Humana 2005 Annual Report Download - page 75

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Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We bill and collect premium and administrative fee remittances from employer groups and some individual
Medicare Advantage members monthly. We receive monthly premiums and administrative fees from the federal
government and various states according to government specified reimbursement rates and various contractual
terms. Changes in revenues from CMS for our Medicare products resulting from the periodic changes in risk
adjustment scores for our membership are recognized when the amounts become determinable and the
collectibility is reasonably assured.
Premium revenues are recognized as income in the period members are entitled to receive services, and are
net of estimated uncollectible amounts and retroactive membership adjustments. Retroactive membership
adjustments result from enrollment changes not yet processed, or not yet reported by an employer group or the
government. We routinely monitor the collectibility of specific accounts, the aging of receivables, historical
retroactivity trends, as well as prevailing and anticipated economic conditions, and reflect any required
adjustments in current operations.
We account for the TRICARE South Region contract under EITF Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables, and as such allocate the consideration to the various components of
the contract based on the relative fair value of the components. TRICARE revenues consist generally of (1) an
insurance premium for assuming underwriting risk for the cost of civilian health care services delivered to
eligible beneficiaries; (2) health care services provided to beneficiaries which are in turn reimbursed by the
federal government; and (3) administrative service fees related to claim processing, customer service, enrollment,
disease management and other services. We recognize the insurance premium as revenue ratably over the period
coverage is provided. Health care services reimbursements are recognized as revenue in the period health
services are provided. Administrative services fees are recognized as revenue in the period services are
performed. Our TRICARE South contract contains provisions to share the risk associated with financing the cost
of health benefits with the federal government. We earn more revenue or incur additional costs based on the
variance of actual health care costs versus a negotiated target cost. We defer the recognition of any contingent
revenues for favorable variances until the amount is determinable and the collectibility is reasonably assured. We
estimate and recognize contingent medical expense for unfavorable variances currently in our results of
operations. We continually review the contingent medical expense estimates of future payments to the
government for cost overruns and make necessary adjustments to our reserves.
Revenues also may include change orders and bid price adjustments attributable to our TRICARE contracts.
Change orders represent equitable adjustments for services not originally specified in the contracts. Bid price
adjustments, or BPAs, represent adjustments defined in our former contracts subject to negotiations with the
federal government. Revenues for these adjustments are recognized when a settlement amount becomes
determinable and the collectibility is reasonably assured.
ASO fees are recognized as income in the period services are performed. Administrative services fees cover
the processing of claims, offering access to our provider networks and clinical programs, and responding to
customer service inquiries from members of self-funded groups. Under ASO contracts, self-funded employers
retain the risk of financing substantially all of the cost of health benefits. However, most ASO customers
purchase stop loss insurance coverage from us to cover catastrophic claims or to limit aggregate annual costs.
Accordingly, we have recorded premiums and medical expenses related to these stop loss arrangements.
Premium and ASO fee receivables are shown net of allowances for estimated uncollectible accounts and
retroactive membership adjustments. Premiums and ASO fees received prior to the service period are recorded as
unearned revenues.
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