Humana 2010 Annual Report Download - page 40

In any particular market, providers could refuse to contract with us, demand to contract with us, demand
higher payments, or take other actions that could result in higher health care costs for us, less desirable products
for customers and members or difficulty meeting regulatory or accreditation requirements. In some markets,
some providers, particularly hospitals, physician specialty groups, physician/hospital organizations or multi-
specialty physician groups, may have significant market positions and negotiating power. In addition, physician
or practice management companies, which aggregate physician practices for administrative efficiency and
marketing leverage, may compete directly with us. If these providers refuse to contract with us, use their market
position to negotiate favorable contracts or place us at a competitive disadvantage, our ability to market products
or to be profitable in those areas may be adversely affected.
In some situations, we have contracts with individual or groups of primary care physicians for an actuarially
determined, fixed, per-member-per-month fee under which physicians are paid an amount to provide all required
medical services to our members. This type of contract is referred to as a “capitation” contract. The inability of
providers to properly manage costs under these capitation arrangements can result in the financial instability of
these providers and the termination of their relationship with us. In addition, payment or other disputes between a
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.
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