Humana 2010 Annual Report Download - page 32

member benefits without corresponding increases in premium payments to us may have a material
adverse effect on our results of operations, financial position, and cash flows.
• At December 31, 2010, our military services business, which accounted for approximately 11% of our
total premiums and ASO fees for the year ended December 31, 2010, primarily consisted of the
TRICARE South Region contract which covers approximately 3.0 million beneficiaries. The original
5-year South Region contract expired on March 31, 2009 and was extended through March 31, 2011.
On October 5, 2010, we were notified that the Department of Defense TRICARE Management
Activity, or TMA, intended to negotiate with us for an extension of our administration of the
TRICARE South Region contract, and on January 6, 2011, an Amendment of Solicitation/Modification
of Contract to the TRICARE South Region contract, in the form of an undefinitized contract action,
became effective. The Amendment adds one additional one-year option period, Option Period IX
(which runs from April 1, 2011 through March 31, 2012). On January 21, 2011, the TMA notified us of
their intent to exercise Option Period IX.
As required under the current contract, the target underwritten health care cost and underwriting fee
amounts for Option Period IX will be negotiated separately. 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 DoD 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 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. On October 22, 2010, TMA issued its latest amendment to the request for
proposal requesting from offerors final proposal revisions to address, among other things, health care
cost savings resulting from provider network discounts in the South Region. We submitted our final
proposal revisions on November 9, 2010. At this time, we are not able to determine whether or not the
protest decision by the GAO will have any effect upon the ultimate disposition of the contract award.
For the year ended December 31, 2010, premiums and ASO fees associated with the TRICARE South
Region contract were $3.4 billion, or 10.3% of our total premiums and ASO fees. We are continuing to
evaluate issues associated with our military services businesses such as potential impairment of certain
assets primarily consisting of goodwill, which had a carrying value of $49.8 million at December 31,
2010, potential exit costs, possible asset sales, and a strategic assessment of ancillary businesses.
Goodwill was not impaired at December 31, 2010. If our current contract is extended through
March 31, 2012 and we are not ultimately awarded the new third generation TRICARE program
contract for the South Region, we expect that as the March 31, 2012 contract end date nears, future
cash flows will not be sufficient to warrant recoverability of all or a portion of the military services
goodwill. In this event, we expect a goodwill impairment would occur during the second half of 2011.
• At December 31, 2010, under our contracts with the Puerto Rico Health Insurance Administration, or
PRHIA, we provided health insurance coverage to approximately 518,800 Medicaid members in Puerto
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