Humana 2014 Annual Report Download - page 96

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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Investment securities available for our long-term insurance products and professional liability funding requirements,
as well as restricted statutory deposits, are classified as long-term assets. For the purpose of determining gross realized
gains and losses, which are included as a component of investment income in the consolidated statements of income,
the cost of investment securities sold is based upon specific identification. Unrealized holding gains and losses, net of
applicable deferred taxes, are included as a component of stockholders’ equity and comprehensive income until realized
from a sale or other-than-temporary impairment.
Under the other-than-temporary impairment model for debt securities held, we recognize an impairment loss in
income in an amount equal to the full difference between the amortized cost basis and the fair value when we have the
intent to sell the debt security or it is more likely than not we will be required to sell the debt security before recovery
of our amortized cost basis. However, if we do not intend to sell the debt security, we evaluate the expected cash flows
to be received as compared to amortized cost and determine if a credit loss has occurred. In the event of a credit loss,
only the amount of the impairment associated with the credit loss is recognized currently in income with the remainder
of the loss recognized in other comprehensive income.
When we do not intend to sell a security in an unrealized loss position, potential other-than-temporary impairment
is considered using a variety of factors, including the length of time and extent to which the fair value has been less
than cost; adverse conditions specifically related to the industry, geographic area or financial condition of the issuer or
underlying collateral of a security; payment structure of the security; changes in credit rating of the security by the
rating agencies; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet
date. For debt securities, we take into account expectations of relevant market and economic data. For example, with
respect to mortgage and asset-backed securities, such data includes underlying loan level data and structural features
such as seniority and other forms of credit enhancements. A decline in fair value is considered other-than-temporary
when we do not expect to recover the entire amortized cost basis of the security. We estimate the amount of the credit
loss component of a debt security as the difference between the amortized cost and the present value of the expected
cash flows of the security. The present value is determined using the best estimate of future cash flows discounted at
the implicit interest rate at the date of purchase.
Receivables and Revenue Recognition
We generally establish one-year commercial membership contracts with employer groups, subject to cancellation
by the employer group on 30-day written notice. Our Medicare contracts with CMS renew annually. Our military
services contracts with the federal government and our contracts with various state Medicaid programs generally are
multi-year contracts subject to annual renewal provisions. Individual polices are subject to the requirements of the
Health Care Reform Law as discussed previously.
Premiums Revenue
We bill and collect premium remittances from employer groups and members in our Medicare and other individual
products monthly. We receive monthly premiums from the federal government and various states according to
government specified payment rates and various contractual terms. Changes in revenues from CMS for our Medicare
products resulting from the periodic changes in risk-adjustment scores derived from medical diagnoses for our
membership are recognized when the amounts become determinable and the collectibility is reasonably assured.
Premiums revenue is estimated by multiplying the membership covered under the various contracts by the
contractual rates. Premiums revenue is recognized as income in the period members are entitled to receive services,
and is net of estimated uncollectible amounts, retroactive membership adjustments, and adjustments to recognize rebates
under the minimum benefit ratios required under the Health Care Reform Law. We estimate policyholder rebates by
projecting calendar year minimum benefit ratios for the individual, small group, and large group markets, as defined
by the Health Care Reform Law using a methodology prescribed by HHS, separately by state and legal entity. Beginning
in 2014, Medicare Advantage products were also subject to minimum benefit ratio requirements under the Health Care
Reform Law. Estimated calendar year rebates recognized ratably during the year are revised each period to reflect
current experience. Retroactive membership adjustments result from enrollment changes not yet processed, or not yet
reported by an employer group or the government. We routinely monitor the collectibility of specific accounts, the
aging of receivables, historical retroactivity trends, estimated rebates, as well as prevailing and anticipated economic