Humana 2007 Annual Report Download - page 61

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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 business have been renewed for 2008.
Our military 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. 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. 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.
In October 2007, we were awarded the Department of Veterans Affairs first specialty network
demonstration project, known as Project HERO (Healthcare Effectiveness through Resource Optimization), to
support healthcare delivery to veterans. The contract is comprised of one base period and four one-year option
periods subject to annual renewals at the federal government’s option, with services beginning January 1, 2008.
Our Medicaid business, which accounted for approximately 2% of our total premiums and ASO fees for the
year ended December 31, 2007, consisted of contracts in Puerto Rico and Florida, with the vast majority in
Puerto Rico. Our Medicaid contracts with the Puerto Rico Health Insurance Administration 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 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.
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 benefit expenses 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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