Humana 2006 Annual Report Download - page 23

focal point for health care services in many of our HMO networks is the primary care physician who, under
contract with us, provides services to our members, and may control utilization of appropriate services, by
directing or approving hospitalization and referrals to specialists and other providers. Some physicians may have
arrangements under which they can earn bonuses when certain target goals relating to the provision of quality
patient care are met. Our hospitalist programs use specially-trained physicians to effectively manage the entire
range of an HMO member’s medical care during a hospital admission and to effectively coordinate the member’s
discharge and post-discharge care. We have available a variety of disease management programs related to
specific medical conditions such as congestive heart failure, coronary artery disease, prenatal and premature
infant care, asthma related illness, end stage renal disease, diabetes, cancer, and certain other conditions.
We typically contract with hospitals on either (1) a per diem rate, which is an all-inclusive rate per day, (2) a
case rate or diagnosis-related groups (DRG), which is an all-inclusive rate per admission, or (3) a discounted
charge for inpatient hospital services. Outpatient hospital services generally are contracted at a flat rate by type of
service, ambulatory payment classifications, or APCs, or at a discounted charge. APCs are similar to flat rates
except multiple services and procedures may be aggregated into one fixed payment. These contracts are often
multi-year agreements, with rates that are adjusted for inflation annually based on the consumer price index or
other nationally recognized inflation indexes. Outpatient surgery centers and other ancillary providers typically
are contracted at flat rates per service provided or are reimbursed based upon a nationally recognized fee
schedule such as the Medicare allowable fee schedule.
Our contracts with physicians typically are renewed automatically each year, unless either party gives
written notice, generally ranging from 90 to 120 days, to the other party of their intent to terminate the
arrangement. Most of the physicians in our PPO networks and some of our physicians in our HMO networks are
reimbursed based upon a fixed fee schedule, which typically provides for reimbursement based upon a
percentage of the standard Medicare allowable fee schedule.
Capitation
For 2.4% of our December 31, 2006 medical membership, we contract with hospitals and physicians to
accept financial risk for a defined set of HMO membership. In transferring this risk, we prepay these providers a
monthly fixed-fee per member, known as a capitation (per capita) payment, to coordinate substantially all of the
medical care for their capitated HMO membership, including some health benefit administrative functions and
claims processing. For these capitated HMO arrangements, we generally agree to reimbursement rates that target
a medical expense ratio, or MER, ranging from 82% to 89%. MER measures underwriting profitability and is
computed by taking total medical expenses as a percentage of premium revenues. Providers participating in
hospital-based capitated HMO arrangements generally receive a monthly payment for all of the services within
their system for their HMO membership. Providers participating in physician-based capitated HMO
arrangements generally have subcontracted directly with hospitals and specialist physicians, and are responsible
for reimbursing such hospitals and physicians for services rendered to their HMO membership.
For another 4.8% of our December 31, 2006 medical membership, we contract with physicians under risk-
sharing arrangements whereby physicians have assumed some level of risk for all or a portion of the medical
costs of their HMO membership. Although these arrangements do include capitation payments for services
rendered, we process substantially all of the claims under these arrangements.
Physicians under capitation arrangements typically have stop loss coverage so that a physician’s financial
risk for any single member is limited to a maximum amount on an annual basis. We monitor the financial
performance and solvency of our capitated providers. However, we remain financially responsible for health care
services to our members in the event our providers fail to provide such services.
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