Humana 2005 Annual Report Download - page 61

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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.
Our Medicaid business, which accounted for approximately 4% of our total premiums and ASO fees for the
year ended December 31, 2005, consisted of contracts in Puerto Rico, Florida and Illinois. Our 3-year contracts
with the Puerto Rico Health Insurance Administration, which accounted for approximately 3% of our total
premium and ASO fees for the year ended December 31, 2005, were extended a fourth year and these contracts
expire on June 30, 2006. We are preparing to bid on the new contracts that will be effective July 2006 although a
request for such proposal has not yet been issued by the Puerto Rico Health Insurance Administration. At this
time we are unable to predict the ultimate impact that any government policy decisions might have on our
Medicaid contracts in Puerto Rico.
Our other current Medicaid contract, which is in Florida, is scheduled to expire on June 30, 2006. Due to
Medicaid reform in Florida, we are currently negotiating the terms and rates for the renewal contract. We expect
the current contract to be extended until August 31, 2006, and the subsequent renewal contract to be effective for
a two-year term beginning September 1, 2006. Due to continual decreases in the reimbursement from the state of
Illinois, we exited the Illinois Medicaid market effective July 31, 2005. The Illinois and Florida Medicaid
contracts accounted for approximately 1% of our total premiums and ASO fees for the year ended December 31,
2005.
Other than as described herein, 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
We are party to a variety of legal actions in the ordinary course of business, including employment matters,
breach of contract actions, tort claims, and shareholder suits involving alleged securities fraud. A description of
material legal actions in which we are currently involved is included under “Legal Proceedings” of Item 3 in Part
1. We cannot predict the outcome of these suits with certainty, and we are incurring expenses in defense of these
matters. In addition, recent court decisions and legislative activity may increase our exposure for any of these
types of claims. Therefore, these legal actions could have a material adverse effect on our financial position,
results of operations and cash flows.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our
consolidated financial statements and accompanying notes, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these financial
statements and accompanying notes requires us to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. We continuously evaluate our estimates and those
critical accounting policies related primarily to medical cost and revenue recognition as well as accounting for
impairments related to our investment securities, goodwill, and long-lived assets. These estimates are based on
knowledge of current events and anticipated future events, and accordingly, actual results ultimately may differ
from those estimates. We believe the following critical accounting policies involve the most significant
judgments and estimates used in the preparation of our consolidated financial statements.
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