Humana 2015 Annual Report Download - page 132

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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and payment accuracy compliance efforts, to more accurately reflect diagnosis conditions under the risk adjustment
model. These compliance efforts include the internal contract level audits described in more detail below.
CMS is continuing to perform audits of various companies’ selected MA contracts related to this risk adjustment
diagnosis data. We refer to these audits as Risk-Adjustment Data Validation Audits, or RADV audits. RADV audits
review medical records in an attempt to validate provider medical record documentation and coding practices which
influence the calculation of premium payments to MA plans.
In 2012, CMS released a “Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage
Risk Adjustment Data Validation (RADV) Contract-Level Audits.” The payment error calculation methodology
provides that, in calculating the economic impact of audit results for an MA contract, if any, the results of the audit
sample will be extrapolated to the entire MA contract based upon a comparison to “benchmark” audit data in Medicare
FFS (which we refer to as the "FFS Adjuster"). This comparison to the FFS Adjuster is necessary to determine the
economic impact, if any, of audit results because the government program data set, including any attendant errors that
are present in that data set, provides the basis for MA plans’ risk adjustment to payment rates. CMS already makes
other adjustments to payment rates based on a comparison of coding pattern differences between MA plans and Medicare
FFS data (such as for frequency of coding for certain diagnoses in MA plan data versus the government program data
set).
The final methodology, including the first application of extrapolated audit results to determine audit settlements,
is expected to be applied to RADV contract level audits currently being conducted for contract year 2011 in which two
of our Medicare Advantage plans are being audited. Per CMS guidance, selected MA contracts will be notified of an
audit at some point after the close of the final reconciliation for the payment year being audited. The final reconciliation
occurs in August of the calendar year following the payment year. We were notified on September 15, 2015, that five
of our Medicare Advantage contracts have been selected for audit for contract year 2012.
Estimated audit settlements are recorded as a reduction of premiums revenue in our consolidated statements of
income, based upon available information. We perform internal contract level audits based on the RADV audit
methodology prescribed by CMS. Included in these internal contract level audits is an audit of our Private Fee-For-
Service business which we used to represent a proxy of the FFS Adjuster which has not yet been released. We based
our accrual of estimated audit settlements for each contract year on the results of these internal contract level audits
and update our estimates as each audit is completed. Estimates derived from these results were not material to our
results of operations, financial position, or cash flows. However, as indicated, we are awaiting additional guidance from
CMS regarding the FFS Adjuster. Accordingly, we cannot determine whether such RADV audits will have a material
adverse effect on our results of operations, financial position, or cash flows.
In addition, CMS' comments in formalized guidance regarding “overpayments” to MA plans appear to be
inconsistent with CMS' prior RADV audit guidance. These statements, contained in the preamble to CMS’ final rule
release regarding Medicare Advantage and Part D prescription drug benefit program regulations for Contract Year 2015,
appear to equate each Medicare Advantage risk adjustment data error with an “overpayment” without reconciliation
to the principles underlying the FFS Adjuster referenced above. We will continue to work with CMS to ensure that
MA plans are paid accurately and that payment model principles are in accordance with the requirements of the Social
Security Act, which, if not implemented correctly could have a material adverse effect on our results of operations,
financial position, or cash flows.
At December 31, 2015, our military services business, which accounted for approximately 1% of our total premiums
and services revenue for the year ended December 31, 2015, primarily consisted of the TRICARE South Region contract.
The current 5-year South Region contract, which expires March 31, 2017, is subject to annual renewals on April 1 of
each year during its term at the government’s option. On January 22, 2016, we received notice from the Defense Health
Agency, or DHA, of its intent to exercise its option to extend the TRICARE South Region contract through March 31,
2017. On April 24, 2015, a request for proposal was issued for the next generation of TRICARE contracts for the period
beginning April 1, 2017. The request for proposal provides for the consolidation of three regions into two - East and
West. The current North Region and South Region are to be combined to form the East Region. We responded to the
request for proposal on July 22, 2015. On January 15, 2016, we received a request for Final Proposal Revisions that
we responded to on February 16, 2016.