Humana 2012 Annual Report Download - page 118

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Amounts incurred related to prior years vary from previously estimated liabilities as the claims ultimately
are settled. Negative amounts reported for incurred related to prior years result from claims being ultimately
settled for amounts less than originally estimated (favorable development).
Actuarial standards require the use of assumptions based on moderately adverse experience, which generally
results in favorable reserve development, or reserves that are considered redundant. We experienced favorable
medical claims reserve development related to prior fiscal years of $257 million in 2012, $372 million in 2011,
and $434 million in 2010. The favorable medical claims reserve development for 2012, 2011, and 2010 primarily
reflects the consistent application of trend and completion factors estimated using an assumption of moderately
adverse conditions. In addition, the favorable medical claims reserve development for 2011 and 2010 reflect
improvements in the claims processing environment and, to a lesser extent, better than originally estimated
utilization. The improvements in the claims processing environment benefited all lines of business during 2011
and 2010, but were more significant during 2010, particularly in our Medicare Private Fee-For-Service line of
business. As a result of these improvements, during 2011 and 2010 we experienced a significant increase in claim
overpayment recoveries for claims incurred in prior years, primarily as a result of increased audits of provider
billings, as well as system enhancements that improved the claim recovery functionality. In addition, in 2010, a
shortening of the cycle time associated with provider claim submissions was a contributing factor.
Benefits expense associated with military services and provisions associated with future policy benefits
excluded from the previous table was as follows for the years ended December 31, 2012, 2011 and 2010:
2012 2011 2010
(in millions)
Military services .................................... $ 908 $3,247 $3,059
Future policy benefits ................................ 136 114 266
Total ......................................... $1,044 $3,361 $3,325
Military services benefits payable of $4 million and $339 million at December 31, 2012 and 2011,
respectively, primarily consisted of our estimate of incurred healthcare services provided to beneficiaries which
are in turn reimbursed by the federal government, as more fully described in Note 2. This amount is generally
offset by a corresponding receivable due from the federal government. The declines in military services benefits
payable and benefits expense in 2012 relate to the transition to the new TRICARE South Region contract on
April 1, 2012, which is accounted for as an administrative services only contract as more fully described in
Note 2.
The higher benefits expense associated with future policy benefits payable during 2012 and 2010 relates to
reserve strengthening for our closed block of long-term care policies acquired in connection with the 2007 KMG
America Corporation, or KMG, acquisition more fully described in Note 17.
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