Humana 2014 Annual Report Download - page 25

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ITEM 1A. RISK FACTORS
If we do not design and price our products properly and competitively, if the premiums we charge are insufficient
to cover the cost of health care services delivered to our members, if we are unable to implement clinical initiatives
to provide a better health care experience for our members, lower costs and appropriately document the risk profile
of our members, or if our estimates of benefits expense are inadequate, our profitability may be materially adversely
affected. We estimate the costs of our benefits expense payments, and design and price our products accordingly,
using actuarial methods and assumptions based upon, among other relevant factors, claim payment patterns, medical
cost inflation, and historical developments such as claim inventory levels and claim receipt patterns. These estimates,
however involve extensive judgment, and have considerable inherent variability because they are extremely sensitive
to changes in claim payment patterns and medical cost trends.
We use a substantial portion of our revenues to pay the costs of health care services delivered to our members.
These costs include claims payments, capitation payments to providers (predetermined amounts paid to cover services),
and various other costs incurred to provide health insurance coverage to our members. These costs also include estimates
of future payments to hospitals and others for medical care provided to our members. Generally, premiums in the health
care business are fixed for one-year periods. Accordingly, costs we incur in excess of our benefit cost projections
generally are not recovered in the contract year through higher premiums. We estimate the costs of our future benefit
claims and other expenses using actuarial methods and assumptions based upon claim payment patterns, medical
inflation, historical developments, including claim inventory levels and claim receipt patterns, and other relevant factors.
We also record benefits payable for future payments. We continually review estimates of future payments relating to
benefit claims costs for services incurred in the current and prior periods and make necessary adjustments to our reserves.
However, these estimates involve extensive judgment, and have considerable inherent variability that is sensitive to
claim payment patterns and medical cost trends. Many factors may and often do cause actual health care costs to exceed
what was estimated and used to set our premiums. These factors may include:
• increased use of medical facilities and services;
• increased cost of such services;
• increased use or cost of prescription drugs, including specialty prescription drugs;
• the introduction of new or costly treatments, including new technologies;
• our membership mix;
• variances in actual versus estimated levels of cost associated with new products, benefits or lines of business,
product changes or benefit level changes;
• changes in the demographic characteristics of an account or market;
• changes or reductions of our utilization management functions such as preauthorization of services,
concurrent review or requirements for physician referrals;
• changes in our pharmacy volume rebates received from drug manufacturers;
• catastrophes, including acts of terrorism, public health epidemics, or severe weather (e.g. hurricanes and
earthquakes);
• medical cost inflation; and
• government mandated benefits or other regulatory changes, including any that result from the Health Care
Reform Law.
Key to our operational strategy is the implementation of clinical initiatives that we believe provide a better health
care experience for our members, lower the cost of healthcare services delivered to our members, and appropriately
document the risk profile of our members. Our profitability and competitiveness depend in large part on our ability to
appropriately manage health care costs through, among other things, the application of medical management programs
such as our chronic care management program.
In addition, we also estimate costs associated with long-duration insurance policies including long-term care, life
insurance, annuities, and certain health and other supplemental insurance policies sold to individuals for which some