Aetna 2013 Annual Report Download - page 65

Annual Report- Page 59
extensive and complex regulations. If we fail to comply with applicable laws and regulations, we could be subject to
significant adverse regulatory actions or suffer reputational harm which may have a material adverse effect on our
business”, beginning on page 52.
Risks Related to Our Business
We may not be able to accurately forecast health care and other benefit costs, which could adversely affect our
operating results. We may not able to obtain appropriate pricing on new or renewal business.
Premiums for our insured Health Care Products, which comprised approximately 84% and 79% of our total
consolidated revenues for 2013 and 2012, respectively, are priced in advance based on our forecasts of health care
and other benefit costs during a fixed premium period, which is generally one year. These forecasts are typically
developed several months before the fixed premium period begins, are influenced by historical data (and recent
historical data in particular), are dependent on our ability to anticipate and detect medical cost trends, and require a
significant degree of judgment. For example, our revenue on Medicare policies is based on bids submitted in June
of the year before the contract year. Cost increases in excess of our projections cannot be recovered in the fixed
premium period through higher premiums. As a result, our profits are particularly sensitive to the accuracy of our
forecasts and our ability to anticipate and detect medical cost trends. Even relatively small differences between
predicted and actual health care and other benefit costs as a percentage of premium revenues can result in
significant adverse changes in our operating results.
Our health care and other benefit costs can be affected by external events that we cannot forecast or project and
over which we have little or no control, such as influenza related health care costs (which may be substantial),
epidemics, pandemics, terrorist attacks or other man-made disasters, natural disasters or other events that materially
increase utilization of medical and/or other covered services, as well as changes in members' healthcare utilization
patterns and provider billing practices. Our health care and other benefit costs also can be affected by changes in
our, products, contracts with providers, medical management, underwriting, rating and/or claims processing
methods and processes.
It is particularly difficult to accurately anticipate, detect, forecast, manage and reserve for medical cost trends and
utilization of medical and/or other covered services during and following periods when such utilization and/or
trends are below recent historical levels and during periods of changing economic conditions and employment
levels. For example, during the calendar years 2010-2013, medical costs and members' utilization of medical and/or
other covered services were lower than we projected and members' utilization was below recent historical levels.
This may have been due to members postponing necessary care or neglecting to seek preventive care, thereby
increasing the risk that acute care will be needed. The recent favorable experience is not projected to continue in
2014, as we expect utilization to increase in 2014 when compared to 2013.
If health care and other benefit costs are higher than the levels reflected in our pricing or if we are not able to obtain
appropriate pricing on new or renewal business, our prices will not reflect the risk we assume, and our operating
results will be adversely affected. If health care and other benefit costs are lower than we predict, our prices may be
higher than those of our competitors, which may cause us to lose membership. For more information, see “Critical
Accounting Estimates - Health Care Costs Payable” beginning on page 23.
Competitive and economic pressures may limit our ability to increase pricing to reflect higher costs or may force
us to accept lower margins. If customers elect to self-insure, reduce benefits or adversely renegotiate or amend
their agreements with us, our revenues and operating results will be negatively affected.
Our customer contracts are generally for a period of one year, and our customers have considerable flexibility in
moving between us and our competitors. One of the key factors on which we compete for customers, especially in
light of the current adverse and uncertain economic environment, is overall cost. We are therefore under pressure to
contain premium price increases despite being faced with increasing health care and other benefit costs and
increasing operating costs. If we are unable to increase our prices to reflect increasing costs, our profitability will be