Humana 2007 Annual Report Download - page 15

Medicare is a federal program that provides persons age 65 and over and some disabled persons under the
age of 65 certain hospital and medical insurance benefits. Hospitalization benefits are provided under Part A,
without the payment of any premium, for up to 90 days per incident of illness plus a lifetime reserve aggregating
60 days. Eligible beneficiaries are required to pay an annually adjusted premium to the federal government to be
eligible for physician care and other services under Part B. Beneficiaries eligible for Part A and Part B coverage
under traditional Medicare are still required to pay out-of-pocket deductibles and coinsurance. Prescription drug
benefits are provided under Part D. CMS, an agency of the United States Department of Health and Human
Services, administers the Medicare program.
Medicare Advantage Products
We contract with CMS under the Medicare Advantage program to provide a comprehensive array of health
insurance benefits including wellness programs to Medicare eligible persons under HMO, PPO, and PFFS plans
in exchange for contractual payments received from CMS, usually a fixed payment per member per month. We
refer to beneficiaries enrolled in these plans collectively as Medicare Advantage, or MA-PD, members. With
each of these products, the beneficiary receives benefits in excess of traditional Medicare, typically including
reduced cost sharing, enhanced prescription drug benefits, care coordination, data mining techniques to help
identify member needs, complex case management, tools to guide members in their health care decisions, disease
management programs, wellness and prevention programs, and a reduced monthly Part B premium. Since 2006,
Medicare beneficiaries have had more health plan options, including a prescription drug benefit option and
greater access to a PPO offering with the roll-out of Regional PPO plans. Prior to 2006, PPO plans were offered
on a local basis only. Most Medicare Advantage plans must offer the prescription drug benefit under Part D as
part of the basic plan, subject to cost sharing and other limitations. Accordingly, all of the provisions of the
Medicare Part D program described in connection with our stand-alone prescription drug plans in the following
section also are applicable to our Medicare Advantage plans. Medicare Advantage plans may charge
beneficiaries monthly premiums and other copayments for Medicare-covered services or for certain extra
benefits.
Our Medicare HMO and PPO plans, which cover Medicare-eligible individuals residing in certain counties,
may eliminate or reduce coinsurance or the level of deductibles on many other medical services while seeking
care from participating in-network providers or in emergency situations. Except in emergency situations, HMO
plans provide no out-of-network benefits. PPO plans carry an out-of network benefit that is subject to higher
member cost-sharing. In many cases, these beneficiaries also may be required to pay a monthly premium to the
HMO or PPO plan in addition to the monthly Part B premium they are required to pay the Medicare program.
Our Medicare PFFS plans have no preferred network. Individuals in these plans pay us a monthly premium
to receive typical Medicare Advantage benefits along with the freedom to choose any health care provider that
accepts individuals at reimbursement rates equivalent to traditional Medicare payment rates.
CMS uses monthly rates per person for each county to determine the fixed monthly payments per member to
pay to health benefit plans. These rates are adjusted under CMS’s risk adjustment model which uses health status
indicators, or risk scores, to improve the accuracy of payment. The risk adjustment model, which CMS
implemented pursuant to the Balanced Budget Act of 1997 (BBA) and the Benefits and Improvement Protection
Act of 2000 (BIPA), uses principal hospital inpatient diagnoses as well as diagnosis data from ambulatory
treatment settings (hospital outpatient department and physician visits). CMS transitioned to this risk-based
reimbursement model while the old reimbursement model based on demographic data including gender, age, and
disability status was phased out. In 2006, the portion of risk adjusted payment was increased to 75% from 50% in
2005. The phase-in of risk adjusted payment increased to 100% in 2007. Under the risk adjustment methodology,
all health benefit organizations must capture, collect, and submit the necessary diagnosis code information to
CMS within prescribed deadlines.
Commensurate with phase-in of the risk-adjustment methodology, payments to Medicare Advantage plans
were increased by a “budget neutrality” factor. The budget neutrality factor was implemented to prevent overall
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