Humana 2011 Annual Report Download - page 126

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Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
appropriately compare the two sets of data. On February 3, 2011, CMS issued a statement that it was closely
evaluating the comments it has received on this matter and anticipates making changes to the proposed
methodology based on input it has received, although we are unable to predict the extent of changes that they
may make.
To date, six Humana contracts have been selected by CMS for RADV audits for the 2007 contract year,
consisting of one “pilot” audit and five “targeted” audits for Humana plans. We believe that the proposed
methodology for these audits is actuarially unsound and in violation of the Social Security Act. We intend to
defend that position vigorously. However, if CMS moves forward with implementation of the proposed
methodology without changes to adequately address the data inconsistency issues described above, it would have
a material adverse effect on our revenues derived from the Medicare Advantage program and, therefore, our
results of operations, financial position, and cash flows.
At December 31, 2011, our military services business, which accounted for approximately 10% of our total
premiums and services revenue for the year ended December 31, 2011, primarily consisted of the TRICARE
South Region contract. The original 5-year South Region contract expired on March 31, 2009 and was extended
through March 31, 2012. On February 25, 2011, the Department of Defense TRICARE Management Activity, or
TMA, awarded the new TRICARE South Region contract to us, which we expect to take effect on April 1, 2012.
The new 5-year South Region contract, which expires March 31, 2017, is subject to annual renewals on April 1
of each year during its term at the government’s option.
Under the current TRICARE South Region contract, any variance from the negotiated target health care cost
is shared with the federal government. Accordingly, events and circumstances not contemplated in the negotiated
target health care cost amount may have a material adverse effect on us. These changes may include an increase
or reduction in the number of persons enrolled or eligible to enroll due to the federal government’s decision to
increase or decrease U.S. military deployments. In the event government reimbursements were to decline from
projected amounts, our failure to reduce the health care costs associated with these programs may have a material
adverse effect on our results of operations, financial position, and cash flows.
Our Medicaid business, which accounted for approximately 3% of our total premiums and services revenue
for the year ended December 31, 2011, consists of contracts in Puerto Rico and Florida, with the vast majority in
Puerto Rico. Effective October 1, 2010, as amended in May 2011, the Puerto Rico Health Insurance
Administration, or PRHIA, awarded us three contracts for the East, Southeast, and Southwest regions for a three
year term through June 30, 2013.
The loss of any of the contracts above or significant changes in these programs as a result of legislative
action, including reductions in premium payments to us, or increases in member benefits without corresponding
increases in premium payments to us, may have a material adverse effect on our results of operations, financial
position, and cash flows.
Legal Proceedings and Certain Regulatory Matters
Provider Litigation
Humana Military Healthcare Services, Inc. (“Humana Military”) was named as a defendant in Sacred Heart
Health System, Inc., et al. v. Humana Military Healthcare Services Inc., Case No. 3:07-cv-00062 MCR/EMT (the
“Sacred Heart” Complaint), a purported class action lawsuit filed on February 5, 2007 in the U.S. District Court
for the Northern District of Florida asserting contract and fraud claims against Humana Military. The Sacred
Heart Complaint alleged, among other things, that, Humana Military breached its network agreements with a
class of hospitals in six states, including the seven named plaintiffs, that contracted for reimbursement of
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