Humana 2005 Annual Report Download - page 55

The detail of total net receivables was as follows at December 31, 2005, 2004 and 2003:
Change
2005 2004 2003 2005 2004
(in thousands)
TRICARE:
Base receivable ....................... $509,444 $396,355 $266,656 $113,089 $129,699
Bid price adjustments (BPAs) ........... — 25,601 92,875 (25,601) (67,274)
Change orders ........................ 32,285 6,021 7,073 26,264 (1,052)
541,729 427,977 366,604 113,752 61,373
Less: long-term portion of BPAs ......... — — (38,794) — 38,794
TRICARE subtotal ................ 541,729 427,977 327,810 113,752 100,167
Medicare ................................ 63,931 213 — 63,718 213
Commercial and other ..................... 165,549 185,931 178,577 (20,382) 7,354
Allowance for doubtful accounts ............. (32,557) (34,506) (40,400) 1,949 5,894
Total net receivables ............... $738,652 $579,615 $465,987 159,037 113,628
Reconciliation to cash flow statement:
Change in long-term receivables ........... — (52,583)
Provision for doubtful accounts ............ 4,566 6,433
Receivables from acquisition .............. (2,289) (16,420)
Change in receivables in cash flow statement . . . $161,314 $ 51,058
TRICARE base receivables began increasing in 2004 due to the transition to the reimbursement model
under the South Region contract beginning on August 1, 2004. Under our former TRICARE contracts with a
fixed price, we bore the cost of changes in the underlying pattern of health care for which the government was at
risk until subsequently reimbursed in a later period through a bid price adjustment, or BPA process. The fixed
price and BPA process added variability to our revenues, related receivables and operating cash flows because
the timing of the settlement was uncertain. Under the new TRICARE South region contract, the fixed price and
BPA process was eliminated and replaced with a new reimbursement model. We are reimbursed by the federal
government generally within 15 calendar days of when we pay the claim under the new reimbursement model.
The delivery of health care services under the TRICARE South region contract results in (1) a lag between
the time the service is provided and when the claim is paid by us, generally three months, and (2) a lag between
the time the claim is paid by us and ultimately reimbursed by the federal government, generally 15 calendar days.
Thus, the claims reimbursement component of TRICARE base receivables is generally collected over a three to
four month period. The transition to the South region contract had the effect of increasing the TRICARE base
receivable and, by a like amount, increasing TRICARE claims payable.
In addition to the effect of transitioning to the new South region contract reimbursement model, TRICARE
base receivables (and related claims payable) increased in 2005 from higher claims inventories at our third party
claims processing vendor. The $26.3 million increase in TRICARE change order receivables resulted from
negotiating an equitable adjustment to the contract price in late 2005 for services not originally specified in the
contract. We expect to collect the majority of these receivables during the first half of 2006.
The $63.7 million increase in Medicare Advantage receivables as of December 31, 2005 as compared to
December 31, 2004 primarily resulted from recording revenues associated with CMS’s risk adjustment model.
CMS has implemented a risk adjustment model which apportions premiums paid to all health plans, including
Humana, according to health severity. This model pays more for enrollees with predictably higher costs. Under
this risk adjustment methodology, diagnosis data from inpatient and ambulatory treatment settings are used to
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