Humana 2011 Annual Report Download - page 100

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
these funds. We account for these subsidies and discounts as a deposit in our consolidated balance sheets and as a
financing activity in our consolidated statements of cash flows. We do not recognize premiums revenue or
benefit expenses for these subsidies or discounts. 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
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 premiums 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 brand name prescription drug
discounts and 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 premiums and 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.
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