Humana 2010 Annual Report Download - page 27

ITEM 1A. RISK FACTORS
If we do not design and price our products properly and competitively, if the premiums we charge are
insufficient to cover the cost of health care services delivered to our members, or if our estimates of benefit
expenses are inadequate, our profitability may be materially adversely affected. We estimate the costs of our
benefit expense payments, and design and price our products accordingly, using actuarial methods and
assumptions based upon, among other relevant factors, claim payment patterns, medical cost inflation, and
historical developments such as claim inventory levels and claim receipt patterns. These estimates, however
involve extensive judgment, and have considerable inherent variability because they are extremely sensitive to
changes in payment patterns and medical cost trends.
We use a substantial portion of our revenues to pay the costs of health care services delivered to our
members. These costs include claims payments, capitation payments to providers (predetermined amounts paid
to cover services), and various other costs incurred to provide health insurance coverage to our members. These
costs also include estimates of future payments to hospitals and others for medical care provided to our members.
Generally, premiums in the health care business are fixed for one-year periods. Accordingly, costs we incur in
excess of our benefit cost projections generally are not recovered in the contract year through higher premiums.
We estimate the costs of our future benefit claims and other expenses using actuarial methods and assumptions
based upon claim payment patterns, medical inflation, historical developments, including claim inventory levels
and claim receipt patterns, and other relevant factors. We also record benefits payable for future payments. We
continually review estimates of future payments relating to benefit claims costs for services incurred in the
current and prior periods and make necessary adjustments to our reserves. However, these estimates involve
extensive judgment, and have considerable inherent variability that is sensitive to payment patterns and medical
cost trends. Many factors may and often do cause actual health care costs to exceed what was estimated and used
to set our premiums. These factors may include:
• increased use of medical facilities and services, including prescription drugs;
• increased cost of such services;
• our membership mix;
• variances in actual versus estimated levels of cost associated with new products, benefits or lines of
business, product changes or benefit level changes;
• changes in the demographic characteristics of an account or market;
• changes or reductions of our utilization management functions such as preauthorization of services,
concurrent review or requirements for physician referrals;
• changes in our pharmacy volume rebates received from drug manufacturers;
• catastrophes, including acts of terrorism, public health epidemics, or severe weather (e.g. hurricanes
and earthquakes);
• the introduction of new or costly treatments, including new technologies;
• medical cost inflation; and
• government mandated benefits or other regulatory changes, including any that result from CMS
Medicare Advantage and Medicare Part D risk adjustment regulatory changes or Health Insurance
Reform Legislation.
In addition, we also estimate costs associated with 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 future policy benefit
reserves are recognized on a net level premium method based on interest rates, mortality, morbidity, withdrawal
and maintenance expense assumptions from published actuarial tables, as modified based upon actual experience.
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