Aetna 2013 Annual Report Download - page 40

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Each health insurer and HMO must file periodic financial and operating reports with the states in which it does
business. In addition, health insurers and HMOs are subject to state examination and periodic license
renewal. Applicable laws also restrict the ability of our regulated subsidiaries to pay dividends, and certain
dividends require prior regulatory approval. In addition, some of our business and related activities may be subject
to PPO, managed care organization, utilization review or third-party administrator-related licensure requirements
and regulations. These licensure requirements and regulations differ from state to state, but may contain health care
provider network, contracting, product and rate, financial and reporting requirements. There also are laws and
regulations that set specific standards for our delivery of services, payment of claims, fraud prevention, protection
of consumer health information, payment for covered benefits and services and escheatment of funds to states. Our
pharmacy benefit management (“PBM”) services suppliers, including CVS Caremark, also are subject to extensive
federal and state regulation, including many of the items described above.
Pricing and Underwriting Restrictions
Pricing and underwriting regulation by states limits our underwriting and rating practices and that of other health
insurers, particularly for small employer groups and individuals. Beginning in 2014, as a result of Health Care
Reform, health insurers cannot vary small group or individual premium rates based on individual members'
characteristics except for geography and limited variation for age and tobacco use. By 2016, as a result of Health
Care Reform, the small group rating category will be expanded to cover groups of up to 100 employees. States can
choose to implement these changes prior to 2016. Pricing and underwriting laws and regulations vary by state. In
general, they apply to certain customer segments and limit our ability to set prices for new or renewal business, or
both, based on specific characteristics of the group or the group's prior claim experience. In some states, these laws
and regulations restrict our ability to price for the risk we assume and/or reflect reasonable costs in our
pricing. Many of these laws and regulations also limit the differentials in premium rates insurers and other carriers
may charge between new and renewal business, and/or between groups or individuals based on differing
characteristics. They may also require that carriers disclose to customers the basis on which the carrier establishes
new business and renewal premium rates and limit the ability of a carrier to terminate coverage of an employer
group.
Health Care Reform expanded the premium rate review process by, among other things, requiring our rates to be
reviewed for “reasonableness” at either the state or the federal level. HHS established a federal premium rate
review process that generally applies to proposed premium rate increases equal to or exceeding 10% (or a state
specified threshold). HHS's rate review process imposes additional public disclosure requirements as well as
additional review on filings requesting premium rate increases equal to or exceeding this “reasonableness”
threshold. These combined state and federal review requirements may prevent, further delay or otherwise affect our
ability to price for the risk we assume, which could adversely affect us particularly during periods of increased
utilization of medical services and/or medical cost trend or when such utilization and/or trend exceeds our
projections.
Health Care Reform also specifies minimum MLRs of 85% for the large group commercial market, 80% for the
individual and small group commercial markets and, beginning in 2014, 85% for Medicare Advantage and
Medicare Part D plans. Because Health Care Reform is structured as a “floor” for many of its requirements, states
have the latitude to enact more stringent rules governing its various restrictions. States may adopt higher minimum
MLR requirements, use more stringent definitions of “medical loss ratio,” incorporate minimum MLR requirements
into prospective premium rate filings, require prior approval of premium rates, or impose other requirements related
to minimum MLR. For example, Texas has expanded from 50 to 100 the maximum size of “small groups” that are
subject to its minimum MLR requirements, and New York, New Jersey and California all have established state-
specific minimum MLR requirements. State-specific minimum MLR requirements and similar actions further limit
the level of margin we can earn in our Insured business while leaving us exposed to medical costs that are higher
than those reflected in our pricing.
The premium rate approval process may further restrict our ability to price for the risk we assume, and the
application of minimum MLR thresholds limits the level of margin we can earn in our Insured business while
leaving us exposed to medical costs that are higher than those reflected in our pricing. Each of these outcomes could