Cigna 2014 Annual Report Download - page 75

PART II
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Balance Sheet Caption / Nature of Critical Accounting Estimate Effect if Different Assumptions Used
Goodwill If we do not achieve our earnings objectives or the cost of capital rises
significantly, the assumptions and estimates underlying these
At the acquisition date, goodwill represents the excess of the cost of impairment evaluations could be adversely affected and result in future
businesses acquired over the fair value of their net assets. impairment charges that would negatively impact our operating
results. Future reductions in the funding for our Medicare programs by
We completed our annual evaluations of goodwill for impairment
the federal government would reduce Cigna-HealthSpring’s revenues
during the third quarter of 2014. These evaluations were performed at
and profitability and adversely impact the fair value of the Government
the reporting unit level, based on discounted cash flow analyses. The
operating segment.
evaluations indicated that no impairment was required.
The estimated fair value of each reporting unit exceeded its carrying
Fair value of a reporting unit was estimated using models and
value by a substantial margin based on our annual evaluations of
assumptions that we believe a hypothetical market participant would
goodwill for impairment during the third quarter of 2014.
use to determine a current transaction price. The significant
assumptions and estimates used in determining fair value include the
discount rate and future cash flows. A range of discount rates was used,
corresponding with the reporting unit’s weighted average cost of
capital, consistent with that used for investment decisions considering
the specific and detailed operating plans and strategies within the
reporting units. Projections of future cash flows were consistent with
our annual planning process for revenues, claims, operating expenses,
taxes, capital levels and long-term growth rates.
Our Cigna-HealthSpring business (reported in the Government
operating segment that is also the reporting unit) contracts with CMS
and various state governmental agencies to provide managed health
care services, including Medicare Advantage plans and Medicare-
approved prescription drug plans. Estimated future cash flows for this
business incorporated the potential effects of sequestration and
Medicare Advantage reimbursement rates for 2015 and beyond as
discussed in the ‘‘Overview’’ section of this MD&A. Revenues from
the Medicare programs are dependent, in whole or in part, upon
annual funding from the federal government through CMS. Funding
for these programs is dependent on many factors including general
economic conditions, continuing government efforts to contain health
care costs and budgetary constraints at the federal level and general
political issues and priorities.
Goodwill as of December 31 was as follows (in millions):
2014 – $5,989
2013 – $6,029
See Notes 2(H) and 8 to the Consolidated Financial Statements for
additional discussion of our goodwill.
CIGNA CORPORATION - 2014 Form 10-K 43
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