Humana 2009 Annual Report Download - page 111

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Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
option period, which runs from April 1, 2009 through March 31, 2010, was exercised by the government. The
Amendment also provides for 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 seventh and eighth option periods is at the government’s option. On
December 16, 2009, we were notified by Department of Defense TRICARE Management Activity, or TMA, that
it intends to exercise its options to extend the TRICARE South Region contract for Option Period VII and Option
Period VIII. The exercise of these option periods would effectively extend the TRICARE South Region contract
through March 31, 2011. The contract’s transition provisions require the continuation of certain activities,
primarily claims processing, during a wind-down period lasting approximately six months following the
expiration date. Claims incurred on or prior to the expiration date would continue to be processed during the
wind-down period under the terms existing prior to the expiration date.
As required under the current 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 may have a material adverse effect on us. These changes may include 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 may have a material adverse effect on our
results of operations, financial position, and cash flows.
In July 2009, we were notified by the Department of Defense that we were not awarded the third generation
TRICARE program contract for the South Region which had been subject to competing bids. We filed a protest
with the Government Accountability Office, or GAO, in connection with the award to another contractor citing
discrepancies between the award criteria and procedures prescribed in the request for proposals issued by the
DoD and those that appear to have been used by the DoD in making its contractor selection. In October 2009, we
learned that the GAO had upheld our protest, determining that the TMA evaluation of our proposal had
unreasonably failed to fully recognize and reasonably account for the likely cost savings associated with our
record of obtaining network provider discounts from our established network in the South Region. On
December 22, 2009, we were advised that TMA notified the GAO of its intent to implement corrective action
consistent with the discussion contained within the GAO’s decision with respect to our protest. At this time, we
are not able to determine what actions TMA will take in response to recommendations by the GAO, nor can we
determine whether or not the protest decision by the GAO will have any effect upon the ultimate disposition of
the contract award.
Legal Proceedings
Securities Litigation
In March and April of 2008, Humana’s directors and certain of its officers (collectively, the “Derivative
Defendants”) were named as defendants in two substantially similar shareholder derivative actions filed in the
Circuit Court for Jefferson County, Kentucky (Del Gaizo v. McCallister et al., No. 08-CI-003527, filed on
March 27, 2008; and Regiec v. McCallister et al., No. 08-CI-04236, filed on April 16, 2008). Humana was named
as a nominal defendant. On May 12, 2008, the Circuit Court entered an order that consolidated the state court
derivative actions into a single action captioned In re Humana Inc. Derivative Litigation, No. 08-CI-003527, and
stayed that consolidated action pending the outcome of a motion to dismiss a federal securities class action,
which was premised on the same allegations and asserted that Humana and certain of its officers and directors
made materially false and misleading statements regarding Humana’s anticipated earnings per share for the first
quarter of 2008 and for the fiscal year of 2008. The federal case, styled In re Humana Inc. Securities Litigation,
101