Humana 2005 Annual Report Download - page 31

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• claims related to the failure to disclose some business practices; and
• claims relating to customer audits and contract performance.
In some cases, substantial non-economic or punitive damages as well as treble damages under the federal
False Claims Act, Rackateer Influenced and Corrupt Organizations Act and other statutes may be sought. While
we currently have insurance coverage for some of these potential liabilities, other potential liabilities may not be
covered by insurance, insurers may dispute coverage or the amount of our insurance may not be enough to cover
the damages awarded. Additionally, the cost of business insurance coverage has increased significantly. As a
result, we have increased the amount of risk that we self-insure, particularly with respect to matters incidental to
our business. In addition, some types of damages, like punitive damages, may not be covered by insurance. In
some jurisdictions, coverage of punitive damages is prohibited. Insurance coverage for all or some forms of
liability may become unavailable or prohibitively expensive in the future.
A description of material legal actions in which we are currently involved is included under “Legal
Proceedings” in Note 14 to the condensed consolidated financial statements included in Item 8.—Financial
Statements and Supplementary Data. We cannot predict the outcome of these suits with certainty, and we are
incurring expenses in the defense of these matters. Therefore, these legal actions could have a material adverse
effect on our financial position, results of operations and cash flows.
As a government contractor, we are exposed to additional risks that could adversely affect our business or
our willingness to participate in government health care programs.
A significant portion of our revenues relates to federal and state government health care coverage programs,
including the Medicare, TRICARE, and Medicaid programs. Our Government Segment accounted for
approximately 53% of our total premiums and ASO fees for the year ended December 31, 2005 and we expect
the Government Segment to account for a greater percentage of our total premiums and ASO fees in 2006. These
programs involve various risks, including:
• at December 31, 2005, under our contracts with CMS we provided health insurance coverage to
approximately 295,400 members in Florida. These contracts accounted for approximately 20% of our
total premiums and ASO fees for the year ended December 31, 2005. The loss of these and other CMS
contracts or significant changes in the Medicare program as a result of legislative or administrative
action, including reductions in payments to us or increases in benefits to members without
corresponding increases in payments, may have a material adverse effect on our financial condition,
results of operations and cash flows;
• at December 31, 2005, our TRICARE business, which accounted for approximately 17% of our total
premiums and ASO fees during the year ended December 31, 2005, primarily consisted of the South
Region contract. The South Region contract is a five-year contract, subject to annual renewals at the
Government’s option, with the the third option period scheduled to begin April 1, 2006, that covers
approximately 2.9 million beneficiaries. The loss of our current TRICARE contract would have a
material adverse effect on our financial position, results of operations and cash flows. This contract
contains provisions to negotiate a target health care cost amount annually with the federal government.
Any variance from the target health care cost is shared with the federal government. As such, events and
circumstances not contemplated in the negotiated target health care cost amount could have a material
adverse effect on our business. These changes may include, for example, an increase or reduction in the
number of persons enrolled or eligible to enroll due to the federal government’s decision to increase or
decrease U.S. military presence around the world. In the event government reimbursements were to
decline from projected amounts, our failure to reduce the health care costs associated with these
programs could have a material adverse effect on our business;
• at December 31, 2005, under our contracts with the Puerto Rico Health Insurance Administration, we
provided health insurance coverage to approximately 403,100 Medicaid members in Puerto Rico. These
contracts accounted for approximately 3% of our total premiums and ASO fees for the year ended
21