Humana 2014 Annual Report Download - page 38

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regulated at the state level by state boards of pharmacy. Many of the states where we deliver pharmaceuticals, including
controlled substances, have laws and regulations that require out-of-state mail-order pharmacies to register with that
state’s board of pharmacy. Federal agencies further regulate our pharmacy operations, requiring registration with the
U.S. Drug Enforcement Administration and individual state controlled substance authorities in order to dispense
controlled substances. In addition, the FDA inspects facilities in connection with procedures to effect recalls of
prescription drugs. The Federal Trade Commission also has requirements for mail-order sellers of goods. The U.S. Postal
Service, or USPS, has statutory authority to restrict the transmission of drugs and medicines through the mail to a degree
that may have an adverse effect on our mail-order operations. The USPS historically has exercised this statutory authority
only with respect to controlled substances. If the USPS restricts our ability to deliver drugs through the mail, alternative
means of delivery are available to us. However, alternative means of delivery could be significantly more expensive.
The Department of Transportation has regulatory authority to impose restrictions on drugs inserted in the stream of
commerce. These regulations generally do not apply to the USPS and its operations. In addition, we are subject to CMS
rules regarding the administration of our PDP plans and intercompany pricing between our PDP plans and our pharmacy
business.
We are also subject to risks inherent in the packaging and distribution of pharmaceuticals and other health care
products, and the application of state laws related to the operation of internet and mail-order pharmacies. The failure
to adhere to these laws and regulations may expose us to civil and criminal penalties.
Changes in the prescription drug industry pricing benchmarks may adversely affect our financial performance.
Contracts in the prescription drug industry generally use certain published benchmarks to establish pricing for
prescription drugs. These benchmarks include average wholesale price, which is referred to as “AWP,” average selling
price, which is referred to as “ASP,” and wholesale acquisition cost. It is uncertain whether payors, pharmacy providers,
pharmacy benefit managers, or PBMs, and others in the prescription drug industry will continue to utilize AWP as it
has previously been calculated, or whether other pricing benchmarks will be adopted for establishing prices within the
industry. Legislation may lead to changes in the pricing for Medicare and Medicaid programs. Regulators have conducted
investigations into the use of AWP for federal program payment, and whether the use of AWP has inflated drug
expenditures by the Medicare and Medicaid programs. Federal and state proposals have sought to change the basis for
calculating payment of certain drugs by the Medicare and Medicaid programs. Adoption of ASP in lieu of AWP as the
measure for determining payment by Medicare or Medicaid programs for the drugs sold in our mail-order pharmacy
business may reduce the revenues and gross margins of this business which may result in a material adverse effect on
our results of operations, financial position, and cash flows.
If we do not continue to earn and retain purchase discounts and volume rebates from pharmaceutical
manufacturers at current levels, our gross margins may decline.
We have contractual relationships with pharmaceutical manufacturers or wholesalers that provide us with purchase
discounts and volume rebates on certain prescription drugs dispensed through our mail-order and specialty pharmacies.
These discounts and volume rebates are generally passed on to clients in the form of steeper price discounts. Changes
in existing federal or state laws or regulations or in their interpretation by courts and agencies or the adoption of new
laws or regulations relating to patent term extensions, and purchase discount and volume rebate arrangements with
pharmaceutical manufacturers, may reduce the discounts or volume rebates we receive and materially adversely impact
our results of operations, financial position, and cash flows.
Our ability to obtain funds from certain of our licensed subsidiaries is restricted by state insurance regulations.
Because we operate as a holding company, we are dependent upon dividends and administrative expense
reimbursements from our subsidiaries to fund the obligations of Humana Inc., our parent company. Certain of our
insurance subsidiaries operate in states that regulate the payment of dividends, loans, administrative expense
reimbursements or other cash transfers to Humana Inc., and require minimum levels of equity as well as limit investments
to approved securities. The amount of dividends that may be paid to Humana Inc. by these insurance subsidiaries,
without prior approval by state regulatory authorities, or ordinary dividends, is limited based on the entity's level of