Humana 2007 Annual Report Download - page 30

17% of our total premiums and ASO fees for the year ended December 31, 2007. 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, 2007, our military services business, which accounted for approximately 12% of our
total premiums and ASO fees for the year ended December 31, 2007, primarily consisted of the
TRICARE South Region contract. The 5-year South Region contract, which expires March 31, 2009, is
subject to annual renewals on April 1 of each year at the government’s option. Effective April 1, 2007,
the South Region contract was extended into the fourth option period, which runs from April 1, 2007 to
March 31, 2008 and covers 2.9 million beneficiaries. We have received a notice from the government of
its intent to renew the fifth option period which runs from April 1, 2008 to March 31, 2009. The
Department of Defense has the option to extend the current contract for up to six months under existing
terms. Congressional authority has also been granted to extend the contract in one year increments for a
maximum of two additional years. In the second quarter of 2007, a draft solicitation related to the new
TRICARE contracts, currently scheduled to begin April 1, 2009, was issued for industry comment.
Currently, we are anticipating a formal request for proposal, or RFP, for the TRICARE contracts. If we
were not awarded a new TRICARE contract, it would have a material adverse effect on our business,
results of operation and financial condition. As required under the contract, the target underwritten
health care cost and underwriting fee amounts for the fourth 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, 2007, under our contracts with the Puerto Rico Health Insurance Administration, we
provided health insurance coverage to approximately 525,400 Medicaid members in Puerto Rico. These
contracts accounted for approximately 2% of our total premiums and ASO fees for the year ended
December 31, 2007. These contracts for the East and Southeast regions of Puerto Rico are effective
from November 1, 2006 through June 30, 2008. In 2007, we also entered into an ASO contract with the
Puerto Rico Health Administration for the Metro North Region which is effective from November 1,
2006 through October 31, 2009. 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
higher costs. Under the risk adjustment methodology, all Medicare health plans must collect, capture
and submit the necessary diagnosis code information from inpatient and ambulatory treatment settings
to CMS within prescribed deadlines. The CMS risk adjustment model uses this diagnosis data to
calculate the risk adjusted premium payment to Medicare health plans. CMS has transitioned to the risk
adjustment model for Medicare Advantage plans. In 2006, the portion of risk adjusted payment was
increased to 75% from 50% in 2005. The phase-in of risk adjusted payment was increased to 100% in
2007;
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