Humana 2010 Annual Report Download - page 94

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Premiums
We bill and collect premium remittances from employer groups and members in our Medicare and
individual products monthly. We receive monthly premiums from the federal government and various states
according to government specified payment rates and various contractual terms. Changes in revenues from CMS
for our Medicare products resulting from the periodic changes in risk-adjustment scores for our membership are
recognized when the amounts become determinable and the collectibility is reasonably assured.
Premium revenues are recognized as income in the period members are entitled to receive services, and are
net of estimated uncollectible amounts, retroactive membership adjustments, and beginning January 1, 2011,
adjustments to recognize rebates to policyholders under the minimum benefit ratios required under Health
Insurance Reform Legislation. Retroactive membership adjustments result from enrollment changes not yet
processed, or not yet reported by an employer group or the government. We routinely monitor the collectibility
of specific accounts, the aging of receivables, historical retroactivity trends, as well as prevailing and anticipated
economic conditions, and reflect any required adjustments in current operations. Premiums received prior to the
service period are recorded as unearned revenues.
Medicare Part D
We cover prescription drug benefits in accordance with Medicare Part D under multiple contracts with
CMS. The payments we receive monthly from CMS and members, which are determined from our annual bid,
represent amounts for providing prescription drug insurance coverage. We recognize premium revenues for
providing this insurance coverage ratably over the term of our annual contract. Our CMS payment is subject to
risk sharing through the Medicare Part D risk corridor provisions. In addition, receipts for reinsurance and
low-income cost subsidies represent payments for prescription drug costs for which we are not at risk.
The risk corridor provisions compare costs targeted in our bids to actual prescription drug costs, limited to
actual costs that would have been incurred under the standard coverage as defined by CMS. Variances exceeding
certain thresholds may result in CMS making additional payments to us or require us to refund to CMS a portion
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.
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.
For plans where we provide enhanced benefits and selected the alternative demonstration payment option in
lieu of the reinsurance subsidy, we receive a monthly per member capitation amount from CMS determined from
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