Aetna 2014 Annual Report Download - page 43

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Our Medicaid and dual eligible products also are regulated by CMS and state Medicaid agencies, which have the
right to audit our performance to determine compliance with CMS contracts and regulations. Our Medicaid
products, dual eligible products and Children’s Health Insurance Program (“CHIP”) contracts also are subject to
federal and state regulations and oversight by state Medicaid agencies regarding the services we provide to
Medicaid enrollees, payment for those services, network requirements (including mandatory inclusion of specified
high-cost providers), and other aspects of these programs, and by external review organizations which audit
Medicaid plans on behalf of the state Medicaid agencies. The laws, regulations and contractual requirements
applicable to us and other participants in Medicaid and dual eligible programs, including requirements that we
submit encounter data to the applicable state agency, are extensive, complex and subject to change. We have
invested significant resources to comply 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,
withhold payments to us, seek premium and other 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 the Medicaid program, 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, Insurance Holding Company and Other State 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. 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, 2014, the RBC level of each 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.