Humana 2008 Annual Report Download - page 31

See “Legal Proceedings” in Note 16 to the consolidated financial statements included in Item 8.—Financial
Statements and Supplementary Data. We cannot predict the outcome of these suits with certainty.
As a government contractor, we are exposed to additional risks that could adversely affect our business or
our willingness to participate in government health care programs.
A significant portion of our revenues relates to federal and state government health care coverage programs,
including the Medicare, Military, and Medicaid programs. Our Government segment accounted for
approximately 74% of our total premiums and ASO fees for the year ended December 31, 2008. These programs
involve various risks, as described further below.
• At December 31, 2008, under our contracts with CMS we provided health insurance coverage to
approximately 492,700 Medicare members in Florida. These contracts accounted for approximately
16% of our total premiums and ASO fees for the year ended December 31, 2008. The loss of these and
other CMS contracts or significant changes in the Medicare program as a result of legislative or
regulatory 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
results of operations, financial position, and cash flows.
• At December 31, 2008, our military services business, which accounted for approximately 12% of our
total premiums and ASO fees for the year ended December 31, 2008, primarily consisted of the
TRICARE South Region contract which covers approximately 3.0 million beneficiaries. The 5-year
South Region contract, which expires March 31, 2009, was subject to annual renewals on April 1 of
each year at the government’s option. On January 16, 2009, we entered into an Amendment of
Solicitation/Modification of Contract to the TRICARE South Region contract. The Amendment added
one additional one-year option period, the sixth option period, which runs from April 1, 2009 through
March 31, 2010, and two additional six-month option periods: the seventh option period runs from
April 1, 2010 through September 30, 2010 and the eighth option period runs from October 1, 2010
through March 31, 2011. Exercise of each of the sixth, seventh, and eighth option periods is at the
government’s option. Under these extensions, government requirements, terms and conditions will
remain the same as the current contract. On January 22, 2009, we were notified by the government of its
intent to exercise its option to extend the TRICARE contract for the sixth option period. As required
under the contract, the target underwritten health care cost and underwriting fee amounts for each option
period are 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 us. 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 results of operations,
financial position, and cash flows.
On March 24, 2008, the Department of Defense issued its formal request for proposal for new contracts
for TRICARE medical benefits nationwide. We submitted our bid in June 2008 and, after discussions
with the Department of Defense, submitted our final proposal revisions in January 2009. If we are not
awarded a new TRICARE contract, it could have a material adverse effect on our results of operations,
financial position, and cash flows.
• At December 31, 2008, under our contracts with the Puerto Rico Insurance Administration and Puerto
Rico Health Administration, we provided health insurance coverage to approximately 341,700 Medicaid
members in Puerto Rico. These contracts accounted for approximately 2% of our total premiums and
ASO fees for the year ended December 31, 2008.
In August 2008, we renewed our contracts with the Puerto Rico Insurance Administration for the East
and Southeast regions. These contracts expire on June 30, 2009. The loss of these contracts or
21