Humana 2010 Annual Report Download - page 97

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
recognize an impairment loss based on the excess of the carrying value over the fair value of the asset. A long-
lived asset held for sale is reported at the lower of the carrying amount or fair value less costs to sell.
Depreciation expense is not recognized on assets held for sale. Losses are recognized for a long-lived asset to be
abandoned when the asset ceases to be used. In addition, we periodically review the estimated lives of all long-
lived assets for reasonableness.
Goodwill and Other Intangible Assets
Goodwill represents the unamortized excess of cost over the fair value of the net tangible and other
intangible assets acquired. We are required to test at least annually for impairment at a level of reporting referred
to as the reporting unit, and more frequently if adverse events or changes in circumstances indicate that the asset
may be impaired. A reporting unit either is our operating segments or one level below the operating segments,
referred to as a component, which comprise our reportable Commercial and Government segments. A component
is considered a reporting unit if the component constitutes a business for which discrete financial information is
available that is regularly reviewed by management. We aggregate the components of an operating segment into
one reporting unit if they have similar economic characteristics. Goodwill is assigned to the reporting unit that is
expected to benefit from a specific acquisition.
We use a two-step process to review goodwill for impairment. The first step is a screen for potential
impairment, and the second step measures the amount of impairment, if any. Impairment tests are performed, at a
minimum, in the fourth quarter of each year supported by our long-range business plan and annual planning
process. Impairment tests completed for 2010, 2009 and 2008 did not result in an impairment loss.
Other intangible assets primarily relate to acquired customer contracts/relationships and are included with
other long-term assets in the consolidated balance sheets. Other intangible assets are amortized over the useful
life, based upon the pattern of future cash flows attributable to the asset. This sometimes results in an accelerated
method of amortization for customer contracts because the asset tends to dissipate at a more rapid rate in earlier
periods. Other than customer contracts, other intangible assets generally are amortized using the straight-line
method. We review other finite-lived intangible assets for impairment under our long-lived asset policy.
Benefits Payable and Benefit Expense Recognition
Benefit expenses include claim payments, capitation payments, pharmacy costs net of rebates, allocations of
certain centralized expenses and various other costs incurred to provide health insurance coverage to members, as
well as estimates of future payments to hospitals and others for medical care and other supplemental benefits
provided prior to the balance sheet date. Capitation payments represent monthly contractual fees disbursed to
primary care physicians and other providers who are responsible for providing medical care to members.
Pharmacy costs represent payments for members’ prescription drug benefits, net of rebates from drug
manufacturers. Receivables for such pharmacy rebates are included in other current assets in the consolidated
balance sheets. Other supplemental benefits include dental, vision, and other voluntary benefits.
We estimate the costs of our benefit expense payments using actuarial methods and assumptions based upon
claim payment patterns, medical cost inflation, historical developments such as claim inventory levels and claim
receipt patterns, and other relevant factors, and record benefit reserves for future payments. We continually
review estimates of future payments relating to claims costs for services incurred in the current and prior periods
and make necessary adjustments to our reserves.
We reassess the profitability of our contracts for providing insurance coverage to our members when current
operating results or forecasts indicate probable future losses. We establish a premium deficiency liability in
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