Aetna 2014 Annual Report Download - page 95

Annual Report- Page 89
year-to-date impact as an adjustment to our premium revenue. At December 31, 2014, we recorded a net payable of
approximately $230 million under the risk adjustment program.
Risk Corridor
Health Care Reform established a temporary three-year risk sharing program for qualified individual and small
group insurance plans. Under this program we make (or receive) a payment to (or from) HHS based on the ratio of
allowable costs to target costs (as defined by Health Care Reform). We record a risk corridor receivable or payable
as an adjustment to premium revenue on a pro-rata year-to-date basis based on our estimate of the ultimate 2014
risk sharing amount. At December 31, 2014, we did not record any Health Care Reform risk corridor receivables
because payments from HHS under this program are uncertain, and we recorded an immaterial Health Care Reform
risk corridor payable.
We will perform a final reconciliation and settlement with HHS of the 2014 Cost Sharing Subsidy and 3Rs during
2015.
Accounting for the Medicare Part D Prescription Drug Program Plans (“PDPs”)
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 2014, 2013 and 2012. 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 are not allocated to the reporting segments, since they are 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 132 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.