Aetna 2008 Annual Report Download - page 35

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Medicaid products and State Children’ s Health Insurance Program contracts are subject to federal and state
regulations and oversight by state Medicaid agencies regarding the services provided to Medicaid enrollees, payment
for those services and other aspects of these programs. The regulations and contractual requirements applicable to us
and other participants in Medicaid programs are complex and subject to change. Although we have invested
significant resources to comply with these standards and believe our compliance efforts are adequate, our Medicaid
compliance efforts will continue to require significant resources. If we fail to comply with the standards, CMS may
prohibit us from continuing to market and/or enroll members in one or more Medicaid products.
HMO and Insurance Holding Company Laws
A number of states, including Pennsylvania and Connecticut, regulate affiliated groups of HMOs and insurers such
as the Company under holding company statutes. These laws may require us and our subsidiaries to maintain certain
levels of equity. Holding company laws and regulations generally require insurance companies and HMOs within an
insurance holding company system to register with the insurance department of each state where they are domiciled
and to file reports with those states’ insurance departments regarding capital structure, ownership, financial
condition, intercompany transactions and general business operations. In addition, various notice or prior regulatory
approval requirements apply to transactions between insurance companies, HMOs and their affiliates within an
insurance holding company system, depending on the size and nature of the transactions.
The states of domicile of our regulated subsidiaries have statutory risk-based capital, or RBC, requirements for
health and other insurance companies and HMOs based on the RBC Model Act. These RBC requirements are
intended to assess the capital adequacy of life and health insurers and HMOs, taking into account the risk
characteristics of a company’ s investments and products. The RBC Model Act sets forth the formula for calculating
the RBC requirements, which are designed to take into account asset risks, insurance risks, interest rate risks and
other relevant risks with respect to an individual company’ s business. In general, under these laws, an insurance
company or HMO must submit a report of its RBC level to the insurance department or insurance commissioner of
its state of domicile for each calendar year.
The RBC Model Act requires increasing degrees of regulatory oversight and intervention as a company’ s RBC
declines and provides for four different levels of regulatory attention depending on the ratio of a company’ s total
adjusted capital (defined as the total of its statutory capital, surplus and asset valuation reserve) to its risk-based
capital. The level of regulatory oversight ranges from requiring the company to inform and obtain approval from the
domiciliary insurance commissioner of a comprehensive financial plan for increasing its RBC, to mandatory
regulatory intervention requiring a company to be placed under regulatory control in a rehabilitation or liquidation
proceeding. As of December 31, 2008, the RBC levels of our insurance and HMO subsidiaries exceeded all RBC
thresholds.
For information regarding restrictions on certain payments of dividends or other distributions by HMO and insurance
company subsidiaries of our company, refer to Note 16 of Notes to Consolidated Financial Statements on page 75.
The holding company laws for the states of domicile of Aetna and certain of its subsidiaries also restrict the ability of
any person to obtain control of an insurance company or HMO without prior regulatory approval. Under those
statutes, without such approval (or an exemption), no person may acquire any voting security of an insurance
holding company (such as our parent company, Aetna Inc.) that controls an insurance company or HMO, or merge
with such a holding company, if as a result of such transaction such person would control the insurance holding
company. Control is generally defined as the direct or indirect power to direct or cause the direction of the
management and policies of a person and is presumed to exist if a person directly or indirectly owns or controls 10%
or more of the voting securities of another person.
Audits and Investigations; Fraud and Abuse Laws
We typically have been and are currently involved in various governmental investigations, audits and reviews, the
frequency and depth of which continue to increase. These include routine, regular and special investigations, audits
and reviews by CMS, state insurance and health and welfare departments, state attorneys general, the Office of the
Inspector General, the Office of Personnel Management, U.S. Congressional committees, the U.S. Department of
Justice, U.S. Attorneys and other governmental authorities. Such government actions can result in changes in our
business practices, assessment of damages, civil or criminal fines or penalties, or other sanctions, including the loss
of licensure or exclusion from participation in government programs. For example, in January 2009, we agreed to