Humana 2010 Annual Report Download - page 73

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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). The
Amendment does not include the costs of the underwritten target health care cost and underwritten health care
target fee, which will be negotiated separately. 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, any 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 Department of Defense, or 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 Government Accountability Office, or 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.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our
consolidated financial statements and accompanying notes, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these financial
statements and accompanying notes requires us to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. We continuously evaluate our
estimates and those critical accounting policies related primarily to benefit expenses and revenue recognition as
well as accounting for impairments related to our investment securities, goodwill, and long-lived assets. These
estimates are based on knowledge of current events and anticipated future events and, accordingly, actual results
ultimately may differ from those estimates. We believe the following critical accounting policies involve the
most significant judgments and estimates used in the preparation of our consolidated financial statements.
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