Aetna 2009 Annual Report Download - page 23

Annual Report – Page 17
numerous factors. Of those factors, we consider the analysis of historical and projected claim payment patterns
(including claims submission and processing patterns) and the assumed health care cost trend rate to be the most
critical assumptions. In developing our estimate of health care costs payable, we consistently apply these actuarial
principles and assumptions each period, with consideration to the variability of related factors.
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 three months prior to the financial statement date have less activity, we use a
combination of historically-derived completion factors and the assumed health care cost trend rate to estimate the
ultimate cost of claims incurred for these months. We place a greater emphasis on the assumed health care cost trend
rate for the most recent dates of services as these months may be influenced by seasonal patterns and changes in
membership and product mix.
Our health care cost trend rate is affected by changes in per member utilization of medical services as well as changes
in the 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 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, claim intensity, 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
rates. 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, 2009;
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, 2009 would cause these estimates to change in the near term, and such a change could be material.
Each quarter, we re-examine previously established health care costs payable estimates based on actual claim
payments for prior periods and other changes in facts and circumstances. Given the extensive degree of judgment in
this estimate, it is possible that our estimates of health care costs payable could develop either favorably, (that is, our
actual health care costs for the period were less than we estimated) or unfavorably. The changes in our estimate of
health care costs payable may relate to a prior quarter, prior year or earlier periods. As reported in the rollforward of
our health care costs payable in Note 6 of our Consolidated Financial Statements on page 56, our prior year estimates
of health care costs payable decreased by approximately $66 million, $163 million and $177 million in 2009, 2008 and