Humana 2009 Annual Report Download - page 86

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Administrative services fees are recognized as revenue in the period services are performed. Our TRICARE
South Region contract contains provisions to share the risk associated with financing the cost of health benefits
with the federal government. We earn more revenue or incur additional costs based on the variance of actual
health care costs versus a negotiated target cost. We defer the recognition of any contingent revenues for
favorable variances until the end of the contract period when the amount is determinable and the collectibility is
reasonably assured. We estimate and recognize contingent benefit expense for unfavorable variances currently in
our results of operations. We continually review the contingent benefit expense estimates of future payments to
the government for cost overruns relative to our negotiated target cost and make necessary adjustments to our
reserves.
Revenues also may include change orders attributable to our military services contracts. Change orders
represent equitable adjustments for services not originally specified in the contracts. Revenues for these
adjustments are recognized when a settlement amount becomes determinable and the collectibility is reasonably
assured.
Administrative Services Fees
Administrative services fees cover the processing of claims, offering access to our provider networks and
clinical programs, and responding to customer service inquiries from members of self-funded groups. Revenues
from providing administration services, also known as administrative services only, or ASO, are recognized in
the period services are performed. Under ASO contracts, self-funded employers retain the risk of financing
substantially all of the cost of health benefits. However, many ASO customers purchase stop loss insurance
coverage from us to cover catastrophic claims or to limit aggregate annual costs. Accordingly, we have recorded
premiums and benefit expenses related to these stop loss arrangements.
Premium and ASO fee receivables are shown net of allowances for estimated uncollectible accounts and
retroactive membership adjustments. Premiums and ASO fees received prior to the service period are recorded as
unearned revenues.
Other Revenue
Other revenues primarily relate to RightSourceRxSM, our mail-order pharmacy. These revenues are
recognized in connection with the shipment of the prescriptions.
Policy Acquisition Costs
Policy acquisition costs are those costs that vary with and primarily are related to the acquisition of new and
renewal business. Such costs include commissions, costs of policy issuance and underwriting, and other costs we
incur to acquire new business or renew existing business. We expense policy acquisition costs related to our
employer-group prepaid health services policies as incurred. These short-duration employer-group prepaid health
services policies typically have a one-year term and may be cancelled upon 30 days notice by the employer
group.
Life insurance, annuities, health and other supplemental policies sold to individuals are accounted for as
long-duration insurance products because they are expected to remain in force for an extended period beyond one
year due to contractual and regulatory requirements.As a result, we defer policy acquisition costs and amortize
them over the estimated life of the policies in proportion to premiums earned. Deferred acquisition costs are
reviewed annually to determine if they are recoverable from future income.
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