Humana 2015 Annual Report Download - page 131

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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Purchase Obligations
We have agreements to purchase services, primarily information technology related services, or to make
improvements to real estate, in each case that are enforceable and legally binding on us and that specify all significant
terms, including: fixed or minimum levels of service to be purchased; fixed, minimum or variable price provisions;
and the appropriate timing of the transaction. We have purchase obligation commitments of $74 million in 2016, $44
million in 2017, $30 million in 2018, $1 million in 2019, and $1 million thereafter. Purchase obligations exclude
agreements that are cancelable without penalty.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate or knowingly seek to participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance
or special purpose entities, or SPEs, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As of December 31, 2015, we were not involved in
any SPE transactions.
Guarantees and Indemnifications
Through indemnity agreements approved by the state regulatory authorities, certain of our regulated subsidiaries
generally are guaranteed by Humana Inc., our parent company, in the event of insolvency for (1) member coverage for
which premium payment has been made prior to insolvency; (2) benefits for members then hospitalized until discharged;
and (3) payment to providers for services rendered prior to insolvency. Our parent also has guaranteed the obligations
of our military services subsidiaries.
In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify
a third party to such arrangement from any losses incurred relating to the services they perform on behalf of us, or for
losses arising from certain events as defined within the particular contract, which may include, for example, litigation
or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses.
Historically, payments made related to these indemnifications have been immaterial.
Government Contracts
Our Medicare products, which accounted for approximately 72% of our total premiums and services revenue for
the year ended December 31, 2015, primarily consisted of products covered under the Medicare Advantage and Medicare
Part D Prescription Drug Plan contracts with the federal government. These contracts are renewed generally for a
calendar year term unless CMS notifies us of its decision not to renew by May 1 of the calendar year in which the
contract would end, or we notify CMS of our decision not to renew by the first Monday in June of the calendar year
in which the contract would end. All material contracts between Humana and CMS relating to our Medicare products
have been renewed for 2016, and all of our product offerings filed with CMS for 2016 have been approved.
CMS uses a risk-adjustment model which apportions premiums paid to Medicare Advantage, or MA, plans
according to health severity of covered members. The risk-adjustment model pays more for enrollees with predictably
higher costs. Under this model, rates paid to MA plans are based on actuarially determined bids, which include a process
whereby our prospective payments are based on a comparison of our beneficiaries’ risk scores, derived from medical
diagnoses, to those enrolled in the government’s traditional fee-for-service Medicare program (referred to as "Medicare
FFS"). Under the risk-adjustment methodology, all MA plans must collect and submit the necessary diagnosis code
information from hospital inpatient, hospital outpatient, and physician providers to CMS within prescribed deadlines.
The CMS risk-adjustment model uses the diagnosis data to calculate the risk-adjusted premium payment to MA plans,
which CMS adjusts for coding pattern differences between the health plans and the government fee-for-service program.
We generally rely on providers, including certain providers in our network who are our employees, to code their claim
submissions with appropriate diagnoses, which we send to CMS as the basis for our payment received from CMS under
the actuarial risk-adjustment model. We also rely on these providers to document appropriately all medical data,
including the diagnosis data submitted with claims. In addition, we conduct medical record reviews as part of our data