Aetna 2012 Annual Report Download - page 40

Annual Report- Page 34
Pricing and Underwriting Restrictions
Pricing and underwriting regulation by states limits our underwriting and rating practices and that of other health
insurers, particularly for small employer groups and individuals. Beginning in 2014, as a result of Health Care
Reform, health insurers cannot vary small group or individual premium rates based on individual members'
characteristics except for geography and limited variation for age and tobacco use. By 2016, as a result of Health
Care Reform, the small group rating category will be expanded to cover groups of up to 100 employees. States can
choose to implement these changes prior to 2016. Pricing and underwriting laws and regulations vary by state. In
general, they apply to certain customer segments and limit our ability to set prices for new or renewal business, or
both, based on specific characteristics of the group or the group's prior claim experience. In some states, these laws
and regulations restrict our ability to price for the risk we assume and/or reflect reasonable costs in our
pricing. Many of these laws and regulations also limit the differentials in premium rates insurers and other carriers
may charge between new and renewal business, and/or between groups or individuals based on differing
characteristics. They may also require that carriers disclose to customers the basis on which the carrier establishes
new business and renewal premium rates, restrict the application of pre-existing condition exclusions and limit the
ability of a carrier to terminate coverage of an employer group.
Health Care Reform expands the premium rate review process by, among other things, requiring our rates to be
reviewed for “reasonableness” at either the state or the federal level. HHS has established a federal premium rate
review process that became effective in September 2011 and generally applies to proposed premium rate increases
equal to or exceeding 10% (or a state specified threshold after September 2012). HHS's rate review process
imposes additional public disclosure requirements as well as additional review on filings requesting premium rate
increases equal to or exceeding this “reasonableness” threshold. These combined state and federal review
requirements may prevent, further delay or otherwise affect our ability to price for the risk we assume, which could
adversely affect us particularly during periods of increased utilization of medical services and/or medical cost trend
or when such utilization and/or trend exceeds our projections.
Health Care Reform also specifies minimum MLRs of 85% for the large group market and 80% for the individual
and small group markets, which began in 2011. Because Health Care Reform is structured as a “floor” for many of
its requirements, states have the latitude to enact more stringent rules governing its various restrictions. States may
adopt higher minimum MLR requirements, use more stringent definitions of “medical loss ratio,” incorporate
minimum MLR requirements into prospective premium rate filings, require prior approval of premium rates, or
impose other requirements related to minimum MLR. For example, Texas has expanded from 50 to 100 the
maximum size of “small groups” that are subject to its minimum MLR requirements, and New York, New Jersey
and California all have established state-specific minimum MLR requirements. State-specific minimum MLR
requirements and similar actions further limit the level of margin we can earn in our Insured business while leaving
us exposed to medical costs that are higher than those reflected in our pricing.
The premium rate approval process may further restrict our ability to price for the risk we assume, and the
application of minimum MLR thresholds limits the level of margin we can earn in our Insured business while
leaving us exposed to medical costs that are higher than those reflected in our pricing. Each of these outcomes could
adversely affect our ability to operate our business profitably in certain product lines and geographies we serve
today, particularly during periods of increased utilization of medical services and/or medical cost trend or when
such utilization and/or trend exceeds our projections.
In addition, we expect to request significant increases in our premium rates in our individual and small group
Health Care businesses for 2014 and beyond in order to adequately price for projected medical cost trends, the
expanded coverages and rating limits required by Health Care Reform and the significant assessments, fees and
taxes imposed by Health Care Reform. These significant increases heighten the risks of adverse public and
regulatory action and adverse selection and the likelihood that our requested premium rate increases will be denied,
reduced or delayed, which could lead to operating margin compression.