Humana 2007 Annual Report Download - page 65

Benefit expenses associated with the TRICARE contract and provisions associated with future policy benefits
excluded from the previous table were as follows for the years ended December 31, 2007, 2006 and 2005:
2007 2006 2005
(in thousands)
TRICARE ...................................... $2,481,814 $2,208,033 $2,060,528
Future policy benefits ............................. 16,392 17,314 28,375
Total ...................................... $2,498,206 $2,225,347 $2,088,903
Future policy benefits payable of $980.7 million and $320.6 million at December 31, 2007 and 2006,
respectively, represent liabilities for long-duration insurance policies including life insurance, annuities and
health policies sold to individuals for which some of the premium received in the earlier years is intended to pay
anticipated benefits to be incurred in future years. These reserves are recognized on a net level premium method
based on interest, mortality, morbidity, withdrawal and maintenance expense assumptions from published
actuarial tables, modified based upon actual experience. Changes in estimates of these reserves are recognized as
an adjustment to benefit expenses in the period the changes occur. Future policy benefits payable of $239.7
million at December 31, 2007 and $242.7 million at December 31, 2006 are subject to 100% coinsurance
agreements as more fully described in Note 16 to the consolidated financial statements included in
Item 8.—Financial Statements and Supplementary Data, and as such are offset by a related reinsurance
recoverable included in other long-term assets. Long-duration insurance policies associated with the KMG
acquisition increased the balance in future policy benefits payable at December 31, 2007 compared to
December 31, 2006.
As previously discussed, our reserving practice is to consistently recognize the actuarial best estimate of our
ultimate liability for claims. Actuarial standards require the use of assumptions based on moderately adverse
experience, which generally results in favorable reserve development, or reserves that are considered redundant.
An increase in the absolute dollar amount of redundancy over the last three years primarily has resulted from the
growth in our Medicare business, coupled with the application of consistent reserving practices. When we
recognize a release of the redundancy, we disclose the amount that is not in the ordinary course of business, if
material. We believe we have consistently applied our methodology in determining our best estimate for benefits
payable.
Revenue Recognition
We generally establish one-year commercial membership contracts with employer groups, subject to
cancellation by the employer group on 30-day written notice. Our Medicare contracts with CMS renew annually.
Our military services contracts with the federal government and our contracts with various state Medicaid
programs generally are multi-year contracts subject to annual renewal provisions.
Our commercial contracts establish rates on a per member basis for each month of coverage. Our Medicare
and Medicaid contracts also establish monthly rates per member. However, our Medicare contracts also have
additional provisions as outlined in the following separate section.
Premium revenues and ASO fees are estimated by multiplying the membership covered under the various
contracts by the contractual rates. In addition, we adjust revenues for estimated changes in an employer’s
enrollment and individuals that ultimately may fail to pay. Enrollment changes not yet reported by an employer
group, an individual, or the government, also known as retroactive membership adjustments, are estimated based
on available data and historical trends. We routinely monitor the collectibility of specific accounts, the aging of
receivables, historical retroactivity trends, as well as prevailing and anticipated economic conditions, and reflect
any required adjustments in the current period’s revenue.
We bill and collect premium and administrative fee remittances from employer groups and members in our
Medicare and individual products monthly. We receive monthly premiums and administrative fees from the
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