Humana 2010 Annual Report Download - page 95

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Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
our annual bid submissions. The capitation amount we receive from CMS for assuming the government’s portion
of prescription drug costs in the catastrophic layer of coverage is recorded as premium revenue. The variance
between the capitation amount and actual drug costs in the catastrophic layer is subject to risk sharing as part of
the risk corridor settlement. The demonstration provision terminated at the end of 2010. See Note 6 for detail
regarding amounts recorded to the consolidated balance sheets related to the risk corridor settlement and
subsidies from CMS.
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. We continue to revise our
estimates with respect to the risk corridor provisions based on subsequent period pharmacy claims data.
Military services
Military services revenue primarily is derived from our TRICARE South Region contract with the
Department of Defense, or DoD. 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. Our TRICARE South Region contract
contains provisions to share the risk associated with financing the cost of health benefits with the federal
government. We earn more revenue or incur additional costs based on the variance of actual health care costs
versus a negotiated target cost. We defer the recognition of any contingent revenues for favorable variances until
the end of the contract period when the amount is determinable and the collectibility is reasonably assured. We
estimate and recognize contingent benefit expense for unfavorable variances currently in our results of
operations. We continually review the contingent benefit expense estimates of future payments to the
government for cost overruns relative to our negotiated target cost and make necessary adjustments to our
reserves.
Revenues also may include change orders attributable to our military services contracts. Change orders
represent equitable adjustments for services not originally specified in the contracts. Revenues for these
adjustments are recognized when a settlement amount becomes determinable and the collectibility is reasonably
assured.
Administrative Services Fees
Administrative services fees cover the processing of claims, offering access to our provider networks and
clinical programs, and responding to customer service inquiries from members of self-funded groups. Revenues
from providing administration services, also known as administrative services only, or ASO, are recognized in
the period services are performed and are net of estimated uncollectible amounts. Under ASO contracts, self-
funded employers retain the risk of financing substantially all of the cost of health benefits. However, many ASO
customers purchase stop loss insurance coverage from us to cover catastrophic claims or to limit aggregate
annual costs. Accordingly, we have recorded premiums and benefit expenses related to these stop loss insurance
contracts. We routinely monitor the collectibility of specific accounts, the aging of receivables, as well as
prevailing and anticipated economic conditions, and reflect any required adjustments in current operations. ASO
fees received prior to the service period are recorded as unearned revenues.
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