Humana 2005 Annual Report Download - page 64

estimates for prior year medical claims payable on our results from operations that are attributable to our
Medicare and Medicaid lines of business may also be significantly reduced, whether positive or negative.
The following table provides a reconciliation of changes in medical and other expenses payable for the years
ended December 31, 2005, 2004 and 2003:
2005 2004 2003
(in thousands)
Balances at January 1 .................................... $ 1,422,010 $ 1,272,156 $ 1,142,131
Acquisitions ............................................ 37,375 71,063 —
Incurred related to:
Current year ........................................ 11,765,662 10,763,105 9,955,491
Prior years ......................................... (114,192) (93,458) (76,070)
Total incurred .................................. 11,651,470 10,669,647 9,879,421
Paid related to:
Current year ........................................ (9,979,449) (9,504,331) (8,710,393)
Prior years ......................................... (1,221,724) (1,086,525) (1,039,003)
Total paid ...................................... (11,201,173) (10,590,856) (9,749,396)
Balances at December 31 ................................. $ 1,909,682 $ 1,422,010 $ 1,272,156
Amounts incurred related to prior years vary from previously estimated liabilities as the claims ultimately
are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately
settled for amounts less than originally estimated (favorable development).
As summarized in the previous table, claim reserve balances at December 31, 2004 ultimately settled during
2005 for $114.2 million less than the amounts originally estimated, representing 1.1% of medical claim expenses
recorded in 2004. During 2004, claim reserve balances at December 31, 2003 ultimately settled for $93.5 million
less than the amounts originally estimated, representing 0.9% of medical claim expenses recorded in 2003. This
$20.7 million change in the amounts incurred related to prior years for 2005 as compared to 2004 resulted
primarily from favorable development in our TRICARE line of business as a result of less than expected
utilization in the latter half of 2004.
During 2003, claim reserve balances at December 31, 2002 ultimately settled during 2003 for $76.1 million
less than the amounts originally estimated, representing 0.8% of medical claim expenses recorded in 2002. The
$17.4 million change in the amounts incurred related to prior years for 2004 as compared to 2003 resulted
primarily from favorable development in our Medicare line of business as a result of less than expected
utilization in the latter half of 2003.
Revenue Recognition
We generally establish one-year contracts with commercial employer groups, subject to cancellation by the
employer group on 30-day written notice. Our commercial contracts establish rates on a per member basis for
each month of coverage.
Our contracts with federal or state governments are generally multi-year contracts subject to annual renewal
provisions with the exception of our Medicare Advantage and PDP contracts with the federal government which
renew annually. Except for TRICARE contracts discussed in the following section, our government contracts
also establish monthly rates per member but may have additional amounts due to us based on items such as age,
working status, or specific health issues of the member. For example, CMS has implemented a risk adjustment
model which apportions premiums paid to all health plans according to health severity.
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