| HUMANA INC ITEM 1A RISK FACTORS This document includes both historical and forward-looking statements |
| The forward-looking statements are made within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 |
| We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe harbor provisions |
| We have based these forward-looking statements on our current expectations and projections about future events, trends and uncertainties |
| These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including, among other things, the information discussed below |
| In making these statements, we are not undertaking to address or update each factor in future filings or communications regarding our business or results |
| Our business is highly complicated, regulated and competitive with many different factors affecting results |
| If the premiums we charge are insufficient to cover the cost of health care services delivered to our members, or if our estimates of medical claim reserves based upon our estimates of future medical claims are inadequate, our profitability could decline |
| We use a significant portion of our revenues to pay the costs of health care services delivered to our members |
| These costs include claims payments, capitation payments, allocations of some centralized expenses and various other costs incurred to provide health insurance coverage to our members |
| These costs also include estimates of future payments to hospitals and others for medical care provided to our members |
| Generally, premiums in the health care business are fixed for one-year periods |
| Accordingly, costs we incur in excess of our medical cost projections generally are not recovered in the contract year through higher premiums |
| We estimate the costs of our future medical claims and other expenses using actuarial methods and assumptions based upon claim payment patterns, medical inflation, historical developments, including claim inventory levels and claim receipt patterns, and other relevant factors |
| We also record medical claims reserves for future payments |
| We continually review estimates of future payments relating to medical claims costs for services incurred in the current and prior periods and make necessary adjustments to our reserves |
| However, many factors may and often do cause actual health care costs to exceed what was estimated and used to set our premiums |
| These factors may include: • increased use of medical facilities and services, including prescription drugs; • increased cost of such services; • our membership mix; • variances in actual versus estimated levels of cost associated with new products, benefits or lines of business, product changes or benefit level changes; • membership in markets lacking adequate provider networks; 17 ______________________________________________________________________ [39]Table of Contents • changes in the demographic characteristics of an account or market; • termination of capitation arrangements resulting in the transfer of membership to fee-for-service arrangements; • changes or reductions of our utilization management functions such as preauthorization of services, concurrent review or requirements for physician referrals; • possible changes in our pharmacy rebate program with drug manufacturers; • catastrophes, including acts of terrorism, public health epidemics, or severe weather (eg Hurricane Katrina); • the introduction of new or costly treatments, including new technologies; • medical cost inflation; and • government mandated benefits or other regulatory changes |
| Failure to adequately price our products or estimate sufficient medical claim reserves may result in a material adverse effect on our financial position, results of operations and cash flows |
| If we do not design and price our products properly and competitively, our membership and profitability could decline |
| We are in a highly competitive industry |
| Many of our competitors are more established in the health care industry in terms of a larger market share and have greater financial resources than we do in some markets |
| In addition, other companies may enter our markets in the future, including emerging competitors in the Medicare program and in consumer-choice health plans, such as high deductible health plans with HSAs |
| We believe that barriers to entry in many markets are not substantial, so the addition of new competitors can occur relatively easily, and customers enjoy significant flexibility in moving between competitors |
| Contracts for the sale of commercial products are generally bid upon or renewed annually |
| While health plans compete on the basis of many factors, including service and the quality and depth of provider networks, we expect that price will continue to be a significant basis of competition |
| In addition to the challenge of controlling health care costs, we face intense competitive pressure to contain premium prices |
| Factors such as business consolidations, strategic alliances, legislative reform and marketing practices create pressure to contain premium price increases, despite being faced with increasing medical costs |
| The commercial pricing environment, particularly in the 2 to 300 member groups, is extremely competitive |
| Several of our competitors, including public and not-for-profit companies, are pricing aggressively to gain market share |
| Premium increases, introduction of new product designs, and our relationship with our providers in various markets, among other issues, could also affect our membership levels |
| Other actions that could affect membership levels include our possible exit from or entrance into Medicare or Commercial markets, or the termination of a large contract, including our TRICARE contract |
| If we do not compete effectively in our markets, if we set rates too high or too low in highly competitive markets to keep or increase our market share, if membership does not increase as we expect, if membership declines, or if we lose accounts with favorable medical cost experience while retaining or increasing membership in accounts with unfavorable medical cost experience, our business and results of operations could be materially adversely affected |
| If we fail to effectively implement our operational and strategic initiatives, our business could be materially adversely affected |
| Our future performance depends in large part upon our management team’s ability to execute our strategy to position the Company for the future |
| This strategy includes opportunities created by the MMA The MMA offers new opportunities in our Medicare programs, including our HMO, PPO, and PFFS Medicare Advantage 18 ______________________________________________________________________ [40]Table of Contents products, as well as our PDP products |
| We have made substantial additional investments in the Medicare program to enhance our ability to participate in these expanded programs |
| We have doubled the size of our Medicare geographic reach since the enactment of the MMA through expanded Medicare product offerings |
| We are offering both the stand-alone Medicare Prescription Drug Coverage (PDP) and Medicare Advantage Health Plan with Prescription Drug Coverage (MA-PD) in addition to our other product offerings |
| Our Medicare presence as of February 1, 2006, included more than 700cmam000 Medicare Advantage members and approximately 1dtta7 million PDP members in 12 HMO markets, 33 local PPO markets, and 35 states in which we have a private fee-for-service offering |
| Enrollment in the new Part D prescription drug plans began on November 15, 2005, and the plans became effective January 1, 2006 |
| We have been approved to offer the Medicare prescription drug plan in 46 states and the District of Columbia |
| The timing of our new membership enrollment in our Medicare Advantage and PDP products is an important factor in meeting our business objectives |
| The pattern of quarterly earnings for 2006 is subject to certain assumptions including the timing of when a member enrolls in a plan, the plan type the member selects, and the speed with which the individual members meet their deductibles and cost-sharing provisions |
| We have also made substantial investments in the service personnel and technology necessary to administer the growing Medicare business |
| Service issues intensified due to an enormous number of individuals being eligible in the new program on January 1 |
| We have to implement various initiatives such as hiring additional service representatives to address the service issues |
| Any failure to achieve this growth may have a material adverse effect on our financial position, results of operations or cash flows |
| In addition, the expansion of our Medicare business in relation to our other businesses may intensify the risks to us inherent in the Medicare business, which are described elsewhere in this document |
| These expansion efforts may result in less diversification of our revenue stream |
| Additionally, our strategy includes the growth of our Commercial segment business, with emphasis on our ASO and individual products, introduction of new products and benefit designs, including our Smart, consumer-choice products such as HSAs as well as the adoption of new technologies and the integration of acquired businesses and contracts |
| There can be no assurance that we will be able to successfully implement our operational and strategic initiatives that are intended to position us for future growth or that the products we design will be accepted or adopted in the time periods assumed |
| Failure to implement this strategy may result in a material adverse effect on our financial position, results of operations and cash flows |
| If we fail to properly maintain the integrity of our data, to strategically implement new information systems, or to protect our proprietary rights to our systems, our business could be materially adversely affected |
| Our business depends significantly on effective information systems and the integrity and timeliness of the data we use to run our business |
| Our business strategy involves providing members and providers with easy to use products that leverage our information to meet their needs |
| Our ability to adequately price our products and services, provide effective and efficient service to our customers, and to timely and accurately report our financial results depends significantly on the integrity of the data in our information systems |
| As a result of our past and on-going acquisition activities, we have acquired additional information systems |
| We have been taking steps to reduce the number of systems we operate, have upgraded and expanded our information systems capabilities, and are gradually migrating existing business to fewer systems |
| Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards, and changing customer preferences |
| If the information we rely upon to run our businesses 19 ______________________________________________________________________ [41]Table of Contents was found to be inaccurate or unreliable or if we fail to maintain effectively our information systems and data integrity, we could have operational disruptions, have problems in determining medical cost estimates and establishing appropriate pricing, have customer and physician and other health care provider disputes, have regulatory or other legal problems, have increases in operating expenses, lose existing customers, have difficulty in attracting new customers, or suffer other adverse consequences |
| We depend on independent third parties for significant portions of our systems-related support, equipment, facilities, and certain data, including data center operations, data network, voice communication services and pharmacy data processing |
| This dependence makes our operations vulnerable to such third parties’ failure to perform adequately under the contract, due to internal or external factors |
| We have recently changed vendors in our pharmacy benefits program |
| A change in service providers could result in a decline in service quality and effectiveness or less favorable contract terms which could adversely affect our operating results |
| We rely on our agreements with customers, confidentiality agreements with employees, and our trade secrets and copyrights to protect our proprietary rights |
| These legal protections and precautions may not prevent misappropriation of our proprietary information |
| In addition, substantial litigation regarding intellectual property rights exists in the software industry |
| We expect software products to be increasingly subject to third-party infringement claims as the number of products and competitors in this area grows |
| Our business plans also include becoming a quality e-business organization by enhancing interactions with customers, brokers, agents, and other stakeholders through web-enabling technology |
| Our strategy includes sales and distribution of health benefit products through the Internet, and implementation of advanced self-service capabilities, for internal and external stakeholders |
| There can be no assurance that our process of improving existing systems, developing new systems to support our expanding operations, integrating new systems, protecting our proprietary information, and improving service levels will not be delayed or that additional systems issues will not arise in the future |
| Failure to adequately protect and maintain the integrity of our information systems and data may result in a material adverse effect on our financial positions, results of operations and cash flows |
| We are involved in various legal actions, which, if resolved unfavorably to us, could result in substantial monetary damages |
| We are a party to a variety of legal actions that affect our business, including employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, and tort claims |
| In addition, because of the nature of the health care business, we are subject to a variety of legal actions relating to our business operations, including the design, management and offering of products and services |
| These include and could include in the future: • claims relating to the methodologies for calculating premiums; • claims relating to the denial of health care benefit payments; • claims relating to the denial or rescission of insurance coverage; • challenges to the use of some software products used in administering claims; • medical malpractice actions based on our medical necessity decisions or brought against us on the theory that we are liable for our providers’ alleged malpractice; • allegations of anti-competitive and unfair business activities; • provider disputes over compensation and termination of provider contracts; • disputes related to ASO business, including actions alleging claim administration errors; 20 ______________________________________________________________________ [42]Table of Contents • claims related to the failure to disclose some business practices; and • claims relating to customer audits and contract performance |
| In some cases, substantial non-economic or punitive damages as well as treble damages under the federal False Claims Act, Rackateer Influenced and Corrupt Organizations Act and other statutes may be sought |
| While we currently have insurance coverage for some of these potential liabilities, other potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of our insurance may not be enough to cover the damages awarded |
| Additionally, the cost of business insurance coverage has increased significantly |
| As a result, we have increased the amount of risk that we self-insure, particularly with respect to matters incidental to our business |
| In addition, some types of damages, like punitive damages, may not be covered by insurance |
| In some jurisdictions, coverage of punitive damages is prohibited |
| Insurance coverage for all or some forms of liability may become unavailable or prohibitively expensive in the future |
| A description of material legal actions in which we are currently involved is included under “Legal Proceedings” in Note 14 to the condensed consolidated financial statements included in Item 8 |
| We cannot predict the outcome of these suits with certainty, and we are incurring expenses in the defense of these matters |
| Therefore, these legal actions could have a material adverse effect on our financial position, results of operations and cash flows |
| As a government contractor, we are exposed to additional risks that could adversely affect our business or our willingness to participate in government health care programs |
| A significant portion of our revenues relates to federal and state government health care coverage programs, including the Medicare, TRICARE, and Medicaid programs |
| Our Government Segment accounted for approximately 53prca of our total premiums and ASO fees for the year ended December 31, 2005 and we expect the Government Segment to account for a greater percentage of our total premiums and ASO fees in 2006 |
| These programs involve various risks, including: • at December 31, 2005, under our contracts with CMS we provided health insurance coverage to approximately 295cmam400 members in Florida |
| These contracts accounted for approximately 20prca of our total premiums and ASO fees for the year ended December 31, 2005 |
| The loss of these and other CMS contracts or significant changes in the Medicare program as a result of legislative or administrative action, including reductions in payments to us or increases in benefits to members without corresponding increases in payments, may have a material adverse effect on our financial condition, results of operations and cash flows; • at December 31, 2005, our TRICARE business, which accounted for approximately 17prca of our total premiums and ASO fees during the year ended December 31, 2005, primarily consisted of the South Region contract |
| The South Region contract is a five-year contract, subject to annual renewals at the Government’s option, with the the third option period scheduled to begin April 1, 2006, that covers approximately 2dtta9 million beneficiaries |
| The loss of our current TRICARE contract would have a material adverse effect on our financial position, results of operations and cash flows |
| This contract contains provisions to negotiate a target health care cost amount annually with the federal government |
| Any variance from the target health care cost is shared with the federal government |
| As such, events and circumstances not contemplated in the negotiated target health care cost amount could have a material adverse effect on our business |
| These changes may include, for example, an increase or reduction in the number of persons enrolled or eligible to enroll due to the federal government’s decision to increase or decrease US military presence around the world |
| In the event government reimbursements were to decline from projected amounts, our failure to reduce the health care costs associated with these programs could have a material adverse effect on our business; • at December 31, 2005, under our contracts with the Puerto Rico Health Insurance Administration, we provided health insurance coverage to approximately 403cmam100 Medicaid members in Puerto Rico |
| These contracts accounted for approximately 3prca of our total premiums and ASO fees for the year ended 21 ______________________________________________________________________ [43]Table of Contents December 31, 2005 |
| We currently have Medicaid contracts with the Puerto Rico Health Insurance Administration that expire on June 30, 2006 |
| We are preparing to bid on the new contracts that will be effective July 2006 although a request for such proposal has not yet been issued by the Puerto Rico Health Insurance Administration |
| The loss of these contracts or significant changes in the Puerto Rico Medicaid program as a result of legislative or administrative action, including reductions in payments to us or increases in benefits to members without corresponding increases in payments, may have a material adverse effect on our financial condition, results of operations and cash flows; • the possibility of temporary or permanent suspension from participating in government health care programs, including Medicare and Medicaid, if we are convicted of fraud or other criminal conduct in the performance of a health care program or if there is an adverse decision against us under the federal False Claims Act; • CMS has implemented a risk adjustment model which apportions premiums paid to Medicare health plans according to health severity |
| A risk adjustment model pays more for enrollees with predictably higher costs |
| Under the new risk adjustment methodology, all Medicare health plans must collect, capture and submit the necessary diagnosis code information from inpatient and ambulatory treatment settings to CMS within prescribed deadlines |
| The CMS risk adjustment model uses this diagnosis data to calculate the risk adjusted premium payment to Medicare health plans |
| CMS is transitioning to the risk adjustment model for Medicare Advantage plans as follows: 50prca in 2005, 75prca in 2006 and 100prca in 2007 |
| The PDP payment methodology is based 100prca on the risk adjustment model beginning in 2006; • commensurate with phase-in of the new risk-adjustment methodology, payments to Medicare Advantage plans have been increased by a “budget neutrality” factor |
| The budget neutrality factor was implemented to prevent overall health plan payments from being reduced during the transition to the new risk-adjustment payment model |
| The payment adjustments for budget neutrality were first developed in 2002 and began to be used with the 2003 payments |
| The budget neutrality adjustment will begin phasing out in 2007 and will be fully eliminated by 2011 |
| This does not mean, however, that the aggregate per-member payments to Medicare plans will be reduced |
| As plans enroll less healthy beneficiaries, the need for the budget neutrality adjustment declines as the underlying risk adjusted Medicare rates paid to plans increase to account for their enrollees’ greater healthcare needs |
| As a result of the CMS payment methodology described above, the amount and timing of our CMS monthly premium payments per member may change materially, either favorably or unfavorably; • future changes to these government programs which may affect our ability or willingness to participate in these programs; • higher comparative medical costs; • government regulatory and reporting requirements; and • higher marketing and advertising costs per member as a result of marketing to individuals as opposed to groups |
| Our industry is currently subject to substantial government regulation, which, along with possible increased governmental regulation or legislative reform, increases our costs of doing business and could adversely affect our profitability |
| The health care industry in general, and health insurance, particularly HMOs and PPOs are subject to substantial federal and state government regulation |
| Our licensed subsidiaries are subject to regulation under state insurance holding company and Puerto Rico regulations |
| These regulations generally require, among other things, prior approval and/or notice of new products, rates, benefit changes, and certain material transactions, including dividend payments, purchases or sales of assets, intercompany agreements, and the filing of various financial and operational reports |
| 22 ______________________________________________________________________ [44]Table of Contents Certain of our subsidiaries operate in states that regulate the payment of dividends, loans, or other cash transfers to Humana Inc, our parent company, and require minimum levels of equity as well as limit investments to approved securities |
| by these subsidiaries, without prior approval by state regulatory authorities, is limited based on the entity’s level of statutory income and statutory capital and surplus |
| In most states, prior notification is provided before paying a dividend even if approval is not required |
| As of December 31, 2005, we maintained aggregate statutory capital and surplus of dlra1cmam203dtta2 million in our state regulated subsidiaries |
| Each of these subsidiaries was in compliance with applicable statutory requirements which aggregated dlra722dtta2 million |
| Although the minimum required levels of equity are largely based on premium volume, product mix, and the quality of assets held, minimum requirements can vary significantly at the state level |
| Given our anticipated premium growth in 2006 resulting from the expansion of our Medicare products, capital requirements will increase |
| We expect to fund these increased requirements with capital contributions from Humana Inc, our parent company, in the range of dlra450 million to dlra650 million in 2006 |
| This calculation indicates recommended minimum levels of required capital and surplus and signals regulatory measures should actual surplus fall below these recommended levels |
| If RBC were adopted by all states and Puerto Rico at December 31, 2005, we would be required to fund dlra14dtta7 million in one of our Puerto Rico subsidiaries to meet all requirements |
| After this funding, we would have dlra378dtta2 million of aggregate capital and surplus above any of the levels that require corrective action under RBC The use of individually identifiable data by our business is regulated at federal and state levels |
| These laws and rules are changed frequently by legislation or administrative interpretation |
| Various state laws address the use and maintenance of individually identifiable health data |
| Most are derived from the privacy provisions in the federal Gramm-Leach-Bliley Act and HIPAA HIPAA includes administrative provisions directed at simplifying electronic data interchange through standardizing transactions, establishing uniform health care provider, payer, and employer identifiers and seeking protections for confidentiality and security of patient data |
| The rules do not provide for complete federal preemption of state laws, but rather preempt all inconsistent state laws unless the state law is more stringent |
| These regulations set standards for the security of electronic health information |
| Violations of these rules will subject us to significant penalties |
| Compliance with HIPAA regulations requires significant systems enhancements, training and administrative effort |
| HIPAA could also expose us to additional liability for violations by our business associates |
| A business associate is a person or entity, other than a member of the work force, who on behalf of a covered entity performs, or assists in the performance of a function or activity involving the use or disclosure of individually identifiable health information, or provides legal, accounting, consulting, data aggregation, management, administrative, accreditation, or financial services |
| Another area receiving increased focus is the time in which various laws require the payment of health care claims |
| Many states already have legislation in place covering payment of claims within a specific number of days |
| However, due to provider groups advocating for laws or regulations establishing even stricter standards, procedures and penalties, we expect additional regulatory scrutiny and supplemental legislation with respect to claims payment practices |
| The provider-sponsored bills are characterized by stiff penalties for late payment, including high interest rates payable to providers and costly fines levied by state insurance departments and attorneys general |
| This legislation and possible future regulation and oversight could expose us to additional liability and penalties |
| We are implementing a mail order pharmacy business that subjects us to extensive federal, state and local regulation |
| We are also subject to risks inherent in the packaging and distribution of pharmaceuticals and other health care products |
| 23 ______________________________________________________________________ [45]Table of Contents We are also subject to various governmental audits and investigations |
| These can include audits and investigations by state attorneys general, CMS, the Office of the Inspector General of Health and Human Services, the Office of Personnel Management, the Department of Justice, the Department of Labor, the Defense Contract Audit Agency, and state Departments of Insurance and Departments of Health |
| Several state attorneys general and Departments of Insurance are currently investigating the practices of insurance brokers, including those of certain of the companies in the health care industry |
| All of these activities could result in the loss of licensure or the right to participate in various programs, or the imposition of fines, penalties and other sanctions |
| In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect our industry or our reputation in various markets and make it more difficult for us to sell our products and services |
| Other areas subject to substantial regulation include: • licensing requirements; • approval of policy language and benefits; • mandated benefits and processes; • approval of entry, withdrawal or re-entry into a state or market; • premium rates; and • periodic examinations by state and federal agencies |
| In recent years, significant federal and state legislation affecting our business has been enacted |
| State and federal governmental authorities are continually considering changes to laws and regulations applicable to us and are currently considering regulations relating to: • health insurance access and affordability; • e-connectivity; • disclosure of provider fee schedules and other data about payments to providers, sometimes called transparency; • disclosure of provider quality information; and • formation of regional/national association health plans for small employers |
| All of these proposals could apply to us and could result in new regulations that increase the cost of our operations |
| There can be no assurance that we will be able to continue to obtain or maintain required governmental approvals or licenses or that legislative or regulatory change will not have a material adverse effect on our business |
| Delays in obtaining or failure to obtain or maintain required approvals could adversely affect entry into new markets, our revenues or the number of our members, increase our costs or adversely affect our ability to bring new products to market as forecasted |
| The level of our administrative expenses impacts our profitability |
| While we attempt to manage effectively such expenses, increases in staff-related expenses, investment in new products, including our opportunities in the Medicare programs, greater emphasis on small group and individual health insurance products, acquisitions, and implementation of regulatory requirements, among others, may occur from time to time |
| There can be no assurance that we will be able to successfully contain our administrative expenses in line with our membership that may result in a material adverse effect on our financial position, results of operations and cash flows |
| 24 ______________________________________________________________________ [46]Table of Contents Any failure by us to manage acquisitions, and other significant transactions successfully could harm our financial results, business and prospects |
| As part of our business strategy, we frequently engage in discussions with third parties regarding possible investments, acquisitions, strategic alliances, joint ventures, and outsourcing transactions and often enter into agreements relating to such transactions in order to further our business objectives |
| In order to pursue this strategy successfully, we must identify suitable candidates for and successfully complete transactions, some of which may be large and complex, and manage post-closing issues such as the integration of acquired companies or employees |
| Integration and other risks can be more pronounced for larger and more complicated transactions, or if multiple transactions are pursued simultaneously |
| If we fail to identify and complete successfully transactions that further our strategic objectives, we may be required to expend resources to develop products and technology internally, we may be at a competitive disadvantage or we may be adversely affected by negative market perceptions, any of which may have a material adverse effect on our results of operations, financial position or cash flows |
| If we fail to develop and maintain satisfactory relationships with the providers of care to our members, our business could be adversely affected |
| We contract with physicians, hospitals and other providers to deliver health care to our members |
| Our products encourage or require our customers to use these contracted providers |
| These providers may share medical cost risk with us or have financial incentives to deliver quality medical services in a cost-effective manner |
| In any particular market, providers could refuse to contract with us, demand to contract with us, demand higher payments, or take other actions that could result in higher health care costs for us, less desirable products for customers and members or difficulty meeting regulatory or accreditation requirements |
| In some markets, some providers, particularly hospitals, physician/hospital organizations or multi-specialty physician groups, may have significant market positions and negotiating power |
| In addition, physician or practice management companies, which aggregate physician practices for administrative efficiency and marketing leverage, may compete directly with us |
| If these providers refuse to contract with us, use their market position to negotiate favorable contracts or place us at a competitive disadvantage, our ability to market products or to be profitable in those areas could be adversely affected |
| In some situations, we have contracts with individual or groups of primary care physicians for an actuarially determined, fixed, per-member-per-month fee under which physicians are paid an amount to provide all required medical services to our members |
| This type of contract is referred to as a “capitation” contract |
| The inability of providers to properly manage costs under these capitation arrangements can result in the financial instability of these providers and the termination of their relationship with us |
| In addition, payment or other disputes between a primary care provider and specialists with whom the primary care provider contracts can result in a disruption in the provision of services to our members or a reduction in the services available to our members |
| The financial instability or failure of a primary care provider to pay other providers for services rendered could lead those other providers to demand payment from us even though we have made our regular fixed payments to the primary provider |
| There can be no assurance that providers with whom we contract will properly manage the costs of services, maintain financial solvency or avoid disputes with other providers |
| Any of these events could have an adverse effect on the provision of services to our members and our operations |
| If we fail to manage prescription drug programs successfully, our financial results could suffer |
| In general, prescription drug costs have been rapidly rising over the past few years |
| These increases are due to the introduction of new drugs costing significantly more than existing drugs, direct to consumer advertising by the pharmaceutical industry that creates consumer demand for particular brand-name drugs, and members seeking medications to address lifestyle changes |
| In order to control prescription drug costs, we have 25 ______________________________________________________________________ [47]Table of Contents implemented multi-tiered copayment benefit designs for prescription drugs, including our four-tiered copayment benefit design, Rx4 and an Rx allowance program structured to account for those drugs that treat more pervasive conditions and are suggested to be more effective by empirical data |
| We cannot assure that these efforts will be successful in controlling costs |
| Failure to control these costs could have a material adverse effect on our financial position, results of operations and cash flows |
| Our ability to obtain funds from our subsidiaries is restricted |
| Because we operate as a holding company, we are dependent upon dividends and administrative expense reimbursements from our subsidiaries to fund the obligations of Humana Inc, our parent company |
| These subsidiaries generally are regulated by states’ Departments of Insurance |
| We are also required by law to maintain specific prescribed minimum amounts of capital in these subsidiaries |
| The levels of capitalization required depend primarily upon the volume of premium generated |
| A significant increase in premium volume will require additional capitalization from our parent company |
| To fund our expanding business opportunities, including the enhanced Medicare business, we anticipate additional required capital ranging from dlra450 million to dlra650 million in 2006 |
| In most states, we are required to seek prior approval by these state regulatory authorities before we transfer money or pay dividends from these subsidiaries that exceed specified amounts, or, in some states, any amount |
| In addition, we normally notify the state Departments of Insurance prior to making payments that do not require approval |
| In the event that we are unable to provide sufficient capital to fund the obligations of Humana Inc, our operations or financial position may be adversely affected |
| Ratings are an important factor in our competitive position |
| Claims paying ability, financial strength, and debt ratings by recognized rating organizations are an increasingly important factor in establishing the competitive position of insurance companies |
| Ratings information is broadly disseminated and generally used throughout the industry |
| We believe our claims paying ability and financial strength ratings are an important factor in marketing our products to certain of our customers |
| Our debt ratings impact both the cost and availability of future borrowings |
| Each of the rating agencies reviews its ratings periodically and there can be no assurance that current ratings will be maintained in the future |
| Our ratings reflect each rating agency’s opinion of our financial strength, operating performance, and ability to meet our debt obligations or obligations to policyholders, but are not evaluations directed toward the protection of investors in our common stock and should not be relied upon as such |
| Downgrades in our ratings, should they occur, may adversely affect our business, financial condition and results of operations |
| Increased litigation and negative publicity could increase our cost of doing business |
| The health benefits industry continues to receive significant negative publicity reflecting the public perception of the industry |
| This publicity and perception have been accompanied by increased litigation, including some large jury awards, legislative activity, regulation and governmental review of industry practices |
| These factors may adversely affect our ability to market our products or services, may require us to change our products or services, may increase the regulatory burdens under which we operate and may require us to pay large judgments or fines |
| Any combination of these factors could further increase our cost of doing business and adversely affect our financial position, results of operations and cash flows |