Humana 2010 Annual Report Download - page 79

of the premiums we received. We estimate and recognize an adjustment to premium revenues related to these risk
corridor provisions based upon pharmacy claims experience to date as if the annual contract were to terminate at
the end of the reporting period. Accordingly, this estimate provides no consideration to future pharmacy claims
experience. We record a receivable or payable at the contract level and classify the amount as current or long-
term in the consolidated balance sheets based on the expected settlement.
The estimate of the settlement associated with risk corridor provisions requires us to consider factors that
may not be certain at period end, including member eligibility and risk adjustment score differences with CMS as
well as pharmacy rebates from manufacturers. These factors have an offsetting effect on changes in the risk
corridor estimate. In 2010, we paid $180.2 million related to our reconciliation with CMS regarding the 2009
Medicare Part D risk corridor provisions compared to our estimate of $144.6 million at December 31, 2009. In
2009, we received net proceeds of $59.6 million related to our reconciliation with CMS regarding the 2008
Medicare Part D risk corridor provisions compared to our estimate of $55.4 million at December 31, 2008. The
net liability associated with the 2010 risk corridor estimate, which will be settled in 2011, was $387.6 million at
December 31, 2010.
Reinsurance and low-income cost subsidies represent funding from CMS in connection with the Medicare
Part D program for which we assume no risk. Reinsurance subsidies represent funding from CMS for its portion
of prescription drug costs which exceed the member’s out-of-pocket threshold, or the catastrophic coverage level.
Low-income cost subsidies represent funding from CMS for all or a portion of the deductible, the coinsurance
and co-payment amounts above the out-of-pocket threshold for low-income beneficiaries. Monthly prospective
payments from CMS for reinsurance and low-income cost subsidies are based on assumptions submitted with our
annual bid. A reconciliation and related settlement of CMS’s prospective subsidies against actual prescription
drug costs we paid is made after the end of the year. We account for these subsidies as a deposit in our
consolidated balance sheets and as a financing activity in our consolidated statements of cash flows. We do not
recognize premium revenues or benefit expense for these subsidies. Receipt and payment activity is accumulated
at the contract level and recorded in our consolidated balance sheets in other current assets or trade accounts
payable and accrued expenses depending on the contract balance at the end of the reporting period. Gross
financing receipts were $1,757.2 million and gross financing withdrawals were $1,994.4 million during 2010.
CMS subsidy activity recorded to the consolidated balance sheets at December 31, 2010 was $16.2 million to
other current assets and $170.2 million to trade accounts payable and accrued expenses.
In order to allow plans offering enhanced benefits the maximum flexibility in designing alternative
prescription drug coverage, CMS provided a demonstration payment option in lieu of the reinsurance subsidy for
plans offering enhanced coverage, or coverage beyond CMS’s defined standard benefits. The demonstration
payment option, available to plans through 2010, was an arrangement in which CMS agreed to pay a capitation
amount to a plan for assuming the government’s portion of prescription drug costs in the catastrophic layer of
coverage. The capitation amount represented a fixed monthly amount per member to provide prescription drug
coverage in the catastrophic layer. We chose the demonstration payment option for some of our plans that offered
enhanced coverage over the last three years. This capitation amount, derived from our annual bid submissions,
was recorded as premium revenue. The variance between the capitation amount and actual drug costs in the
catastrophic layer was subject to risk sharing as part of the risk corridor settlement.
Settlement of the reinsurance and low-income cost subsidies as well as the risk corridor payment is based on
a reconciliation made approximately 9 months after the close of each calendar year. This reconciliation process
requires us to submit claims data necessary for CMS to administer the program.
Medicare Risk-Adjustment Provisions
CMS utilizes a risk-adjustment model which apportions premiums paid to Medicare Advantage plans
according to health severity. A risk-adjustment model pays more for enrollees with predictably higher costs.
Under the risk-adjustment methodology, all Medicare Advantage plans must collect and submit the necessary
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