Humana 2012 Annual Report Download - page 103

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
financing activity in our consolidated statements of cash flows. We do not recognize premiums revenue or
benefit expenses for these subsidies or discounts. Receipt and payment activity is accumulated at the contract
level and recorded in our consolidated balance sheets in other current assets or trade accounts payable and
accrued expenses depending on the contract balance at the end of the reporting period.
For plans where we provide enhanced benefits and selected the alternative demonstration payment option in
lieu of the reinsurance subsidy, we receive a monthly per member capitation amount from CMS determined from
our annual bid submissions. The capitation amount we receive from CMS for assuming the government’s portion
of prescription drug costs in the catastrophic layer of coverage is recorded as premiums revenue. The variance
between the capitation amount and actual drug costs in the catastrophic layer is subject to risk sharing as part of
the risk corridor settlement. The demonstration provision terminated at the end of 2010. See Note 6 for detail
regarding amounts recorded to the consolidated balance sheets related to the risk corridor settlement and
subsidies from CMS.
Settlement of the reinsurance and low-income cost subsidies as well as the brand name prescription drug
discounts and risk corridor payment is based on a reconciliation made approximately 9 months after the close of
each calendar year. We continue to revise our estimates with respect to the risk corridor provisions based on
subsequent period pharmacy claims data.
Military services
Military services premiums and services revenue primarily is derived from our TRICARE South Region
contract with the Department of Defense, or DoD. On April 1, 2012, we began delivering services under a new
TRICARE South Region contract with the DoD. Under the new contract, we provide administrative services,
including offering access to our provider networks and clinical programs, claim processing, customer service,
enrollment, and other services, while the federal government retains all of the risk of the cost of health benefits.
Under the terms of the new TRICARE South Region contract, we do not record premiums revenue or benefits
expense in our consolidated statements of income related to these health care costs and related reimbursements.
Instead, we account for revenues under the new contract net of estimated health care costs similar to an
administrative services fee only agreement.
Our TRICARE members are served by both in-network and out-of-network providers in accordance with the
new contract. We pay health care costs related to these services to the providers and are subsequently reimbursed
by the DoD for such payments. We account for the payments associated with these health care costs and the
related reimbursements under deposit accounting in our consolidated balance sheets and as a financing activity
under receipts (withdrawals) from contract deposits in our consolidated statements of cash flows. For the first
nine months of the new contract, April 1, 2012 to December 31, 2012, health care cost payments were $2.1
billion, exceeding reimbursements of $2.0 billion by $56 million.
Our previous TRICARE South Region contract that expired on March 31, 2012 provided a financial interest
in the underlying health care cost; therefore, we reported revenues on a gross basis. We shared the risk with the
federal government for the cost of health benefits incurred under our previous contract, earning more revenue or
incurring additional cost based on the variance of actual health care costs from an annually negotiated target
health care cost. TRICARE revenues consisted generally of (1) an insurance premium for assuming underwriting
risk for the cost of civilian health care services delivered to eligible beneficiaries; (2) health care services
provided to beneficiaries which were in turn reimbursed by the federal government; and (3) administrative
services fees related to claim processing, customer service, enrollment, and other services. We recognized the
insurance premium as revenue ratably over the period coverage was provided. Health care services
93