Humana 2014 Annual Report Download - page 26

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of the premium received in the earlier years is intended to pay anticipated benefits to be incurred in future years. At
policy issuance, these future policy benefit reserves are recognized on a net level premium method based on interest
rates, mortality, morbidity, and maintenance expense assumptions. Because these policies have long-term claim payout
periods, there is a greater risk of significant variability in claims costs, either positive or negative. Our actual claims
experience will emerge many years after assumptions have been established. The risk of a deviation of the actual interest,
morbidity, mortality, and maintenance expense assumptions from those assumed in our reserves are particularly
significant to our closed block of long-term care insurance policies. We monitor the loss experience of these long-term
care insurance policies, and, when necessary, apply for premium rate increases through a regulatory filing and approval
process in the jurisdictions in which such products were sold. However, to the extent premium rate increases or loss
experience vary from the assumptions we have locked in, additional future adjustments to reserves could be required.
While we proactively attempt to effectively manage our operating expenses, increases or decreases in staff-related
expenses, additional investment in new products (including our opportunities in the Medicare programs, state-based
contracts, participation in health insurance exchanges, and expansion of clinical capabilities as part of our integrated
care delivery model), investments in health and well-being product offerings, acquisitions, new taxes and assessments
(including the non-deductible health insurance industry fee and other assessments under the Health Care Reform Law),
and implementation of regulatory requirements may increase our operating expenses.
Failure to adequately price our products or estimate sufficient benefits payable or future policy benefits payable,
or effectively manage our operating expenses, may result in a material adverse effect on our results of operations,
financial position, and cash flows.
We are in a highly competitive industry. Some of our competitors are more established in the health care industry
in terms of a larger market share and have greater financial resources than we do in some markets. In addition, other
companies may enter our markets in the future, including emerging competitors in the Medicare program or competitors
in the delivery of health care services. We may also face increased competition due to participation by other insurers
in the health insurance exchanges implemented under the Health Care Reform Law. We believe that barriers to entry
in our markets are not substantial, so the addition of new competitors can occur relatively easily, and customers enjoy
significant flexibility in moving between competitors. Contracts for the sale of commercial products are generally bid
upon or renewed annually. While health plans compete on the basis of many factors, including service and the quality
and depth of provider networks, we expect that price will continue to be a significant basis of competition. In addition
to the challenge of controlling health care costs, we face intense competitive pressure to contain premium prices. Factors
such as business consolidations, strategic alliances, legislative reform, and marketing practices create pressure to contain
premium price increases, despite being faced with increasing medical costs.
The policies and decisions of the federal and state governments regarding the Medicare, military, Medicaid and
health insurance exchange programs in which we participate have a substantial impact on our profitability. These
governmental policies and decisions, which we cannot predict with certainty, directly shape the premiums or other
revenues to us under the programs, the eligibility and enrollment of our members, the services we provide to our
members, and our administrative, health care services, and other costs associated with these programs. Legislative or
regulatory actions, such as those resulting in a reduction in premium payments to us, an increase in our cost of
administrative and health care services, or additional fees, taxes or assessments, may have a material adverse effect on
our results of operations, financial position, and cash flows.
Premium increases, introduction of new product designs, and our relationships with our providers in various
markets, among other issues, could also affect our membership levels. Other actions that could affect membership
levels include our possible exit from or entrance into Medicare or commercial markets, or the termination of a large
contract.
If we do not compete effectively in our markets, if we set rates too high or too low in highly competitive markets
to keep or increase our market share, if membership does not increase as we expect, if membership declines, or if we
lose membership with favorable medical cost experience while retaining or increasing membership with unfavorable