Aetna 2013 Annual Report Download - page 47

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The economic aspects of the Medicaid and dual eligible business vary from state to state and are subject to frequent
change. Medicaid premiums are paid by each state and differ from state to state. The federal government and
various states are also considering proposals and legislation for Medicaid and dual eligible program reforms or
redesigns, including changes to benefits, reimbursement, or payment levels, eligibility criteria, network adequacy
requirements (including requiring the inclusion of specified high cost providers in our networks) and program
structure. Current Medicaid and dual eligible funding and premium revenue may not be sustainable due to state and
federal budgetary constraints, which have become particularly acute at the state level in the past few years, and
continuing efforts to reduce health care costs. In addition, our Medicaid and dual eligible contracts with states (or
sponsors of Medicaid managed care plans) are subject to cancellation by the state (or the sponsors of the managed
care plans) after a short notice period without cause (for example, when a state discontinues a managed care
program) or in the event of insufficient state funding.
Our Medicaid and dual eligible products also are regulated by CMS, which has the right to audit our performance to
determine compliance with CMS contracts and regulations. Our Medicaid products, dual eligible products and
State Children's Health Insurance Program (“SCHIP”) contracts also are subject to federal and state regulations and
oversight by state Medicaid agencies regarding the services we provide to Medicaid enrollees, payment for those
services, network requirements (including mandatory inclusion of specified high-cost providers), and other aspects
of these programs, and by external review organizations which audit Medicaid plans on behalf of the state Medicaid
agencies. The regulations and contractual requirements applicable to us and other participants in Medicaid and dual
eligible programs are extensive, complex and subject to change. We have invested significant resources to comply
with these standards, and our Medicaid and dual eligible program compliance efforts will continue to require
significant resources. CMS and/or state Medicaid agencies may fine us, seek premium refunds, terminate our
existing contracts, elect not to award us new contracts or renew our existing contracts, require us to include specific
high cost providers in our networks, prohibit us from continuing to market and/or enroll members in or refuse to
auto assign members to one or more of our Medicaid or dual eligible products, exclude us from participating in one
or more Medicaid or dual eligible programs and/or institute other sanctions against us if we fail to comply with
CMS or state regulations or our contractual requirements.
We cannot predict whether pending or future federal or state legislation or court proceedings will change various
aspects of the Medicaid program, nor can we predict the impact those changes will have on our business operations
or financial results, but the effects could be materially adverse.
HMO and Insurance Holding Company Laws
A number of states, including Pennsylvania and Connecticut, regulate affiliated groups of insurers and HMOs such
as the Company under holding company statutes. These laws may, among other things, require us and our
subsidiaries to maintain certain levels of equity. We expect the states in which our insurance and HMO subsidiaries
are licensed to continue to expand their regulation of the corporate governance and internal control activities of our
insurance companies and HMOs.
The states of domicile of our regulated subsidiaries have statutory risk-based capital, or “RBC”, requirements for
health and other insurance companies and HMOs based on the RBC Model Act. These RBC requirements are
intended to assess the capital adequacy of life and health insurers and HMOs, taking into account the risk
characteristics of a company's investments and products. The RBC Model Act sets forth the formula for calculating
RBC requirements, which are designed to take into account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to an individual company's business. In general, under these laws, an insurance company
or HMO must submit a report of its RBC level to the insurance department or insurance commissioner of its state of
domicile for each calendar year.
The RBC Model Act requires increasing degrees of regulatory oversight and intervention as a company's RBC
declines and provides for four different levels of regulatory action depending on the ratio of a company's total
adjusted capital (defined as the total of its statutory capital, surplus and asset valuation reserve) to its risk-based
capital. The level of regulatory action ranges from requiring the company to submit a comprehensive financial plan