Aetna 2008 Annual Report Download - page 59

Annual Report - Page 54
We review health care and insurance liabilities periodically. We reflect any necessary adjustments during the
current period in results of operations. While the ultimate amount of claims and related expenses are dependent on
future developments, it is our management’ s opinion that the liabilities that have been established are adequate to
cover such costs. The health care and insurance liabilities that are expected to be paid within one year from the
balance sheet date are classified as current liabilities in our balance sheets.
Premium Deficiency Reserves
We evaluate our health care and group insurance contracts to determine if it is probable that a loss will be incurred.
We would recognize a premium deficiency loss when it is probable that expected future claims, including
maintenance costs (for example, claim processing costs), will exceed existing reserves plus anticipated future
premiums and reinsurance recoveries on existing contracts. Anticipated investment income is considered in the
calculation of premium deficiency losses for short-duration contracts. For purposes of determining premium
deficiency losses, contracts are grouped in a manner consistent with our method of acquiring, servicing and
measuring the profitability of such contracts. We did not have any material premium deficiency reserves at
December 31, 2008 or 2007.
Health Care Contract Acquisition Costs
Health care products included in the Health Care segment are cancelable by either the customer or the member
monthly upon written notice. Acquisition costs related to our prepaid health care and health indemnity contracts are
expensed as incurred.
Revenue Recognition
Health care premiums are recognized as income in the month in which the enrollee is entitled to receive health care
services. Health care premiums are reported net of an allowance for estimated terminations and uncollectable
amounts. Other premium revenue for group life, long-term care and disability products is recognized as income, net
of allowances for termination and uncollectable accounts, over the term of the coverage. Other premium revenue for
Large Case Pensions’ limited payment pension and annuity contracts is recognized as revenue in the period received.
Premiums related to unexpired contractual coverage periods are reported as unearned premiums in our balance
sheets.
The balance of the allowance for estimated terminations and uncollectable accounts on premiums receivable was $82
million and $76 million at December 31, 2008 and 2007, respectively, and is reflected as a reduction of premiums
receivable in our balance sheets. The balance of the allowance for uncollectable accounts on other receivables was
$61 million and $78 million at December 31, 2008 and 2007, respectively, and is reflected as a reduction of other
receivables in our balance sheets.
Some of our contracts allow for premiums to be adjusted to reflect actual experience. Such adjustments are
reasonably estimable (based on actual experience of the customer emerging under the contract and the terms of the
underlying contract) and are recognized as the experience emerges.
Fees and other revenue consists primarily of ASC fees which are received in exchange for performing certain claims
processing and member services for health and disability members and are recognized as revenue over the period the
service is provided. Some of our contracts include guarantees with respect to certain functions such as customer
service response time, claim processing accuracy and claim processing turnaround time, as well as certain guarantees
that claim expenses to be incurred by plan sponsors will fall within a certain range. With any of these guarantees, we
are financially at risk if the conditions of the arrangements are not met, although the maximum amount at risk is
typically limited to a percentage of the fees otherwise payable to us by the customer involved. We accrue for any
such exposure upon occurrence.
In addition, fees and other revenue also include charges assessed against contract holders’ funds for contract fees,
participant fees and asset charges related to pension and annuity products in the Large Case Pensions business.
Other amounts received on pension and annuity investment-type contracts are reflected as deposits and are not
recorded as revenue. Some of our Large Case Pension contract holders have the contractual right to purchase
annuities with life contingencies using the funds they maintain on deposit with us. Since these products are
considered an insurance contract, when the contract holder makes this election, we treat the accumulated investment
balance as a single premium and reflect it as both premiums and current and future benefits in our statements of
income.