Humana 2011 Annual Report Download - page 103

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 supplemental health and financial
protection products.
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
current operations to the extent that the sum of expected future costs, claim adjustment expenses, and
maintenance costs exceeds related future premiums under contracts without consideration of investment income.
For purposes of determining premium deficiencies, contracts are grouped in a manner consistent with our method
of acquiring, servicing, and measuring the profitability of such contracts. Losses recognized as a premium
deficiency result in a beneficial effect in subsequent periods as operating losses under these contracts are charged
to the liability previously established. Because the majority of our member contracts renew annually, we do not
anticipate recording a material premium deficiency liability, except when unanticipated adverse events or
changes in circumstances indicate otherwise.
We believe our benefits payable are adequate to cover future claims payments required. However, such
estimates are based on knowledge of current events and anticipated future events. Therefore, the actual liability
could differ materially from the amounts provided.
Future policy benefits payable
Future policy benefits payable include liabilities for long-duration insurance policies including life
insurance, annuities, health, and long-term care policies sold to individuals for which some of the premium
received in the earlier years is intended to pay anticipated benefits to be incurred in future years. These reserves
are recognized on a net level premium method based on interest, mortality, morbidity, withdrawal and
maintenance expense assumptions from published actuarial tables, modified based upon actual experience.
Changes in estimates of these reserves are recognized as an adjustment to benefit expenses in the period the
changes occur.
Book Overdraft
Under our cash management system, checks issued but not yet presented to banks frequently result in
overdraft balances for accounting purposes and are classified as a current liability in the consolidated balance
sheets. Changes in book overdrafts from period to period are reported in the consolidated statement of cash flows
as a financing activity.
Income Taxes
We recognize an asset or liability for the deferred tax consequences of temporary differences between the
tax bases of assets or liabilities and their reported amounts in the consolidated financial statements. These
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