Aetna 2012 Annual Report Download - page 45

Annual Report- Page 39
Federal Employees Health Benefits (“FEHB”) Program
Our subsidiaries contract with the OPM to provide managed health care services under the FEHB program in their
service areas. These contracts with the OPM and applicable government regulations establish premium rating
arrangements for this program. Prior to 2012, OPM regulations required that FEHB plans receive pricing that was
at least as favorable as similarly sized subscriber groups (“SSSG”) in the applicable market. Compliance with the
SSSG requirements complicated pricing of our Commercial business and could result in the payment of an
unanticipated premium refund to the OPM. The OPM issued new pricing regulations for 2012, which eliminated
the SSSG requirements and moved to a FEHB program-specific MLR by plan code and market. In 2012, carriers
were able to elect the SSSG rules or the MLR regulations. Aetna elected the MLR regulations in all plan codes and
markets except our Washington D.C. area and New York HMO's. For 2013 and beyond, the new MLR regulations
are mandatory for all our plan codes and markets. Managing to these rules is further complicated by the
simultaneous application of the minimum MLR standards and associated premium rebate requirements of Health
Care Reform. The OPM conducts periodic audits of its contractors to, among other things, verify that the premiums
established under its contracts are in compliance with the SSSG/MLR and other requirements under FEHB
program. The OPM may seek premium refunds or institute other sanctions against us if we fail to comply with the
FEHB program requirements.
Medicare
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, and continues to expand our Medicare Supplement membership. Medicare Supplement
products are regulated at the state level. We expect to further expand our Medicare business in 2013 as a result of
the completion of the proposed Coventry acquisition and are seeking to substantially grow our Medicare business
over the next several years. The 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 and/or new reforms or surcharges on existing programs. For example,
the ATRA reduced Medicare reimbursements to health plans and eliminated funding for certain Health Care Reform
programs, and any sequestration would result in an automatic reduction in Medicare reimbursements to health plans
of not more than 2% of total program costs for nine years. Absent further legislation, sequestration will start in
March 2013. The BCA exempts 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. The OMB is responsible for making these cuts. We are exploring strategies, such as
amendments to our contracts with providers, to mitigate any impact that may result from these cuts and/or related
Congressional action. We cannot predict the impact that any sequestration, if it occurs, or entitlement program
reform will have on our business, operations or operating results, but the effects could be materially adverse,
particularly on our Medicare revenues and operating results.
Our Medicare Advantage and Part D products are regulated by CMS. The regulations and contractual requirements
applicable to us and other participants in Medicare programs are complex, expensive to comply with and subject to
change. We have invested significant resources to comply with Medicare standards, and our Medicare compliance
efforts will continue to require significant resources. CMS may seek premium refunds, prohibit us from continuing
to market and/or enroll members in one or more Medicare products, exclude us from participating in one or more
Medicare programs and/or institute other sanctions against us if we fail to comply with CMS regulations or our
Medicare contractual requirements. For example, in April 2010, CMS imposed intermediate sanctions on us
suspending the enrollment of and marketing to new members of all Aetna Medicare Advantage and Standalone PDP
contracts. CMS lifted those sanctions in June, 2011. As a result of those sanctions, our 2011 Medicare membership
and operating results were adversely affected because we did not participate in the annual enrollment process for
2011. We were not again eligible to receive assignments of low-income subsidy PDP members from CMS until
September 2012.
CMS regularly audits our performance to determine our compliance with CMS's regulations and our contracts with
CMS and to assess the quality of services we provide to Medicare beneficiaries. CMS uses various payment