurance
subsidiary. We reduce exposure to these risks by insuring levels of coverage for losses in excess of our retained
limits with a number of third-party insurance companies. We remain liable in the event these insurance
companies are unable to pay their portion of the losses. In an effort to minimize credit risk, we insure our risks
with a number of insurance companies having a long history of strong financial ratings. Since January 1, 2003,
we have reduced the amount of coverage purchased from third-party insurance carriers and increased the amount
of risk we retain based on the financial strength and liquidity of our captive insurance subsidiary. We provide a
detail of the significant assets and liabilities as well as a rollforward of reserve activity related to our captive
insurance subsidiary in Note 10 to the consolidated financial statements included in Item 8.—Financial
Statements and Supplementary Data.
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