Humana 2011 Annual Report Download - page 32

As a government contractor, we are exposed to risks that may materially adversely affect our business or
our willingness or ability to participate in government health care programs.
A significant portion of our revenues relates to federal and state government health care coverage programs,
including the Medicare, Military, and Medicaid programs. These programs accounted for approximately 78% of
our total premiums and services revenue for the year ended December 31, 2011. These programs involve various
risks, as described further below.
• At December 31, 2011, under our contracts with CMS we provided health insurance coverage to
approximately 381,300 Medicare Advantage members in Florida. These contracts accounted for
approximately 16% of our total premiums and services revenues for the year ended December 31,
2011. The loss of these and other CMS contracts or significant changes in the Medicare program as a
result of legislative or regulatory 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.
• At December 31, 2011, our military services business primarily consisted of the TRICARE South
Region contract which covers approximately 3.0 million beneficiaries. For the year ended
December 31, 2011, premiums and services revenue associated with the TRICARE South Region
contract accounted for approximately 9.8% of our total premiums and services revenue. 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. We expect to account for revenues
under the new TRICARE South contract net of estimated health care costs similar to an administrative
services fee only agreement. As such, we expect a decline in TRICARE revenues for 2012 and an
increase in our operating cost ratio as compared to 2011. 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. The loss of the TRICARE South Region contract or, 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.
• At December 31, 2011, under our contracts with the Puerto Rico Health Insurance Administration, or
PRHIA, we provided health insurance coverage to approximately 529,300 Medicaid members in Puerto
Rico. These contracts accounted for approximately 2% of our total premiums and services revenue for
the year ended December 31, 2011.
Effective October 1, 2010, the PRHIA awarded us three contracts for the East, Southeast, and
Southwest regions for a one year term with two options to extend the contracts for an additional term of
up to one year, exercisable at the sole discretion of the PRHIA. The loss of these contracts or
significant changes in the Puerto Rico Medicaid program 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.
• There is a possibility of temporary or permanent suspension from participating in government health
care programs, including Medicare and Medicaid, if we are convicted of fraud or other criminal
conduct in the performance of a health care program or if there is an adverse decision against us under
the federal False Claims Act. As a government contractor, we may be subject to qui tam litigation
brought by individuals who seek to sue on behalf of the government, alleging that the government
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