Aetna 2011 Annual Report Download - page 41

Annual Report- Page 35
CMS regularly audits our performance to determine our compliance with CMS's regulations, our contracts with
CMS and the quality of services we provide to Medicare beneficiaries. CMS uses various payment mechanisms to
allocate and adjust premium payments to our and other companies' Medicare plans by considering the applicable
health status of Medicare members as supported by information maintained and provided by health care
providers. We collect claim and encounter data from providers and generally rely on providers to appropriately
code their submissions and document their medical records. Medicare Advantage plans and PDPs receive increased
premiums for members who have certain medical conditions identified with specific health condition
codes. Federal regulators review and audit the providers' medical records and related health condition codes that
determine the members' health status and the resulting risk-adjusted premium payments to us. CMS has instituted
risk adjustment data validation (“RADV”) audits of various Medicare Advantage organizations, including two of
Aetna's contracts for the 2007 contract year. Although these two audits are ongoing, we do not believe that they
will have a material impact on our operating results, financial position or cash flows.
We believe that the OIG also is auditing risk adjustment data, and we expect CMS and the OIG to continue auditing
risk adjustment data for the 2007 contract year and beyond. Aetna and other Medicare Advantage organizations
have provided comments to CMS in response to CMS's December 2010 proposed RADV sampling and payment
error calculation methodology by which CMS proposes to calculate and extrapolate RADV audit payment error
rates for, and determine premium refunds payable by, Medicare Advantage plans. Our concerns with CMS's
proposed methodology include the fact that the proposed methodology does not take into account the “error rate” in
the original Medicare fee-for-service data that was used to develop the risk adjustment system and that retroactive
audit and payment adjustments undermine the actuarial soundness of Medicare Advantage bids. CMS has indicated
that it may make retroactive contract-level premium payment adjustments based on the results of these RADV
audits, which could occur as early as 2012. CMS's premium adjustments could be implemented prior to our or
other Medicare Advantage organizations having an opportunity to appeal the audit or payment error calculation
results or methodology. We are unable to predict the ultimate outcome of CMS's final RADV audit methodology,
other audits for the 2007 contract year or subsequent contract years, the amounts of any retroactive refunds of, or
prospective adjustments to, premium payments made to us, or whether any audit findings would cause a change to
our method of estimating future premium revenue in bid submissions to CMS for the current or future contract
years or compromise premium assumptions made in our bids for prior contract years. Any premium refunds or
adjustments resulting from regulatory audits, including those resulting from CMS's selection of its final RADV
audit methodology, whether as a result of RADV or other audits by CMS or OIG or otherwise, could be material
and could adversely affect our operating results, financial position and cash flows.
Since 2005, we have generally expanded the Medicare markets we serve and Medicare products we offer, including
by acquiring the Medicare Supplement business of Genworth Financial during the fourth quarter of 2011, which
significantly expanded our Medicare Supplement membership. This expansion of the Medicare markets we serve
and Medicare products we offer and the Medicare-related provisions of Health Care Reform increase our exposure
to changes in government policy with respect to and/or regulation of the various Medicare programs in which we
participate, including changes in the amounts payable to us under those programs. For example, as a result of the
failure of the Joint Select Committee on Deficit Reduction to cut the federal deficit by $1.2 trillion, the BCA
triggers automatic sequestration starting in 2013, including Medicare spending cuts of not more than two percent of
total program costs for nine years, starting in 2013. The BCA exempts certain programs from these cuts, including
Medicaid, and certain Medicare payments from these cuts, including Part D LIS; the Part D catastrophic subsidies;
and payments to states for coverage of Medicare cost-sharing for certain low-income Medicare beneficiaries. OMB
is responsible for making these cuts. We are exploring strategies to mitigate any impact that may result from these
cuts. In addition, on July 15, 2008, the U.S. Congress overrode the President's veto and passed a Medicare funding
bill that reduced amounts payable to health plans that offer Medicare Advantage plans beginning in 2010 and
imposed new marketing requirements for Medicare Advantage and Medicare Part D Prescription Drug plans
beginning in 2009.