Humana 2006 Annual Report Download - page 63

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Our TRICARE business, which accounted for approximately 12% of our total premiums and ASO fees for
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. 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.
Our Medicaid business, which accounted for approximately 3% of our total premiums and ASO fees for the
year ended December 31, 2006, consisted of contracts in Puerto Rico and Florida. Our Medicaid contracts with
the Puerto Rico Health Insurance Administration accounted for approximately 2% of our total premium 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 any of the contracts above or significant changes in these programs 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.
Legal Proceedings
We are party to a variety of legal actions in the ordinary course of business, including employment matters,
breach of contract actions, tort claims, and shareholder suits involving alleged securities fraud. A description of
material legal actions in which we are currently involved is included under “Legal Proceedings” of Item 3 in Part
1. We cannot predict the outcome of these suits with certainty, and we are incurring expenses in defense of these
matters. In addition, recent court decisions and legislative activity may increase our exposure for any of these
types of claims. Therefore, these legal actions could have a material adverse effect on our financial position,
results of operations and cash flows.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our
consolidated financial statements and accompanying notes, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these financial
statements and accompanying notes requires us to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. We continuously evaluate our
estimates and those critical accounting policies related primarily to medical cost and revenue recognition as well
as accounting for impairments related to our investment securities, goodwill, and long-lived assets. These
estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results
ultimately may differ from those estimates. We believe the following critical accounting policies involve the
most significant judgments and estimates used in the preparation of our consolidated financial statements.
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