Humana 2012 Annual Report Download - page 106

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other intangible assets primarily relate to acquired customer contracts/relationships and are included with
other long-term assets in the consolidated balance sheets. Other intangible assets are amortized over the useful
life, based upon the pattern of future cash flows attributable to the asset. This sometimes results in an accelerated
method of amortization for customer contracts because the asset tends to dissipate at a more rapid rate in earlier
periods. Other than customer contracts, other intangible assets generally are amortized using the straight-line
method. We review other finite-lived intangible assets for impairment under our long-lived asset policy.
Benefits Payable and Benefits Expense Recognition
Benefits expense includes claim payments, capitation payments, pharmacy costs net of rebates, allocations
of certain centralized expenses and various other costs incurred to provide health insurance coverage to members,
as well as estimates of future payments to hospitals and others for medical care and other supplemental benefits
provided prior to the balance sheet date. Capitation payments represent monthly contractual fees disbursed to
primary care and other providers who are responsible for providing medical care to members. Pharmacy costs
represent payments for members’ prescription drug benefits, net of rebates from drug manufacturers. Receivables
for such pharmacy rebates are included in other current assets in the consolidated balance sheets. Other
supplemental benefits include dental, vision, and other supplemental health and financial protection products.
We estimate the costs of our benefits expense payments using actuarial methods and assumptions based
upon claim payment patterns, medical cost inflation, historical developments such as claim inventory levels and
claim receipt patterns, and other relevant factors, and record benefit reserves for future payments. We continually
review estimates of future payments relating to claims costs for services incurred in the current and prior periods
and make necessary adjustments to our reserves.
We reassess the profitability of our contracts for providing insurance coverage to our members when current
operating results or forecasts indicate probable future losses. We establish a premium deficiency liability in current
operations to the extent that the sum of expected future costs, claim adjustment expenses, and maintenance costs exceeds
related future premiums under contracts without consideration of investment income. For purposes of determining
premium deficiencies, contracts are grouped in a manner consistent with our method of acquiring, servicing, and
measuring the profitability of such contracts. Losses recognized as a premium deficiency result in a beneficial effect in
subsequent periods as operating losses under these contracts are charged to the liability previously established. Because
the majority of our member contracts renew annually, we do not anticipate recording a material premium deficiency
liability, except when unanticipated adverse events or changes in circumstances indicate otherwise.
We believe our benefits payable are adequate to cover future claims payments required. However, such
estimates are based on knowledge of current events and anticipated future events. Therefore, the actual liability
could differ materially from the amounts provided.
Future policy benefits payable
Future policy benefits payable include liabilities for long-duration insurance policies including life
insurance, annuities, health, and long-term care policies sold to individuals for which some of the premium
received in the earlier years is intended to pay anticipated benefits to be incurred in future years. These reserves
are recognized on a net level premium method based on interest, mortality, morbidity, withdrawal and
maintenance expense assumptions from published actuarial tables, modified based upon actual experience.
Changes in estimates of these reserves are recognized as an adjustment to benefits expense in the period the
changes occur. We adjust future policy benefits payable for the additional liability that would have been recorded
if investment securities backing the liability had been sold at their stated aggregate fair value and the proceeds
reinvested at current yields. We include the impact of this adjustment, net of applicable deferred taxes, with the
change in unrealized investment gain (loss) in accumulated other comprehensive income in stockholders’ equity.
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