Aetna 2009 Annual Report Download - page 39

Annual Report – Page 33
We must continue to differentiate our products and services from those of our competitors; we operate in an
evolving industry that requires us to anticipate changes in customer preferences and to innovate and deliver
products and services that demonstrate value to our customers, particularly in response to market changes
from public policy.
We operate in a highly competitive environment and in an industry that is subject to significant ongoing changes from
market pressures brought about by customer demands, as well as business consolidations, strategic alliances, legislative
and regulatory changes and marketing practices. In addition, our customers generally, and our larger customers
particularly, are well informed and organized and can easily move between us and our competitors. These factors
require us to differentiate our products and services by anticipating changes in customer preferences and innovating
and delivering products and services that demonstrate value to our customers, particularly in response to market
changes from public policy. Failure to anticipate changes in customer preferences or to innovate and deliver products
and services that demonstrate value to our customers can affect our ability to retain or grow profitable membership
which can adversely affect our operating results.
Our ability to anticipate and detect medical cost trends and achieve appropriate pricing affects our
profitability; and our business and profitability may continue to be adversely affected by prevailing economic
conditions. There can be no assurance that future health care costs will not continue to exceed our projections.
Adverse economic conditions and unanticipated increases in our health care costs can significantly and adversely
affect our businesses and profitability in a number of ways. The current economic environment is challenging and less
predictable than recently experienced, which has caused and may continue to cause unanticipated increases and
volatility in our health care costs. Premium revenues from our Insured Health Care products comprised approximately
81% of our total consolidated revenues for the year ended December 31, 2009. We continue to be vigilant in our
pricing and have generally increased our premium rates for Insured business that will be under contract in 2010. Our
health care premiums are generally fixed for one-year periods. Accordingly, future cost increases in excess of health
care or other benefit cost projections reflected in our pricing cannot be recovered in the contract year through higher
premiums. As a result, our profits are particularly sensitive to the accuracy of our forecasts of the increases in health
care and other benefit costs that we expect to occur during the fixed premium period. Those forecasts typically are
made several months before the fixed premium period begins and are dependent on our ability to anticipate and detect
medical cost trends. For example, during the year ended December 31, 2009, medical costs were higher and more
volatile than we predicted, which led to health care costs that were significantly higher than we projected. As a result
of these increases and volatility, accurately detecting, forecasting, managing and reserving for our and our self-insured
customers’ medical cost trends and future health care costs have become more challenging. There can be no assurance
regarding the accuracy of the health care or other benefit cost projections reflected in our pricing, and our health care
and other benefit costs can be affected by external events over which we have no control. Relatively small differences
between predicted and actual health care costs as a percentage of premium revenues can result in significant adverse
changes in our results of operations. If the rate of increase in our health care or other benefit costs in 2010 were to
exceed the levels reflected in our pricing or if we are not able to obtain appropriate pricing on new or renewal business,
our operating results would be adversely affected.
Our ability to manage health care costs affects our profitability.
Our profitability depends in large part on our ability to appropriately manage future health care costs through
underwriting criteria, product design, negotiation of favorable provider contracts and medical management programs.
The aging of the population and other demographic characteristics, advances in medical technology and other factors
continue to contribute to rising health care costs. Changes in health care practices, general economic conditions such
as inflation and employment levels, new technologies, increases in the cost of prescription drugs, direct-to-consumer
marketing by pharmaceutical companies, clusters of high cost cases, changes in the regulatory environment, health
care provider or member fraud and numerous other factors affecting the cost of health care can be beyond any health
plan’ s control and may adversely affect our ability to manage health care costs, which can adversely affect our
operating results.
We face risks from industry, public policy and economic forces that can change the fundamentals of the health
and related benefits industry and adversely affect our business and operating results.
Various factors particular to the health and related benefits industry may affect our business model. Those factors
include, among others, the rapid evolution of the business model, particularly as that model moves to a direct sales to
the consumer model, shifts in public policy, adverse changes in laws and regulations, consumerism, pricing actions by
competitors, competitor and supplier consolidation and a declining number of commercially insured people. We also
face the potential of competition from existing or new companies that have not historically been in the health or group