Humana 2008 Annual Report Download - page 84

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SFAS 142 requires a two-step process to review goodwill for impairment. The first step is a screen for
potential impairment, and the second step measures the amount of impairment, if any. Impairment tests are
performed, at a minimum, in the fourth quarter of each year supported by our long-range business plan and annual
planning process. Impairment tests completed for 2008, 2007 and 2006 did not result in an impairment loss.
Other intangible assets primarily relate to acquired customer and provider contracts and are included with
other long-term assets in the consolidated balance sheets. Other intangible assets are amortized over the useful
life, based upon the pattern of future cash flows attributable to the asset. This sometimes results in an accelerated
method of amortization for customer contracts because the asset tends to dissipate at a more rapid rate in earlier
periods. Other than customer contracts, other intangible assets generally are amortized using the straight-line
method. We review other finite-lived intangible assets for impairment under our long-lived asset policy.
Benefits Payable and Benefit Expense Recognition
Benefit expenses include claim payments, capitation payments, pharmacy costs net of rebates, allocations of
certain centralized expenses and various other costs incurred to provide health insurance coverage to members, as
well as estimates of future payments to hospitals and others for medical care and other supplemental benefits
provided prior to the balance sheet date. Capitation payments represent monthly contractual fees disbursed to
primary care physicians and other providers who are responsible for providing medical care to members.
Pharmacy costs represent payments for members’ prescription drug benefits, net of rebates from drug
manufacturers. Receivables for such pharmacy rebates are included in other current assets in the consolidated
balance sheets. Other supplemental benefits include dental, vision, and other voluntary benefits.
We estimate the costs of our benefit expense payments using actuarial methods and assumptions based upon
claim payment patterns, medical cost inflation, historical developments such as claim inventory levels and claim
receipt patterns, and other relevant factors, and record benefit reserves for future payments. We continually
review estimates of future payments relating to claims costs for services incurred in the current and prior periods
and make necessary adjustments to our reserves.
We reassess the profitability of our contracts for providing insurance coverage to our members when current
operating results or forecasts indicate probable future losses. We establish a premium deficiency liability in
current operations to the extent that the sum of expected future costs, claim adjustment expenses, and
maintenance costs exceeds related future premiums under contract without consideration of investment income.
For purposes of premium deficiencies, contracts are grouped in a manner consistent with our method of
acquiring, servicing, and measuring the profitability of such contracts. Losses recognized as a premium
deficiency result in a beneficial effect in subsequent periods as operating losses under these contracts are charged
to the liability previously established. Because the majority of our member contracts renew annually, we do not
anticipate recording a material premium deficiency liability, except when unanticipated adverse events or
changes in circumstances indicate otherwise.
We believe our benefits payable are adequate to cover future claims payments required. However, such
estimates are based on knowledge of current events and anticipated future events. Therefore, the actual liability
could differ materially from the amounts provided.
Future Policy Benefits Payable
Future policy benefits payable include liabilities for long-duration insurance policies including life
insurance, annuities, health, and long-term care policies sold to individuals for which some of the premium
received in the earlier years is intended to pay anticipated benefits to be incurred in future years. These reserves
are recognized on a net level premium method based on interest, mortality, morbidity, withdrawal and
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