Aetna 2006 Annual Report Download - page 58

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Fees and other revenue consists primarily of ASC fees which are received in exchange for performing certain
claims processing and member services for self-insured health and disability members and are recognized as
revenue over the period the service is provided. Some of our contracts include guarantees with respect to certain
functions such as customer service response time, claim processing accuracy and claim processing turnaround time,
as well as certain guarantees that claim expenses to be incurred by plan sponsors will fall within a certain range.
With any of these guarantees, we are financially at risk if the conditions of the arrangements are not met, although
the maximum amount at risk is typically limited to a percentage of the fees otherwise payable to us by the customer
involved. We accrue for any such exposure upon occurrence.
In addition, fees and other revenue includes charges assessed against contract holders’ funds for contract fees,
participant fees and asset charges related to pension and annuity products in the Large Case Pensions business.
Other amounts received on pension and annuity investment-type contracts are reflected as deposits and are not
recorded as revenue. When annuities with life contingencies are purchased under contracts that were initially
investment contracts, the accumulated balance related to the purchase is treated as a single premium and reflected
as an offsetting amount in both other premiums and current and future benefits in the Consolidated Statements of
Income. Fees and other revenue also includes co-payments and ASC plan sponsor reimbursements related to our
mail order and specialty pharmacies, network access fees and other fees charged for health care data analytics.
Accounting for the Medicare Part D Prescription Drug Program (“PDP”)
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”)
was signed into law. The Act expanded Medicare, primarily by adding a voluntary prescription drug benefit for
Medicare eligible individuals beginning in 2006. We were selected by the Centers for Medicare and Medicaid
Services (“CMS”) to be a national provider of PDP in all 50 states to both individuals and employer groups
beginning in 2006 and again in 2007. 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 target amount (what we received in
premiums from members and CMS based on our annual bid amount less administrative expenses) 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 the 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 is not allocated to the reporting segments since it is not used as a basis for measuring the
operating performance of the segments. Such amounts are reflected in Corporate Interest in segment financial
information. (Refer to Note 19 beginning on page 82 for additional information.)
Income Taxes
We are taxed at regular corporate 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. The current income tax provision reflects the tax results of revenues and expenses currently taxable or
deductible.