Humana 2007 Annual Report Download - page 16

health plan payments from being reduced during the transition from the previous reimbursement model, based
upon average original Medicare fee-for-service spending, to the risk-adjustment payment model. The payment
adjustments for budget neutrality were first developed in 2002 and first used with the 2003 payments.
The budget neutrality adjustment began phasing out in 2007 and will be fully eliminated by 2011. This does
not mean, however, that the aggregate per-member payments to Medicare plans will be reduced. As plans enroll
less healthy beneficiaries, the need for the budget neutrality adjustment declines as the underlying risk adjusted
Medicare rates paid to plans increase to account for their enrollees’ greater healthcare needs. As a result of
changes in the CMS payment processes, including the phasing in of the risk adjustment methodology and the
phasing out of the budget neutrality adjustment described previously, our CMS payments per member may
change materially, either favorably or unfavorably.
At December 31, 2007, we provided health insurance coverage under CMS contracts to approximately
1,143,000 MA-PD members for which we received premium revenues of approximately $11.2 billion, or 45.0%
of our total premiums and ASO fees for the year ended December 31, 2007. Under our Medicare Advantage
contracts with CMS in Florida, we provided health insurance coverage to approximately 325,000 members.
These contracts accounted for premium revenues of approximately $4.2 billion, which represented approximately
37.5% of our Medicare Advantage premium revenues, or 16.8% of our total premiums and ASO fees for the year
ended December 31, 2007.
Our HMO, PFFS, and PPO products covered under Medicare Advantage contracts with CMS are renewed
generally for a one-year term each December 31 unless CMS notifies Humana of its decision not to renew by
August 1 of the year in which the contract would end, or Humana notifies CMS of its decision not to renew by
the first Monday in June of the year in which the contract would end. All material contracts between Humana and
CMS relating to our Medicare Advantage business have been renewed for 2008.
Medicare Stand-Alone Prescription Drug Products
On January 1, 2006, we began offering stand-alone prescription drug plans, or PDPs, under Medicare Part
D. Generally, Medicare-eligible individuals enroll in one of our three plan choices between November 15 and
December 31 for coverage that begins January 1. The enrollment period was extended to May 31 during 2006
because it was the first year of the program. Our stand-alone PDP offerings consist of plans offering basic
coverage with benefits mandated by Congress, as well as plans providing enhanced coverage with varying
degrees of out-of-pocket costs for premiums, deductibles and co-insurance. Our revenues from CMS and the
beneficiary are determined from our bids submitted annually to CMS. These revenues also reflect the health
status of the beneficiary and risk sharing provisions as more fully described beginning on page 56. Our stand-
alone PDP contracts with CMS are renewed generally for a one-year term each December 31 unless CMS
notifies Humana of its decision not to renew by August 1 of the year in which the contract would end, or Humana
notifies CMS of its decision not to renew by the first Monday in June of the year in which the contract would
end. All material contracts between Humana and CMS relating to our Medicare stand-alone PDP business have
been renewed for 2008.
Medicaid Product
Medicaid is a federal program that is state-operated to facilitate the delivery of health care services
primarily to low-income residents. Each electing state develops, through a state specific regulatory agency, a
Medicaid managed care initiative that must be approved by CMS. CMS requires that Medicaid managed care
plans meet federal standards and cost no more than the amount that would have been spent on a comparable
fee-for-service basis. States currently either use a formal proposal process in which they review many bidders
before selecting one or award individual contracts to qualified bidders who apply for entry to the program. In
either case, the contractual relationship with a state generally is for a one-year period. Under these contracts, we
receive a fixed monthly payment from a government agency for which we are required to provide health
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