Aetna 2013 Annual Report Download - page 45

Annual Report- Page 39
acquisition significantly expanded our Medicare Supplement membership, which expansion continued during
2013. Medicare Supplement products are regulated at the state level. We expect to further expand our Medicare
business in 2014 and are seeking to substantially grow our Medicare business over the next several years. The
expansion of the Medicare markets we serve and Medicare products we offer and the Medicare-related provisions
of Health Care Reform increase our exposure to changes in government policy with respect to and/or regulation of
the various Medicare programs in which we participate, including changes in the amounts payable to us under those
programs and/or new reforms or surcharges on existing programs. For example, sequestration began in 2013 and
resulted in an automatic reduction in Medicare reimbursements to health plans of not more than 2% of total
program costs per year through 2024. In addition, CMS's Medicare Advantage and PDP premium rates for 2014
reflect a material reduction in 2014 premiums compared to 2013 for Medicare Advantage and PDP plans which is in
addition to the challenge we face from the impact of the industry-wide health insurer fee that became effective
January 1, 2014. CMS's 2014 and proposed 2015 rates represent a meaningful revenue and operating results
challenge for us. A recent CMS proposal also indicates that CMS may seek, among other things, to substantially
revise Medicare's prescription drug programs in future years. If it were implemented in its current form, this
proposal could have a significant adverse impact on our Medicare Advantage and PDP products, our PBM business
and/or our mail order pharmacies beginning in 2015. Significant uncertainty remains as to whether and how the
Congress will proceed with actions that create additional federal revenue and/or with entitlement reform. We cannot
predict future Medicare funding levels or the impact that future federal budget actions or entitlement program
reform, if it occurs, will have on our business, operations or operating results, but the effects could be materially
adverse, particularly on our Medicare and/or Medicaid revenues and operating results.
Our Medicare Advantage and Part D products are regulated by CMS. The regulations and contractual requirements
applicable to us and other participants in Medicare programs are complex, expensive to comply with and subject to
change. We have invested significant resources to comply with Medicare standards, and our Medicare compliance
efforts will continue to require significant resources. CMS may seek premium refunds, prohibit us from continuing
to market and/or enroll members in or refuse to passively enroll members in one or more of our Medicare or
Medicare-Medicaid demonstration (historically known as “dual eligible”) plans, exclude us from participating in
one or more Medicare or dual eligible programs and/or institute other sanctions against us if we fail to comply with
CMS regulations or our Medicare contractual requirements.
CMS regularly audits our performance to determine our compliance with CMS's regulations and our contracts with
CMS and to assess the quality of services we provide to Medicare beneficiaries. CMS uses various payment
mechanisms to allocate and adjust premium payments to our and other companies' Medicare plans by considering
the applicable health status of Medicare members as supported by information maintained and provided by health
care providers. We collect claim and encounter data from providers and generally rely on providers to appropriately
code their submissions and document their medical records. CMS pays increased premiums to Medicare Advantage
plans and PDPs for members who have certain medical conditions identified with specific diagnosis codes. Federal
regulators review and audit the providers' medical records to determine whether those records support the related
diagnosis codes that determine the members' health status and the resulting risk-adjusted premium payments to us.
In that regard, CMS has instituted risk adjustment data validation (“RADV”) audits of various Medicare Advantage
plans, including certain of the Company's plans. The OIG also is auditing risk adjustment data, and we expect CMS
and the OIG to continue auditing risk adjustment data.
CMS is using a new audit methodology for RADV audits to determine refunds payable by Medicare Advantage
plans for contract year 2011 and forward. Under the new methodology, among other things, CMS will project the
error rate identified in an audit sample of approximately 200 members to all risk adjusted premium payments made
under the contract being audited. Historically, CMS did not project sample error rates to the entire contract. During
2013, CMS selected certain of our Medicare Advantage contracts for contract year 2011 for audit. We are currently
unable to predict which of our Medicare Advantage contracts will be selected for future audit, the amounts of any
retroactive refunds of, or prospective adjustments to, Medicare Advantage premium payments made to us, the effect
of any such refunds or adjustments on the actuarial soundness of our Medicare Advantage bids, or whether any
RADV audit findings would cause a change to our method of estimating future premium revenue in future bid
submissions to CMS or compromise premium assumptions made in our bids for prior contract years or the current