Humana 2011 Annual Report Download - page 77

Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate or knowingly seek to participate in transactions that
generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities (SPEs), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of
December 31, 2011, we were not involved in any SPE transactions.
Guarantees and Indemnifications
Through indemnity agreements approved by the state regulatory authorities, certain of our regulated
subsidiaries generally are guaranteed by Humana Inc., our parent company, in the event of insolvency for
(1) member coverage for which premium payment has been made prior to insolvency; (2) benefits for members
then hospitalized until discharged; and (3) payment to providers for services rendered prior to insolvency. Our
parent also has guaranteed the obligations of our military services subsidiaries.
In the ordinary course of business, we enter into contractual arrangements under which we may agree to
indemnify a third party to such arrangement from any losses incurred relating to the services they perform on
behalf of us, or for losses arising from certain events as defined within the particular contract, which may
include, for example, litigation or claims relating to past performance. Such indemnification obligations may not
be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been
immaterial.
Government Contracts
Our Medicare products, which accounted for approximately 65% of our total premiums and services
revenue for the year ended December 31, 2011, primarily consisted of products covered under the Medicare
Advantage and Medicare Part D Prescription Drug Plan contracts with the federal government. These contracts
are renewed generally for a calendar year term unless CMS notifies us of its decision not to renew by August 1 of
the calendar year in which the contract would end, or we notify CMS of our decision not to renew by the first
Monday in June of the calendar year in which the contract would end. All material contracts between Humana
and CMS relating to our Medicare products have been renewed for 2012, and all of our product offerings filed
with CMS for 2012 have been approved.
CMS uses a risk-adjustment model which apportions premiums paid to Medicare Advantage plans
according to health severity. The risk-adjustment model pays more for enrollees with predictably higher costs.
Under this model, rates paid to Medicare Advantage plans are based on actuarially determined bids, which
include a process that bases our prospective payments on a comparison of our beneficiaries’ risk scores, derived
from medical diagnoses, to those enrolled in the government’s original Medicare program. Under the risk-
adjustment methodology, all Medicare Advantage plans must collect and submit the necessary diagnosis code
information from hospital inpatient, hospital outpatient, and physician providers to CMS within prescribed
deadlines. The CMS risk-adjustment model uses this diagnosis data to calculate the risk-adjusted premium
payment to Medicare Advantage plans. We generally rely on providers to code their claim submissions with
appropriate diagnoses, which we send to CMS as the basis for our payment received from CMS under the
actuarial risk-adjustment model. We also rely on providers to appropriately document all medical data, including
the diagnosis data submitted with claims.
CMS is continuing to perform audits of various companies’ selected Medicare Advantage contracts related
to this risk adjustment diagnosis data. These audits are referred to herein as Risk-Adjustment Data Validation
Audits, or RADV audits. RADV audits review medical record documentation in an attempt to validate provider
coding practices and the presence of risk adjustment conditions which influence the calculation of premium
payments to Medicare Advantage plans.
67