Humana 2006 Annual Report Download - page 32

As a government contractor, we are exposed to additional risks that could adversely affect our business or
our willingness to participate in government health care programs.
A significant portion of our revenues relates to federal and state government health care coverage programs,
including the Medicare, TRICARE, and Medicaid programs. Our Government segment accounted for
approximately 70% of our total premiums and ASO fees for the year ended December 31, 2006 and we expect
the Government segment to account for a greater percentage of our total premiums and ASO fees in 2007. These
programs involve various risks, including:
• at December 31, 2006, under our contracts with CMS we provided health insurance coverage to
approximately 518,900 Medicare members in Florida. These contracts accounted for approximately
17% of our total premiums and ASO fees for the year ended December 31, 2006. The loss of these and
other CMS contracts or significant changes in the Medicare program 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;
• at December 31, 2006, our TRICARE business, which accounted for approximately 12% of our total
premiums and ASO fees during the year ended December 31, 2006, primarily consisted of the South
Region contract. The 5-year South Region contract is subject to annual renewals on April 1 of each year
at the government’s option. Effective April 1, 2006, the South Region contract was extended into the
third option period, which runs from April 1, 2006 to March 31, 2007 and covers 2.9 million
beneficiaries. We have received a notice from the government of its intent to renew the fourth option
period. The 5-year South Region contract expires March 31, 2009. As required under the contract, the
target underwritten health care cost and underwriting fee amounts for the third option period were
negotiated. Any variance from the target health care cost is shared with the federal government.
Accordingly, 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 persons enrolled or eligible to enroll due to the federal
government’s decision to increase or decrease U.S. military deployments. 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;
• at December 31, 2006, under our contracts with the Puerto Rico Health Insurance Administration, we
provided health insurance coverage to approximately 523,100 Medicaid members in Puerto Rico. These
contracts accounted for approximately 2% of our total premiums and ASO fees for the year ended
December 31, 2006. We currently are operating under the terms of our contracts that expired
October 31, 2006. Due to several ongoing and unresolved issues with the program, the government of
Puerto Rico has decided to delay the bid process for new contracts. We currently are working with the
Puerto Rico Health Insurance Administration regarding terms and rates which is expected to result in an
extension of the existing contracts through September 30, 2007. There is no assurance that the Puerto
Rico Health Insurance Administration will request such an extension, and we are unable to predict the
ultimate impact that any government policy or fiscal decisions might have on the continuation of our
Medicaid contracts in Puerto Rico. The loss of these contracts or significant changes in the Puerto Rico
Medicaid program 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;
• the possibility of temporary or permanent suspension from participating in government health care
programs, including Medicare and Medicaid, if we are convicted of fraud or other criminal conduct in
the performance of a health care program or if there is an adverse decision against us under the federal
False Claims Act;
• CMS has implemented a risk adjustment model which apportions premiums paid to Medicare health
plans according to health severity. A risk adjustment model pays more for enrollees with predictably
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