Humana 2009 Annual Report Download - page 36

primary care provider and specialists with whom the primary care provider contracts can result in a disruption in
the provision of services to our members or a reduction in the services available to our members. The financial
instability or failure of a primary care provider to pay other providers for services rendered could lead those other
providers to demand payment from us even though we have made our regular fixed payments to the primary
provider. There can be no assurance that providers with whom we contract will properly manage the costs of
services, maintain financial solvency or avoid disputes with other providers. Any of these events may have a
material adverse effect on the provision of services to our members and our results of operations, financial
position, and cash flows.
Our pharmacy business is highly competitive and subjects us to regulations in addition to those we face
with our core health benefits businesses.
Our pharmacy business, opened in 2006, competes with locally owned drugstores, retail drugstore chains,
supermarkets, discount retailers, membership clubs, and Internet companies as well as other mail-order and long-
term care pharmacies. Our pharmacy business also subjects us to extensive federal, state and local regulation.
The practice of pharmacy is generally regulated at the state level by state boards of pharmacy. Many of the states
where we deliver pharmaceuticals, including controlled substances, have laws and regulations that require
out-of-state mail-order pharmacies to register with that state’s board of pharmacy. In addition, some states have
proposed laws to regulate online pharmacies, and we may be subject to this legislation if it is passed. Federal
agencies further regulate our pharmacy operations. Pharmacies must register with the U.S. Drug Enforcement
Administration and individual state controlled substance authorities in order to dispense controlled substances. In
addition, the FDA inspects facilities in connection with procedures to effect recalls of prescription drugs. The
Federal Trade Commission also has requirements for mail-order sellers of goods. The U.S. Postal Service, or
USPS, has statutory authority to restrict the transmission of drugs and medicines through the mail to a degree that
may have an adverse effect on our mail-order operations. The USPS historically has exercised this statutory
authority only with respect to controlled substances. If the USPS restricts our ability to deliver drugs through the
mail, alternative means of delivery are available to us. However, alternative means of delivery could be
significantly more expensive. The Department of Transportation has regulatory authority to impose restrictions
on drugs inserted in the stream of commerce. These regulations generally do not apply to the USPS and its
operations. In addition, we are subject to CMS rules regarding the administration of our PDP plans and
intercompany pricing between our PDP plans and our pharmacy business.
We are also subject to risks inherent in the packaging and distribution of pharmaceuticals and other health care
products, and the application of state laws related to the operation of internet and mail-services pharmacies. The
failure to adhere to these laws and regulations may expose our pharmacy subsidiary to civil and criminal penalties.
Changes in the prescription drug industry pricing benchmarks may adversely affect our financial
performance.
Contracts in the prescription drug industry generally use certain published benchmarks to establish pricing
for prescription drugs. These benchmarks include average wholesale price, which is referred to as “AWP,”
average selling price, which is referred to as “ASP,” and wholesale acquisition cost. Recent events have raised
uncertainties as to whether payors, pharmacy providers, pharmacy benefit managers, or PBMs, and others in the
prescription drug industry will continue to utilize AWP as it has previously been calculated, or whether other
pricing benchmarks will be adopted for establishing prices within the industry. Legislation may lead to changes
in the pricing for Medicare and Medicaid programs. The DOJ is currently conducting, and the U.S. House of
Representatives Commerce Committee has conducted, an investigation into the use of AWP for federal program
payment, and whether the use of AWP has inflated drug expenditures by the Medicare and Medicaid programs.
Federal and state proposals have sought to change the basis for calculating payment of certain drugs by the
Medicare and Medicaid programs. Adoption of ASP in lieu of AWP as the measure for determining payment by
Medicare or Medicaid programs for the drugs sold in our mail-order pharmacy business may reduce the revenues
and gross margins of this business which may result in a material adverse effect on our results of operations,
financial position, and cash flows.
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