Humana 2014 Annual Report Download - page 100

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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evaluation of future discounted cash flows to determine fair value of our reporting units. Impairment tests completed
for 2014, 2013, and 2012 did not result in an impairment loss.
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 our 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 long-term care, life
insurance, annuities, and certain health and other supplemental 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. At policy
issuance, these reserves are recognized on a net level premium method based on interest rates, mortality, morbidity,
and maintenance expense assumptions. Interest rates are based on our expected net investment returns on the investment
portfolio supporting the reserves for these blocks of business. Mortality, a measure of expected death, and morbidity,
a measure of health status, assumptions are based on 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 perform loss recognition tests at least annually in the fourth quarter, and more frequently if adverse events
or changes in circumstances indicate that the level of the liability, together with the present value of future gross
premiums, may not be adequate to provide for future expected policy benefits and maintenance costs. We adjust future
policy benefits payable for the additional liability that would have been recorded if investment securities backing the