Humana 2010 Annual Report Download - page 80

diagnosis code information from hospital inpatient, hospital outpatient, and physician providers to CMS within
prescribed deadlines. The CMS risk-adjustment model uses this diagnosis data to calculate the risk adjusted
premium payment to Medicare Advantage plans. Rates paid to Medicare Advantage plans are established under
an actuarial bid model, including a process whereby our payments are based on a comparison of our
beneficiaries’ risk scores, derived from medical diagnoses, to those enrolled in the government’s original
Medicare program. We generally rely on providers to code their claim submissions with appropriate diagnoses,
which we send to CMS as the basis for our payment received from CMS under the actuarial risk-adjustment
model. We also rely on providers to appropriately document all medical data, including the diagnosis data
submitted with claims. We estimate risk-adjustment revenues based upon the diagnosis data submitted to CMS
and ultimately accepted by CMS. The risk-adjustment model is more fully described in Item 1.—Business
beginning on page 6.
Military services
In 2010, military services revenues represented approximately 11% of total premiums and administrative
services fees. Military services revenue primarily is derived from our TRICARE South Region contract with the
Department of Defense. The single TRICARE contract for the South Region includes multiple revenue
generating activities. We allocate the consideration to the various components of the contract based on the
relative fair value of the components. TRICARE revenues consist generally of (1) an insurance premium for
assuming underwriting risk for the cost of civilian health care services delivered to eligible beneficiaries;
(2) health care services provided to beneficiaries which are in turn reimbursed by the federal government; and
(3) administrative services fees related to claim processing, customer service, enrollment, and other services. We
recognize the insurance premium as revenue ratably over the period coverage is provided. Health care services
reimbursements are recognized as revenue in the period health services are provided. Administrative services
fees are recognized as revenue in the period services are performed.
The TRICARE South Region contract contains provisions whereby the federal government bears a
substantial portion of the risk associated with financing the cost of health benefits. Annually, we negotiate a
target health care cost amount, or target cost, with the federal government and determine an underwriting fee.
Any variance from the target cost is shared. We earn more revenue or incur additional costs based on the
variance of actual health care costs versus the negotiated target cost. We receive 20% for any cost underrun,
subject to a ceiling that limits the underwriting profit to 10% of the target cost. We pay 20% for any cost overrun,
subject to a floor that limits the underwriting loss to negative 4% of the target cost. A final settlement occurs 12
to 18 months after the end of each contract year to which it applies. We defer the recognition of any revenues for
favorable contingent underwriting fee adjustments related to cost underruns until the amount is determinable and
the collectibility is reasonably assured. We estimate and recognize unfavorable contingent underwriting fee
adjustments related to cost overruns currently in operations as an increase in benefit expenses. We continually
review these benefit expense estimates of future payments to the government for cost overruns and make
necessary adjustments to our reserves.
The military services contracts contain provisions to negotiate change orders. Change orders occur when we
perform services or incur costs under the directive of the federal government that were not originally specified in
our contract. Under federal regulations we may be entitled to an equitable adjustment to the contract price in
these situations. Change orders may be negotiated and settled at any time throughout the year. We record revenue
applicable to change orders when services are performed and these amounts are determinable and the
collectibility is reasonably assured.
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