Aetna 2014 Annual Report Download - page 62

Annual Report- Page 56
If the United States defaults on its obligations due to a failure to timely raise the debt ceiling or otherwise, or its
credit rating is downgraded by any of the credit rating agencies, interest rates could rise, financial markets could
become volatile and/or the availability of credit (and short-term credit in particular) could be adversely affected,
thereby increasing our borrowing costs, negatively impacting the value of our investment portfolio, and/or
adversely affecting our ability to access the capital markets, which could have a material adverse effect on our
operating results, financial condition and cash flows and could adversely affect our liquidity.
Risks Related to Our Business
We may not be able to accurately forecast health care and other benefit costs, which could adversely affect our
operating results. We may not able to obtain appropriate pricing on new or renewal business.
Premiums for our insured Health Care Products, which comprised approximately 85% and 84% of our total
consolidated revenues for 2014 and 2013, respectively, are priced in advance based on our forecasts of health care
and other benefit costs during a fixed premium period, which is generally one year. These forecasts are typically
developed several months before the fixed premium period begins, are influenced by historical data (and recent
historical data in particular), are dependent on our ability to anticipate and detect medical cost trends, and require a
significant degree of judgment. For example, our revenue on Medicare policies is based on bids submitted in June
of the year before the contract year. Cost increases in excess of our projections cannot be recovered in the fixed
premium period through higher premiums. As a result, our profits are particularly sensitive to the accuracy of our
forecasts and our ability to anticipate and detect medical cost trends. Even relatively small differences between
predicted and actual health care and other benefit costs as a percentage of premium revenues can result in
significant adverse changes in our operating results.
Our health care and other benefit costs can be affected by external events that we cannot forecast or project and
over which we have little or no control, such as emerging changes in the economy and/or public policy, government
mandated benefits or other regulatory changes, influenza related health care costs (which may be substantial and are
projected to be higher in 2014-2015 than in 2013-2014), epidemics, pandemics, terrorist attacks or other man-made
disasters, natural disasters or other events that materially increase utilization of medical and/or other covered
services, as well as changes in members’ behavior and healthcare utilization patterns and provider billing practices.
Our health care and other benefit costs also can be affected by changes in our business mix, products, contracts with
providers, medical management, underwriting, rating and/or claims processing methods and processes, and our
medical management initiatives may not deliver the reduction in utilization and/or medical cost trend that we
project.
It is particularly difficult to accurately anticipate, detect, forecast, manage and reserve for medical cost trends and
utilization of medical and/or other covered services during and following periods when such utilization and/or
trends are below recent historical levels and during periods of changing economic conditions and employment
levels. For example, during calendar year 2014, medical costs in our smaller middle market and individual
businesses were higher than we projected, and during the calendar years 2010-2013, medical costs and members’
utilization of medical and/or other covered services were lower than we projected and members’ utilization was
below recent historical levels. The recent favorable experience is not projected to continue in 2015, as we expect
utilization to increase in 2015 when compared to 2014.
We have implemented price increases for 2015. If health care and other benefit costs are higher than the levels
reflected in our pricing or if we are not able to obtain appropriate pricing on new or renewal business, our prices
will not reflect the risk we assume, and our operating results will be adversely affected. If health care and other
benefit costs are lower than we predict, our prices may be higher than those of our competitors, which may cause us
to lose membership. For more information, see “Critical Accounting Estimates - Health Care Costs Payable”
beginning on page 20.