Humana 2012 Annual Report Download - page 82

increases in premium payments to us, may have a material adverse effect on our results of operations, financial
position, and cash flows.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our
consolidated financial statements and accompanying notes, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these financial
statements and accompanying notes requires us to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. We continuously evaluate our
estimates and those critical accounting policies related primarily to benefits expense and revenue recognition as
well as accounting for impairments related to our investment securities, goodwill, and long-lived assets. These
estimates are based on knowledge of current events and anticipated future events and, accordingly, actual results
ultimately may differ from those estimates. We believe the following critical accounting policies involve the
most significant judgments and estimates used in the preparation of our consolidated financial statements.
Benefits Expense Recognition
Benefits expense is recognized in the period in which services are provided and includes an estimate of the
cost of services which have been incurred but not yet reported, or IBNR. IBNR represents a substantial portion of
our benefits payable as follows:
December 31,
2012
Percentage
of Total
December 31,
2011
Percentage
of Total
(dollars in millions)
IBNR .......................................... $2,552 67.5% $2,056 54.8%
Reported claims in process ......................... 315 8.3% 376 10.0%
Other benefits payable ............................. 908 24.1% 983 26.2%
Benefits payable, excluding military services ....... 3,775 99.9% 3,415 91.0%
Military services benefits payable .................... 4 0.1% 339 9.0%
Total benefits payable ......................... $3,779 100.0% $3,754 100.0%
Military services benefits payable primarily relates to our previous TRICARE South Region contract that
expired on March 31, 2012 and primarily consists of our estimate of incurred healthcare services provided to
beneficiaries which were in turn reimbursed by the federal government as further described in Note 2 to the
consolidated financial statements included in Item 8. – Financial Statements and Supplementary Data. This
amount was generally offset by a corresponding receivable due from the federal government, as more fully-
described in Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations
under the section titled “Cash Flow from Operating Activities.” Under the new TRICARE South Region contract
effective April 1, 2012, the federal government retains the risk of the cost of health benefits and related benefit
obligation as further described in Note 2 to the consolidated financial statements included in Item 8. – Financial
Statements and Supplementary Data.
Our reserving practice is to consistently recognize the actuarial best point estimate within a level of
confidence required by actuarial standards. Actuarial standards of practice generally require a level of confidence
such that the liabilities established for IBNR have a greater probability of being adequate versus being
insufficient, or such that the liabilities established for IBNR are sufficient to cover obligations under an
assumption of moderately adverse conditions. Adverse conditions are situations in which the actual claims are
expected to be higher than the otherwise estimated value of such claims at the time of the estimate. Therefore, in
many situations, the claim amounts ultimately settled will be less than the estimate that satisfies the actuarial
standards of practice.
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