Humana 2015 Annual Report Download - page 100

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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The Health Care Reform Law also establishes risk spreading premium stabilization programs effective January 1,
2014. The risk spreading programs are applicable to certain of our commercial medical insurance products. In the
aggregate, our commercial medical insurance products represented approximately 18% of our total premiums and
services revenue for the year ended December 31, 2015, a subset of which is subject to these programs. These programs,
commonly referred to as the 3Rs, include a permanent risk adjustment program, a transitional reinsurance program,
and a temporary risk corridors program designed to more evenly spread the financial risk borne by issuers and to
mitigate the risk that issuers would have mispriced products. The transitional reinsurance and temporary risk corridors
programs are for years 2014 through 2016, with potential for additional reinsurance recoveries through 2018 to the
extent funds are available. Policies issued prior to March 23, 2010 are considered grandfathered policies and are exempt
from the 3Rs. Certain states have allowed non-grandfathered policies issued prior to January 1, 2014 to extend the date
of required transition to policies compliant with the Health Care Reform Law to as late as 2017. Accordingly, such
policies are exempt from the 3Rs until they transition to policies compliant with the Health Care Reform Law.
The permanent risk adjustment program adjusts the premiums that commercial individual and small group health
insurance issuers receive based on the demographic factors and health status of each member as derived from current
year medical diagnosis as reported throughout the year. This program transfers funds from lower risk plans to higher
risk plans within similar plans in the same state. The risk adjustment program is applicable to commercial individual
and small group health plans (except certain exempt and grandfathered plans as discussed above) operating both inside
and outside of the health insurance exchanges established under the Health Care Reform Law. Under the risk adjustment
program, a risk score is assigned to each covered member to determine an average risk score at the individual and small
group level by legal entity in a particular market in a state. Additionally, an average risk score is determined for the
entire subject population for each market in each state. Settlements are determined on a net basis by legal entity and
state. Each health insurance issuer’s average risk score is compared to the state’s average risk score. Plans with an
average risk score below the state average will pay into a pool and health insurance issuers with an average risk score
that is greater than the state average risk score will receive money from that pool. We generally rely on providers,
including certain network providers who are our employees, to appropriately document all medical data, including the
diagnosis codes submitted with claims, as the basis for our risk scores under the program. Our estimate of amounts
receivable and/or payable under the risk adjustment program is based on our estimate of both our own and the state
average risk scores. Assumptions used in these estimates include but are not limited to published third party studies
and other publicly available data including regulatory plan filings, geographic considerations including our historical
experience in markets we have participated in over a long period of time, member demographics (including age and
gender for our members and other health insurance issuers), our pricing model, sales data for each metal tier (different
metal tiers yield different risk scores), and the mix of previously underwritten membership as compared to new members
in plans compliant with the Health Care Reform Law. We refine our estimates as new information becomes available,
including additional data released by the Department of Health and Human Services, or HHS, regarding estimates of
state average risk scores. Risk adjustment is subject to audit by HHS beginning with the 2015 coverage year, however,
there will be no payments associated with these audits for 2015, the pilot year for the audits.
The temporary risk corridor program applies to individual and small group Qualified Health Plans (or substantially
equivalent plans), or QHPs, as defined by HHS, operating both inside and outside of the exchanges. Accordingly, plans
subject to risk adjustment that are not QHPs, including our small group health plans, were not subject to the risk corridor
program in 2014 or 2015. The risk corridor provisions limit issuer gains and losses by comparing allowable medical
costs to a target amount, each defined/prescribed by HHS, and sharing the risk for allowable costs with the federal
government. Allowable medical costs are adjusted for risk adjustment settlements, transitional reinsurance recoveries,
and cost sharing reductions received from HHS. Variances from the target exceeding certain thresholds may result in
HHS making additional payments to us or require us to refund HHS a portion of the premiums we received.
We estimate and recognize adjustments to premiums revenue for the risk adjustment and risk corridor provisions
by projecting our ultimate premium for the calendar year separately for individual and group plans by state and legal
entity. Estimated calendar year settlement amounts are recognized ratably during the year and are revised each period
to reflect current experience, including changes in risk scores derived from medical diagnoses submitted by providers.
We record receivables or payables at the individual or group level within each state and legal entity and classify the
amounts as current or long-term in our consolidated balance sheets based on the timing of expected settlement.