Humana 2008 Annual Report Download - page 104

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate or knowingly seek to participate in transactions that
generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities (SPEs), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of
December 31, 2008, we are not involved in any SPE transactions.
Guarantees and Indemnifications
Through indemnity agreements approved by the state regulatory authorities, certain of our regulated
subsidiaries generally are guaranteed by Humana Inc., our parent company, in the event of insolvency for
(1) member coverage for which premium payment has been made prior to insolvency; (2) benefits for members
then hospitalized until discharged; and (3) payment to providers for services rendered prior to insolvency. Our
parent also has guaranteed the obligations of our military services subsidiaries.
In the ordinary course of business, we enter into contractual arrangements under which we may agree to
indemnify a third party to such arrangement from any losses incurred relating to the services they perform on
behalf of us, or for losses arising from certain events as defined within the particular contract, which may
include, for example, litigation or claims relating to past performance. Such indemnification obligations may not
be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been
immaterial.
Government Contracts
Our Medicare business, which accounted for approximately 60% of our total premiums and ASO fees for
the year ended December 31, 2008, primarily consisted of products covered under the Medicare Advantage and
Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed
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 2009.
CMS has announced that it will perform audits of selected Medicare Advantage plans each year to validate
the provider coding practices under the risk-adjustment model used to reimburse Medicare Advantage plans.
These audits will involve a comprehensive review of medical records, and may result in contract-level payment
adjustments to premium payments made to a health plan pursuant to its Medicare contract with CMS or other
payment reductions. The first data validation audits will focus on risk-adjustment data for 2006 used to determine
2007 payment amounts.
Several Humana contracts are included in audits being undertaken by CMS. If necessary, based on audit
results, CMS may make contract-level payment adjustments that may occur during 2009, and adjustments may
occur prior to Humana or other Medicare Advantage plans having the opportunity to appeal audit findings. We
primarily rely on providers to appropriately document risk-adjustment data in their medical records and
appropriately code their claim submissions, which we send to CMS as the basis for our risk-adjustment model
premium. We are working with CMS and our industry group to develop an orderly audit process, for which CMS
has not yet indicated the complete details. Therefore, we are unable to predict the complete audit methodology to
be used by CMS, the outcome of these audits, or whether these audits would result in a payment adjustment.
However, it is reasonably possible that a payment adjustment as a result of these audits could occur, and that any
such adjustment could have a material adverse effect on our results of operations, financial position, and cash
flows.
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