Aetna 2012 Annual Report Download - page 96

Annual Report- Page 90
Accounting for the Medicare Part D Prescription Drug Program (“PDP”)
We were selected by the Centers for Medicare & Medicaid Services (“CMS”) to be a national provider of PDP in
all 50 states to both individuals and employer groups in 2012, 2011 and 2010. Under these annual contracts, CMS
pays us a portion of the premium, a portion of, or a capitated fee for, catastrophic drug costs and a portion of the
health care costs for low-income Medicare beneficiaries and provides a risk-sharing arrangement to limit our
exposure to unexpected expenses.
We recognize premiums received from, or on behalf of, members or CMS and capitated fees as premium revenue
ratably over the contract period. We expense the cost of covered prescription drugs as incurred. Costs associated
with low-income Medicare beneficiaries (deductible, coinsurance, etc.) and the catastrophic drug costs paid in
advance by CMS are recorded as a liability and offset health care costs when incurred. For individual PDP
coverage, the risk-sharing arrangement provides a risk corridor whereby the amount we received in premiums from
members and CMS based on our annual bid is compared to our actual drug costs incurred during the contract year.
Based on the risk corridor provision and PDP activity-to-date, an estimated risk-sharing receivable or payable is
recorded on a quarterly basis as an adjustment to premium revenue. We perform a reconciliation of the final risk-
sharing, low-income subsidy and catastrophic amounts after the end of each contract year.
Allocation of Operating Expenses
We allocate to the business segments centrally-incurred costs associated with specific internal goods or services
provided to us, such as employee services, technology services and rent, based on a reasonable method for each
specific cost (such as membership, usage, headcount, compensation or square footage occupied). Interest expense
on third-party borrowings and the financing components of our pension and other post-retirement benefit plan
expense is not allocated to the reporting segments, since it is not used as a basis for measuring the operating
performance of the segments. Such amounts are reflected in Corporate Financing in our segment financial
information. Refer to Note 19 beginning on page 128 for additional information.
Income Taxes
We are taxed at the statutory corporate income tax rates after adjusting income reported for financial statement
purposes for certain items. We recognize deferred income tax assets and liabilities for the differences between the
financial and income tax reporting basis of assets and liabilities based on enacted tax rates and laws. Valuation
allowances are provided when it is considered more likely than not that deferred tax assets will not be realized.
Deferred income tax expense or benefit primarily reflects the net change in deferred income tax assets and
liabilities during the year.
Our current income tax provision reflects the tax results of revenues and expenses currently taxable or deductible.
Penalties and interest on our tax positions are classified as a component of our income tax provision.
3. Acquisitions and Proposed Acquisition
On August 19, 2012, we entered into a definitive agreement (as amended, and as may be further amended, the
“Merger Agreement”) to acquire Coventry Health Care, Inc. (“Coventry”) in a transaction valued at approximately
$7.3 billion, based on the closing price of Aetna common shares on August 17, 2012, including the assumption of
Coventry debt. Coventry is a diversified managed health care company that offers a full portfolio of risk and fee-
based products, including Medicare Advantage and Medicare Part D programs, Medicaid managed care plans,
group and individual health insurance, coverage for specialty services such as workers' compensation, and network
rental services. Under the terms of the Merger Agreement, Coventry stockholders will receive $27.30 in cash and
0.3885 Aetna common shares for each Coventry share. In November 2012, we issued $2.0 billion of long-term debt
to fund a portion of the cash purchase price, and Coventry's stockholders approved the transaction. We expect to
finance the remainder of the cash portion of the purchase price through a combination of cash on hand and by
issuing approximately $500 million of commercial paper.