Humana 2007 Annual Report Download - page 66

federal government and various states according to government specified reimbursement rates and various
contractual terms. Changes in revenues from CMS for our Medicare products resulting from the periodic changes
in risk adjustment scores for our membership are recognized when the amounts become determinable and the
collectibility is reasonably assured.
Medicare Part D Provisions
On January 1, 2006, we began covering prescription drug benefits in accordance with Medicare Part D
under multiple contracts with CMS. The payments we receive monthly from CMS and members, which are
determined from our annual bid, represent amounts for providing prescription drug insurance coverage. We
recognize premium revenues for providing this insurance coverage ratably over the term of our annual contract.
Our CMS payment is subject to risk sharing through the Medicare Part D risk corridor provisions. In addition, we
receive and disburse amounts for portions of prescription drug costs for which we are not at risk, as described
more fully below.
The risk corridor provisions compare costs targeted in our bids to actual prescription drug costs, limited to
actual costs that would have been incurred under the standard coverage as defined by CMS. Variances exceeding
certain thresholds may result in CMS making additional payments to us or require us to refund to CMS a portion
of the premiums we received. We estimate and recognize an adjustment to premium revenues related to these risk
corridor provisions based upon pharmacy claims experience to date as if the annual contract were to terminate at
the end of the reporting period. Accordingly, this estimate provides no consideration to future pharmacy claims
experience. We record a receivable or payable at the contract level and classify the amount as current or long-
term in the consolidated balance sheets based on the expected settlement.
The estimate of the settlement associated with risk corridor provisions requires us to consider factors that
may not be certain, including, among others, member eligibility differences with CMS. In 2007, we paid $725.5
million related to our reconciliation with CMS regarding the 2006 Medicare Part D risk corridor provisions
compared to our estimate of $738.7 million at December 31, 2006. 2006 marked the first year of providing for
the risk corridor estimate and required us to consider factors which were not certain, including certain first year
implementation issues. The net liability associated with the 2007 risk corridor estimate, which will be settled in
2008, was $102.6 million at December 31, 2007.
Reinsurance and low-income cost subsidies represent reimbursements from CMS in connection with the
Medicare Part D program for which we assume no risk. Reinsurance subsidies represent reimbursements for
CMS’s portion of prescription drug costs which exceed the member’s out-of-pocket threshold, or the catastrophic
coverage level. Low-income cost subsidies represent reimbursements from CMS for all or a portion of the
deductible, the coinsurance and co-payment amounts above the out-of-pocket threshold for low-income
beneficiaries. Monthly prospective payments from CMS for reinsurance and low-income cost subsidies are based
on assumptions submitted with our annual bid. A reconciliation and related settlement of CMS’s prospective
subsidies against actual prescription drug costs we paid is made after the end of the year. We account for these
subsidies as a deposit in our consolidated balance sheets and as a financing activity in our consolidated
statements of cash flows. We do not recognize premium revenues or benefit expense for these subsidies. Receipt
and payment activity is accumulated at the contract level and recorded in our consolidated balance sheets in other
current assets or trade accounts payable and accrued expenses depending on the contract balance at the end of the
reporting period. Gross financing receipts were $2,866.2 million and gross financing withdrawals were $3,051.2
million during 2007. CMS subsidy activity recorded to the consolidated balance sheets at December 31, 2007
was $580.4 million to other current assets and $273.0 million to trade accounts payable and accrued expenses.
In order to allow plans offering enhanced benefits the maximum flexibility in designing alternative
prescription drug coverage, CMS provided a demonstration payment option in lieu of the reinsurance subsidy for
plans offering enhanced coverage, or coverage beyond CMS’s defined standard benefits. The demonstration
payment option is an arrangement in which CMS pays a capitation amount to a plan for assuming the
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