Aetna 2006 Annual Report Download - page 24

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We analyze historical claim payment patterns by comparing claim incurred dates (i.e., the date services were
provided) to claim payment dates to estimate “completion factors.” We estimate completion factors by aggregating
claim data based on the month of service and month of claim payment and estimating the percentage of claims
incurred for a given month that are complete by each month thereafter. For any given month, substantially all
claims are paid within six months of the date of service, but it can take up to 48 months or longer before all of the
claims are completely resolved and paid. These historically derived completion factors are then applied to claims
paid through the financial statement date to estimate the ultimate claim cost for a given month’ s incurred claim
activity. The difference between the estimated ultimate claim cost and the claims paid through the financial
statement date represents our estimate of claims remaining to be paid as of the financial statement date and is
included in our health care costs payable.
We use completion factors predominantly to estimate reserves for claims with claim incurred dates greater than
three months prior to the financial statement date. The completion factors we use reflect judgments and possible
adjustments based on data such as claim inventory levels, claim submission and processing patterns and, to a lesser
extent, other factors such as changes in health care cost trend rates, changes in membership and product mix. If
claims are submitted or processed on a faster (slower) pace than prior periods, the actual claims may be more (less)
complete than originally estimated using our completion factors, which may result in reserves that are higher
(lower) than the ultimate cost of claims.
Because claims incurred within 3 months prior to the financial statement date have less activity (i.e., a large portion
of health care claims are not submitted to us and/or processed until after the end of the quarter in which services are
rendered by providers to our members), estimates of the ultimate cost of claims incurred for these months are not
based primarily on the historically derived completion factors. Rather, the estimates for these months also reflect
increased emphasis on the assumed health care cost trend rate, which may be influenced by seasonal patterns and
changes in membership and product mix.
Our health care cost trend rate is affected by increases in per member utilization of medical services as well as
increases in the per unit cost of such services. Many factors influence the health care cost trend rate, including our
ability to manage health care costs through underwriting criteria, product design, negotiation of favorable provider
contracts and medical management programs. The aging of the population and other demographic characteristics,
advances in medical technology and other factors continue to contribute to rising per member utilization and per
unit costs. Changes in health care practices, inflation, new technologies, increases in the cost of prescription drugs,
direct-to-consumer marketing by pharmaceutical companies, clusters of high cost cases, changes in the regulatory
environment, health care provider or member fraud and numerous other factors also contribute to the cost of health
care and our health care cost trend rate.
For each reporting period, we use an extensive degree of judgment in the process of estimating our health care costs
payable, and as a result, considerable variability and uncertainty is inherent in such estimates, and the adequacy of
such estimates is highly sensitive to changes in assumed completion factors and the assumed health care cost trend
rate. For each reporting period we recognize our best estimate of health care costs payable considering the potential
volatility in assumed completion factors and health care cost trend rates, as well as other factors. We believe our
estimate of health care costs payable is reasonable and adequate to cover our obligations at December 31, 2006;
however, actual claim payments may differ from our estimates. A worsening (or improvement) of our health care
cost trend rates or changes in completion factors from those that we assumed in estimating health care costs payable
at December 31, 2006 would cause these estimates to change in the near term, and such a change could be material.