Aetna 2009 Annual Report Download - page 60

Annual Report – Page 54
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 $107
million and $82 million at December 31, 2009 and 2008, 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
$55 million and $61 million at December 31, 2009 and 2008, 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.
Accounting for the Medicare Part D Prescription Drug Program (“PDP”)
We were selected by the Centers for Medicare & Medicaid Services (“CMS”) to be a national provider of PDP in all
50 states to both individuals and employer groups in 2009, 2008 and 2007. Under these annual contracts, CMS pays
us a portion of the premium, a portion of, or a capitated fee for, catastrophic drug costs and a portion of the health
care costs for low-income Medicare beneficiaries and provides a risk sharing arrangement to limit our exposure to
unexpected expenses.
We recognize premiums received from, or on behalf of, members or CMS and capitated fees as premium revenue
ratably over the contract period. We expense the cost of covered prescription drugs as incurred. Costs associated with
low-income Medicare beneficiaries (deductible, coinsurance, etc.) and the catastrophic drug costs paid in advance by
CMS are recorded as a liability and offset health care costs when incurred. For individual PDP coverage, the risk
sharing arrangement provides a risk corridor whereby the target amount (what we received in premiums from members
and CMS based on our annual bid amount less administrative expenses) is compared to our actual drug costs incurred
during the contract year. Based on the risk corridor provision and PDP activity to date, an estimated risk sharing
receivable or payable is recorded on a quarterly basis as an adjustment to premium revenue. We perform a
reconciliation of the final risk sharing, low-income subsidy and catastrophic amounts after the end of each contract
year.
Allocation of Operating Expenses
We allocate to the business segments centrally incurred costs associated with specific internal goods or services
provided to us, such as employee services, technology services and rent, based on a reasonable method for each
specific cost (such as membership, usage, headcount, compensation or square footage occupied). Interest expense on
third-party borrowings and, beginning on January 1, 2009, the financing components of our pension and other post-
retirement benefit plan expense is not allocated to the reporting segments, since it is not used as a basis for measuring
the operating performance of the segments. Such amounts are reflected in Corporate Financing in our segment