Humana 2007 Annual Report Download - page 79

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
our annual bid submissions. The capitation amount we receive from CMS for assuming the government’s portion
of prescription drug costs in the catastrophic layer of coverage is recorded as premium revenue. The variance
between the capitation amount and actual drug costs in the catastrophic layer is subject to risk sharing as part of
the risk corridor settlement.
See Note 5 for detail regarding amounts recorded to the consolidated balance sheets related to the risk
corridor settlement and subsidies from CMS.
Military Services
Military services revenue primarily is derived from our TRICARE South Region contract with the
Department of Defense. We account for the TRICARE South Region contract under EITF Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables, and as such allocate the consideration to the
various components of the contract based on the relative fair value of the components. TRICARE revenues
consist generally of (1) an insurance premium for assuming underwriting risk for the cost of civilian health care
services delivered to eligible beneficiaries; (2) health care services provided to beneficiaries which are in turn
reimbursed by the federal government; and (3) administrative services fees related to claim processing, customer
service, enrollment, disease management and other services. We recognize the insurance premium as revenue
ratably over the period coverage is provided. Health care services reimbursements are recognized as revenue in
the period health services are provided. Administrative services fees are recognized as revenue in the period
services are performed. Our TRICARE South Region contract contains provisions to share the risk associated
with financing the cost of health benefits with the federal government. We earn more revenue or incur additional
costs based on the variance of actual health care costs versus a negotiated target cost. We defer the recognition of
any contingent revenues for favorable variances until the end of the contract period when the amount is
determinable and the collectibility is reasonably assured. We estimate and recognize contingent benefit expense
for unfavorable variances currently in our results of operations. We continually review the contingent benefit
expense estimates of future payments to the government for cost overruns and make necessary adjustments to our
reserves.
Revenues also may include change orders and bid price adjustments attributable to our military services
contracts. Change orders represent equitable adjustments for services not originally specified in the contracts. Bid
price adjustments, or BPAs, represent adjustments defined in our former contracts subject to negotiations with
the federal government. Revenues for these adjustments are recognized when a settlement amount becomes
determinable and the collectibility is reasonably assured.
Administrative Services Fees
Administrative services fees cover the processing of claims, offering access to our provider networks and
clinical programs, and responding to customer service inquiries from members of self-funded groups. Revenues
from providing administration services, also known as administrative services only, or ASO, are recognized in
the period services are performed. Under ASO contracts, self-funded employers retain the risk of financing
substantially all of the cost of health benefits. However, many ASO customers purchase stop loss insurance
coverage from us to cover catastrophic claims or to limit aggregate annual costs. Accordingly, we have recorded
premiums and benefit expenses related to these stop loss arrangements.
Premium and ASO fee receivables are shown net of allowances for estimated uncollectible accounts and
retroactive membership adjustments. Premiums and ASO fees received prior to the service period are recorded as
unearned revenues.
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