Aetna 2011 Annual Report Download - page 50

Annual Report- Page 44
medical technology and other factors contribute to rising health care costs and medical cost trends. Medical cost
trends may also be impacted by a number of other factors that are beyond our control, such as epidemics,
pandemics, terrorist attacks, natural disasters or other extreme events that materially increase utilization of medical
services, as well as changes in members' healthcare utilization patterns and provider billing practices. During the
year ended December 31, 2009, medical costs were higher and more volatile than we projected. During the years
ended December 31, 2011 and 2010, medical costs and members' utilization of medical services were lower than we
projected and members' utilization was below historical levels. Our 2010 and 2011 experience is not projected to
continue in 2012; we expect utilization to increase to more normal levels in 2012. As a result of the volatility we
have experienced in recent years, accurately anticipating, detecting, forecasting, managing and reserving for
utilization of medical services for ourselves and our self-insured customers and medical cost trends have become
more challenging. Such challenges are particularly heightened during and following periods when such utilization
and/or trends are below historical levels such as we experienced during 2010 and 2011. 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 that we cannot forecast or project and over which we
have no control, such as the higher than projected H1N1 influenza and COBRA related health care costs we
experienced in 2009, as well as changes in our products, contracts with providers, medical management,
underwriting, rating and/or claims processing methods and processes. Relatively small differences between
predicted and actual health care and other benefit costs as a percentage of premium revenues can result in
significant adverse changes in our operating results. Furthermore, if we are unable to accurately and promptly
anticipate and detect medical cost trends, our ability to take timely pricing and other corrective actions may be
limited, which would further exacerbate the extent of the adverse impact on our profitability. This risk is magnified
by Health Care Reform and other legislation and regulations (such as rate reviews and limits on premium rate
increases) that limit our ability to price for our projected and/or experienced increases in utilization of medical
services and/or such trend. If health care and other benefit costs are higher than we predict or if we are not able to
obtain appropriate pricing on new or renewal business, our prices will not reflect the risk we assume and our
profitability will be adversely affected. If health care and other benefit costs are lower than we predict, our prices
may be higher than those of our competitors, which may cause us to lose membership. For more information, see
“Critical Accounting Estimates - Health Care Costs Payable” beginning on page 19.
Our ability to manage health care and other benefit costs affects our profitability and competitiveness.
Our profitability and competitiveness depend in large part on our ability to appropriately manage future health care
and other benefit costs through underwriting criteria, product design, negotiation of favorable provider contracts
and medical management programs. Government-imposed limitations on Medicare and Medicaid reimbursement
also have caused the private sector to bear a greater share of increasing health care and other benefits costs over
time. The aging of the population and other demographic characteristics, advances in medical technology and other
factors continue to contribute to rising health care and other benefit costs. Changes as a result of Health Care
Reform and other changes in the regulatory environment, implementation of ICD-10, 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,
health care provider or member fraud, changes to Medicare and/or Medicaid reimbursement levels to health plans
and providers 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 predict and manage health care and other benefit costs, which can adversely
affect our competitiveness and 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-to-
consumer marketing model, such as the model contemplated by the Insurance Exchanges, which will begin to
operate in 2014; shifts in public policy, including those embodied in Health Care Reform; adverse changes in laws
and regulations or the interpretation of laws and regulations; consumerism; pricing actions by competitors;
competitor and supplier consolidation and integration; a declining number of commercially insured people; and
changes in technology. We also face the potential of competition from existing or new companies that have not