Aetna 2008 Annual Report Download - page 24

Annual Report - Page 19
For each reporting period, we use an extensive degree of judgment in the process of estimating our health care costs
payable, and as a result, considerable variability and uncertainty is inherent in such estimates, and the adequacy of
such estimates is highly sensitive to changes in assumed completion factors and the assumed health care cost trend
rates. For each reporting period we recognize our best estimate of health care costs payable considering the potential
volatility in assumed completion factors and health care cost trend rates, as well as other factors. We believe our
estimate of health care costs payable is reasonable and adequate to cover our obligations at December 31, 2008;
however, actual claim payments may differ from our estimates. A worsening (or improvement) of our health care
cost trend rates or changes in completion factors from those that we assumed in estimating health care costs payable
at December 31, 2008 would cause these estimates to change in the near term, and such a change could be material.
Each quarter, we re-examine previously established health care costs payable estimates based on actual claim
payments for prior periods and other changes in facts and circumstances. Given the extensive degree of judgment in
this estimate, it is possible that our estimates of health care costs payable could develop either favorably (i.e., our
actual health care costs for the period were less than we estimated) or unfavorably. The changes in our estimate of
health care costs payable may relate to a prior fiscal quarter, prior fiscal year or earlier periods. We also consider the
results of these re-examinations when we determine our current year liabilities. Because of the uncertainty involved
in establishing estimates of health care costs payable each period, changes in prior period health care cost estimates
may be offset by current period health care costs when we establish our estimate of current period health care costs.
Our reserving practice is to consistently recognize the actuarial best estimate of our ultimate liability for health care
costs payable. When significant decreases (increases) in prior periods’ health care cost estimates occur that we
believe significantly impact our current period results of operations, we disclose that amount as favorable
(unfavorable) development of prior period health care cost estimates. We had no significant amount of favorable
(unfavorable) development of prior period health care cost estimates that affected our results of operations in 2008 or
2007 (refer to Health Care beginning on page 5 and Note 6 of Notes to Consolidated Financial Statements on page
57 for additional information).
During 2008 and 2007, we have observed an increase in our completion factors as a result of an increase in the speed
of our provider claim submission and our processing times. After considering the claims paid in 2008 and 2007 with
dates of service prior to the fourth quarter of the previous year, we observed the assumed weighted average
completion factors were approximately .2% and .5%, respectively, higher than previously estimated, resulting in a
reduction of approximately $39 million in 2008 and $66 million in 2007 in health care costs payable that related to
the prior year. We have considered this continued increase in completion factors when determining the completion
factors used in our estimates of IBNR at December 31, 2008. However, based on our historical claim experience, it
is reasonably possible that our assumed completion factors may vary by plus or minus .5% from our assumed rates,
which could impact health care costs payable by approximately plus or minus $26 million pretax.
Also during 2008 and 2007, we observed that our health care cost trend rates for claims with dates of service three
months or less before the financial statement date were slightly lower than previously estimated. Specifically, after
considering the claims paid in 2008 and 2007 with dates of service for the fourth quarter of the previous year, we
observed health care cost trend rates that were approximately 3.7% and 4.5%, respectively, lower than previously
estimated for claims associated with combined Commercial and Medicare IBNR, resulting in a reduction of
approximately $108 million in 2008 and $111 million in 2007 in health care costs payable that related to the prior
year. The lower than anticipated health care cost trend rates we observed in 2008 for claims incurred in 2007 were
due primarily to moderating outpatient and lower pharmacy trends. The lower than anticipated health care cost trend
rates we observed in 2007 for claims incurred in 2006 were due to moderating outpatient and physician trends, and
lower pharmacy trends. Historical health care cost trend rates are not necessarily representative of current trends.
Therefore, we consider historical trend rates together with our knowledge of recent events that may impact current
trends when developing our estimates of current trend rates. When establishing our reserves at December 31, 2008,
we decreased our assumed health care cost trend rates to account for the lower than anticipated health care cost trend
rates recently observed. However, based on our historical claim experience, it is reasonably possible that our
estimated health care cost trend rates may vary by plus or minus 3.0 percentage points from our assumed rates,
which could impact health care costs payable by approximately plus or minus $137 million pretax.