Humana 2008 Annual Report Download - page 63

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.
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. 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.
Our Medicaid business, which accounted for approximately 2% of our total premiums and ASO fees for the
year ended December 31, 2008, consisted of contracts in Puerto Rico and Florida, with the vast majority in
Puerto Rico. In August 2008, we renewed our Medicaid contracts with the Puerto Rico Insurance Administration
for the East and Southeast regions. These contracts expire on June 30, 2009. We also provide services under a
three-year ASO contract with the Puerto Rico Health Administration for the Metro North Region. The Puerto
Rico Health Administration did not renew the third year of the ASO contract and the contract expired
September 30, 2008. The loss of this contract did not have a material effect on our results of operations, financial
position, or cash flows.
The loss of any of the contracts above (exclusive of the three-year Puerto Rico ASO contract) or significant
changes in these programs as a result of legislative action, including reductions in premium payments to us, or
increases in member benefits without corresponding increases in premium payments to us, could have a material
adverse effect on our results of operations, financial position, and cash flows.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our
consolidated financial statements and accompanying notes, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these financial
statements and accompanying notes requires us to make estimates and assumptions that affect the amounts
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