Humana 2015 Annual Report Download - page 106

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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or prior to the balance sheet date. Capitation payments represent monthly contractual fees disbursed to primary care
and other providers who are responsible for providing medical care to members. Pharmacy costs represent payments
for members’ prescription drug benefits, net of rebates from drug manufacturers. Receivables for such pharmacy rebates
are included in other current assets in our consolidated balance sheets. Other supplemental benefits include dental,
vision, and other supplemental health and financial protection products.
We estimate the costs of our benefits expense payments using actuarial methods and assumptions based upon claim
payment patterns, medical cost inflation, historical developments such as claim inventory levels and claim receipt
patterns, and other relevant factors, and record benefit reserves for future payments. We continually review estimates
of future payments relating to claims costs for services incurred in the current and prior periods and make necessary
adjustments to our reserves.
We reassess the profitability of our contracts for providing insurance coverage to our members when current
operating results or forecasts indicate probable future losses. We establish a premium deficiency reserve in current
operations to the extent that the sum of expected future costs, claim adjustment expenses, and maintenance costs exceeds
related future premiums under contracts without consideration of investment income. For purposes of determining
premium deficiencies, contracts are grouped in a manner consistent with our method of acquiring, servicing, and
measuring the profitability of such contracts. Losses recognized as a premium deficiency result in a beneficial effect
in subsequent periods as operating losses under these contracts are charged to the liability previously established.
Because the majority of our member contracts renew annually, we would not record a material premium deficiency
reserve, except when unanticipated adverse events or changes in circumstances indicate otherwise. In the fourth quarter
of 2015, we recognized a premium deficiency reserve for our individual commercial medical business compliant with
the Health Care Reform Law associated with the 2016 coverage year as discussed in more detail in Note 7.
We believe our benefits payable are adequate to cover future claims payments required. However, such estimates
are based on knowledge of current events and anticipated future events. Therefore, the actual liability could differ
materially from the amounts provided.
Future policy benefits payable
Future policy benefits payable include liabilities for long-duration insurance policies including long-term care, life
insurance, annuities, and certain health and other supplemental policies sold to individuals for which some of the
premium received in the earlier years is intended to pay anticipated benefits to be incurred in future years. At policy
issuance, these reserves are recognized on a net level premium method based on interest rates, mortality, morbidity,
and maintenance expense assumptions. Interest rates are based on our expected net investment returns on the investment
portfolio supporting the reserves for these blocks of business. Mortality, a measure of expected death, and morbidity,
a measure of health status, assumptions are based on published actuarial tables, modified based upon actual experience.
Changes in estimates of these reserves are recognized as an adjustment to benefits expense in the period the changes
occur. We perform loss recognition tests at least annually in the fourth quarter, and more frequently if adverse events
or changes in circumstances indicate that the level of the liability, together with the present value of future gross
premiums, may not be adequate to provide for future expected policy benefits and maintenance costs. We adjust future
policy benefits payable for the additional liability that would have been recorded if investment securities backing the
liability had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. We include the
impact of this adjustment, if any, net of applicable deferred taxes, with the change in unrealized investment gain (loss)
in accumulated other comprehensive income in stockholders’ equity. As discussed previously, beginning in 2014, health
policies sold to individuals that conform to the Health Care Reform Law are accounted for under a short-duration model
under which policy reserves are not established because premiums received in the current year are intended to pay
anticipated benefits in that year. In addition, as previously underwritten members transition to plans compliant with
the Health Care Reform Law, it results in policy lapses and the release of reserves for future policy benefits.
Book Overdraft
Under our cash management system, checks issued but not yet presented to banks that would result in negative
bank balances when presented are classified as a current liability in the consolidated balance sheets. Changes in book
overdrafts from period to period are reported in the consolidated statement of cash flows as a financing activity.