Aetna 2011 Annual Report Download - page 31

Annual Report- Page 25
Revenue Recognition and Allowance for Estimated Terminations and Uncollectable Accounts
Our revenue is principally derived from premiums and fees billed to customers in the Health Care and Group
Insurance businesses. In Health Care, revenue is recognized based on customer billings, which reflect contracted
rates per employee and the number of covered employees recorded in our records at the time the billings are
prepared. Billings are generally sent monthly for coverage during the following month. In Group Insurance,
premium for group life and disability products is recognized as revenue, net of allowances for uncollectable
accounts, over the term of coverage. Amounts received before the period of coverage begins are recorded as
unearned premiums.
Health Care billings may be subsequently adjusted to reflect changes in the number of covered employees due to
terminations or other factors. These adjustments are known as retroactivity adjustments. We estimate the amount
of future retroactivity each period and adjust the recorded revenue accordingly. We also estimate the amount of
uncollectable receivables each period and establish an allowance for uncollectable amounts. We base such
estimates on historical trends, premiums billed, the amount of contract renewal activity during the period and other
relevant information. As information regarding actual retroactivity and uncollectable amounts becomes known, we
refine our estimates and record any required adjustments to revenues in the period they arise. A significant
difference in the actual level of retroactivity or uncollectable amounts when compared to our estimated levels would
have a significant effect on Health Care's operating results.
Beginning in 2011, premium revenue subject to the minimum MLR rebate requirements of Health Care Reform is
recorded net of the estimated minimum MLR rebates for the current calendar year. We estimate the minimum MLR
rebates by projecting MLRs for the individual, small group and large group markets, as defined by Health Care
Reform, for each state in which each of our insurance entities operate. The claims and premiums used in estimating
such rebates are modified for certain adjustments allowed by Health Care Reform and include a statistical
credibility adjustment for those states with a number of members that is not statistically credible.
NEW ACCOUNTING STANDARDS
Refer to Note 2 of Notes to Consolidated Financial Statements, beginning on page 66, for a discussion of recently
issued accounting standards.
REGULATORY ENVIRONMENT
General
Our operations are subject to comprehensive United States federal, state and local and comparable multiple levels
of international regulation in the jurisdictions in which we do business. The laws and rules governing our business
and interpretations of those laws and rules continue to become more restrictive each year and are subject to frequent
change. Health Care Reform has made and will continue to make extensive changes to the U.S. health care system
and significantly increases the regulation of our business. There also continues to be a heightened review by
federal, state and international regulators of the health and related benefits industry's business and reporting
practices.
Further, we must obtain and maintain regulatory approvals to price and market many of our products. Supervisory
agencies, including CMS, and the Center for Consumer Information and Insurance Oversight (“CCIIO”), as well as
state health, insurance and managed care departments and state boards of pharmacy have broad authority to:
• Grant, suspend and revoke our licenses to transact business;
• Exclude us from participation in government programs;
• Suspend or limit our authority to market products;
• Regulate many aspects of the products and services we offer, including the pricing and underwriting of such
products and services;
• Audit us and our performance of our contracts;
• Impose sanctions;
• Assess damages, fines and/or penalties;