Humana 2005 Annual Report Download - page 98

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
price provisions; and the appropriate timing of the transaction. We have purchase obligation commitments of
$24.0 million in 2006, $11.6 million in 2007, $6.7 million in 2008, $2.4 million in 2009 and $1.7 million
thereafter. Purchase obligations exclude agreements that are cancelable without penalty.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate or knowingly seek to participate in transactions that
generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or SPEs, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As of December 31, 2005, we are not involved
in any SPE transactions.
Guarantees and Indemnifications
Our operating lease of an airplane, which expires January 1, 2010, provides for a residual value payment of
no more than $4.8 million at the end of the lease term. At the end of the term, we have the right to exercise a
purchase option for $8.9 million or the airplane can be sold to a third party. If we decide not to exercise our
purchase option, we must pay the lessor a maximum amount of $4.8 million. This amount will be reduced by the
net sales proceeds in excess of $4.2 million from the sale of the airplane to a third party.
Through indemnity agreements approved by the state regulatory authorities, certain of our regulated
subsidiaries generally are guaranteed by Humana Inc., our parent company, in the event of insolvency for (1)
member coverage for which premium payment has been made prior to insolvency; (2) benefits for members then
hospitalized until discharged; and (3) payment to providers for services rendered prior to insolvency. Our parent
also has guaranteed the obligations of our TRICARE subsidiaries.
In the ordinary course of business, we enter into contractual arrangements under which we may agree to
indemnify a third party to such arrangement from any losses incurred relating to the services they perform on
behalf of us, or for losses arising from certain events as defined within the particular contract, which may
include, for example, litigation or claims relating to past performance. Such indemnification obligations may not
be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been
immaterial.
Government Contracts
Our Medicare business, which accounted for approximately 32% of our total premiums and ASO fees for
the year ended December 31, 2005, primarily consisted of HMO, PPO and Fee-For-Service products covered
under the Medicare Advantage contracts with the federal government. The contracts are renewed generally for a
one-year term each December 31 unless CMS notifies Humana of its decision not to renew by May 1 of the
contract year, or Humana notifies CMS of its decision not to renew by the first Monday in June of the contract
year.
Our TRICARE business, which accounted for approximately 17% of our total premiums and ASO fees for
the year ended December 31, 2005, primarily consisted of the South Region contract. The 5-year South Region
contract is subject to annual renewals at the Government’s option and expires March 31, 2009. 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
88