Aetna 2013 Annual Report Download - page 30

Annual Report- Page 24
IBNR, 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 changes in 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 are less mature, 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 claim incurred dates 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
(including specialty pharmacy 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, 2013; 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, 2013 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 Notes to Consolidated Financial Statements on page 98,
our prior year estimates of health care costs payable decreased by approximately $449 million, $147 million, and