Humana 2011 Annual Report Download - page 78

On December 21, 2010, CMS posted a description of the agency’s proposed RADV sampling and payment
adjustment calculation methodology to its website, and invited public comment, noting that CMS may revise its
sampling and payment error calculation methodology based upon the comments received. We believe the audit
and payment adjustment methodology proposed by CMS is fundamentally flawed and actuarially unsound. In
essence, in making the comparison referred to above, CMS relies on two interdependent sets of data to set
payment rates for Medicare Advantage (MA) plans: (1) fee for service (FFS) data from the government’s original
Medicare program; and (2) MA data. The proposed methodology would review medical records for only one set
of data (MA data), while not performing the same exercise on the other set (FFS data). However, because these
two sets of data are inextricably linked, we believe CMS must audit and validate both of them before determining
the financial implications of any potential RADV audit results, in order to ensure that any resulting payment
adjustment is accurate. We believe that the Social Security Act, under which the payment model was established,
requires the consistent use of these data sets in determining risk-adjusted payments to MA plans. Furthermore,
our payment received from CMS, as well as benefits offered and premiums charged to members, is based on bids
that did not, by CMS design, include any assumption of retroactive audit payment adjustments. We believe that
applying a retroactive audit adjustment after CMS acceptance of bids would improperly alter this process of
establishing member benefits and premiums.
CMS has received public comments, including our comments and comments from other industry
participants and the American Academy of Actuaries, which expressed concerns about the failure to
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.
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