Aetna 2012 Annual Report Download - page 48

Annual Report- Page 42
with these standards, and our Medicaid and dual eligible program compliance efforts will continue to require
significant resources. CMS and/or state Medicaid agencies may fine us, seek premium refunds, terminate our
existing contracts, elect not to award us new contracts or renew our existing contracts, prohibit us from continuing
to market and/or enroll members in or refuse to auto assign members to one or more of our Medicaid or dual
eligible products, exclude us from participating in one or more Medicaid or dual eligible programs and/or institute
other sanctions against us if we fail to comply with CMS or state regulations or our contractual requirements.
We cannot predict whether pending or future federal or state legislation or court proceedings will change various
aspects of Health Care Reform or state level health care reform, nor can we predict the impact those changes will
have on our business operations or financial results, but the effects could be materially adverse.
HMO and Insurance Holding Company Laws
A number of states, including Pennsylvania and Connecticut, regulate affiliated groups of insurers and HMOs such
as the Company under holding company statutes. These laws may, among other things, require us and our
subsidiaries to maintain certain levels of equity. Holding company laws and regulations generally require insurance
companies and HMOs within an insurance holding company system to register with the insurance department of
each state where they are domiciled and to file reports with those states' insurance departments regarding capital
structure, ownership, financial condition, intercompany transactions and general business operations. In addition,
various notice or prior regulatory approval requirements apply to transactions between insurance companies, HMOs
and their affiliates within an insurance holding company system, depending on the size and nature of the
transactions. Following the amendment of the Annual Financial Reporting Model Regulation by the NAIC to
include provisions similar to certain elements of the Sarbanes-Oxley Act of 2002, we expect the states in which our
insurance and HMO subsidiaries are licensed to continue to expand their regulation of the corporate governance and
internal control activities of our insurance companies and HMOs.
The states of domicile of our regulated subsidiaries have statutory risk-based capital, or “RBC”, requirements for
health and other insurance companies and HMOs based on the RBC Model Act. These RBC requirements are
intended to assess the capital adequacy of life and health insurers and HMOs, taking into account the risk
characteristics of a company's investments and products. The RBC Model Act sets forth the formula for calculating
RBC requirements, which are designed to take into account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to an individual company's business. In general, under these laws, an insurance company
or HMO must submit a report of its RBC level to the insurance department or insurance commissioner of its state of
domicile for each calendar year.
The RBC Model Act requires increasing degrees of regulatory oversight and intervention as a company's RBC
declines and provides for four different levels of regulatory action depending on the ratio of a company's total
adjusted capital (defined as the total of its statutory capital, surplus and asset valuation reserve) to its risk-based
capital. The level of regulatory action ranges from requiring the company to submit a comprehensive financial plan
for increasing its RBC to the domiciliary state insurance commissioner, to mandatory regulatory intervention
requiring a company to be placed under regulatory control in a rehabilitation or liquidation proceeding. At
December 31, 2012, the RBC levels of our insurance and HMO subsidiaries was above the level that would require
regulatory action.
In addition, changes to regulations or the interpretation of those regulations due to regulators' increasing concerns
regarding insurance company and/or HMO solvency due, among other things, to the current adverse and uncertain
economic environment, could negatively impact our business in various ways, including through increases in
solvency fund assessments, requirements that the Company hold greater levels of capital and/or delays in approving
dividends from regulated subsidiaries.
For information regarding restrictions on certain payments of dividends or other distributions by our HMO and
insurance company subsidiaries, refer to Note 16 of Notes to Consolidated Financial Statements on page 123.