Humana 2014 Annual Report Download - page 21

13
We have available care management programs related to complex chronic conditions such as congestive heart failure
and coronary artery disease. We also have programs for prenatal and premature infant care, asthma related illness, end
stage renal disease, diabetes, cancer, and certain other conditions.
We typically contract with hospitals on either (1) a per diem rate, which is an all-inclusive rate per day, (2) a case
rate or diagnosis-related groups (DRG), which is an all-inclusive rate per admission, or (3) a discounted charge for
inpatient hospital services. Outpatient hospital services generally are contracted at a flat rate by type of service,
ambulatory payment classifications, or APCs, or at a discounted charge. APCs are similar to flat rates except multiple
services and procedures may be aggregated into one fixed payment. These contracts are often multi-year agreements,
with rates that are adjusted for inflation annually based on the consumer price index, other nationally recognized inflation
indexes, or specific negotiations with the provider. Outpatient surgery centers and other ancillary providers typically
are contracted at flat rates per service provided or are reimbursed based upon a nationally recognized fee schedule such
as the Medicare allowable fee schedule.
Our contracts with physicians typically are renewed automatically each year, unless either party gives written
notice, generally ranging from 90 to 120 days, to the other party of its intent to terminate the arrangement. Most of the
physicians in our PPO networks and some of our physicians in our HMO networks are reimbursed based upon a fixed
fee schedule, which typically provides for reimbursement based upon a percentage of the standard Medicare allowable
fee schedule.
The terms of our contracts with hospitals and physicians may also vary between Medicare and commercial business.
A significant portion of our Medicare network contracts, including those with both hospitals and physicians, are tied
to Medicare reimbursement levels and methodologies.
Automatic reductions to the federal budget, known as sequestration, took effect on April 1, 2013, including aggregate
reductions to Medicare payments to providers of up to 2% per fiscal year. Due to the uncertainty around the application
of these reductions, there can be no assurances that we can completely offset any reductions to the Medicare healthcare
programs. See “Legal Proceedings and Certain Regulatory Matters” in Note 16 to the consolidated financial statements
included in Item 8. – Financial Statements and Supplementary Data.
Capitation
We offer providers a continuum of opportunities to increase the integration of care and offer assistance to providers
in transitioning from a fee-for-service to a value-based arrangement. These include performance bonuses, shared savings
and shared risk relationships. For some of our medical membership, we share risk with providers under capitation
contracts where physicians and hospitals accept varying levels of financial risk for a defined set of membership, primarily
HMO membership. Under the typical capitation arrangement, we prepay these providers a monthly fixed-fee per
member, known as a capitation (per capita) payment, to cover all or a defined portion of the benefits provided to the
capitated member.
We believe these risk-based models represent a key element of our integrated care delivery model at the core of
our strategy. Our health plan subsidiaries may enter into these risk-based contracts with third party providers or our
owned provider subsidiaries.
At December 31, 2014, approximately 883,000 members, or 6.4% of our medical membership, were covered under
risk-based contracts, including 709,000 individual Medicare Advantage members, or 29.0% of our total individual
Medicare Advantage membership.
Physicians under capitation arrangements typically have stop loss coverage so that a physician’s financial risk for
any single member is limited to a maximum amount on an annual basis. We typically process all claims and monitor
the financial performance and solvency of our capitated providers. However, we delegated claim processing functions
under capitation arrangements covering approximately 141,200 HMO members, including 113,200 individual Medicare
Advantage members, or 16.0% of the 709,000 individual Medicare Advantage members covered under risk-based
contracts at December 31, 2014, with the provider assuming substantially all the risk of coordinating the members’
health care benefits. Capitation expense under delegated arrangements for which we have a limited view of the