Cigna 2011 Annual Report Download - page 69

47CIGNA CORPORATION2011 Form10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Benefits and Expenses
Health Care segment benets and expenses consist of the following:
(In millions) 2011 2010 2009
Medical claims expense - excluding Medicare IPFFS $ 8,201 $ 7,798 $ 6,927
Medical claims expense - Medicare IPFFS (19) 772 -
Medical claims expense 8,182 8,570 6,927
Other benet expenses 83 100 169
Mail order pharmacy cost of goods sold 1,203 1,169 1,036
Other operating expenses:
Medical operating expenses 2,757 2,739 2,723
Operating expenses (excluding Medicare IPFFS) 1,364 1,251 1,124
Other operating expenses (excluding Medicare IPFFS) 4,121 3,990 3,847
Operating expenses - Medicare IPFFS - 82 -
Total other operating expenses 4,121 4,072 3,847
TOTAL BENEFITS AND EXPENSES $ 13,589 $ 13,911 $ 11,979
Medical claims expense decreased 5% in 2011 compared with 2010.
Excluding the impact of exiting the Medicare IPFFS business, medical
claims expense increased 5% in 2011 compared with 2010, largely due
to medical cost ination, tempered by low medical services utilization
trend in commercial risk businesses.
Medical claims expense increased 24% in 2010 compared with 2009.
Excluding the impact of Medicare IPFFS business, medical claims
expenses increased 13% in 2010 compared with 2009 largely due
to higher medical membership, particularly in the commercial risk
business. e increase also reects medical cost ination.
Other operating expenses. One measure of the segment’s overall operating
eciency is the operating expense ratio calculated as total operating
expenses divided by segment revenues. is measure can be signicantly
inuenced by the mix of business between fully-insured and fee-based
business, since the expense ratio on fee-based business, which comprises
most of the segment’s business is higher than the corresponding ratio
for fully-insured business. e ratio is also inuenced by the level of
xed versus variable expenses. e segment’s variable expenses include
premium taxes and commissions, while the xed component consists
primarily of infrastructure costs and certain strategic investments.
e variable component uctuates due to changes in revenue, mix of
business, and other items.
Excluding the impact of the Medicare IPFFS business, the operating
expense ratio improved from 27.7% in 2010 to 27.2% in 2011,
driven largely by continued focus on expense management. On a
reported basis, the operating expense ratio increased from 26.7%
in 2010 to 27.2% in 2011 primarily driven by a change in business
mix resulting from the Company’s decision to exit the non-strategic
Medicare IPFFS business, that was a fully-insured business. Because
fully-insured businesses collect premium revenue (compared with a
relatively lower administrative fee for ASO business), they typically
have a lower expense ratio than the Company’s current business mix
that is more heavily weighted toward fee-based products.
Excluding the impact of the Medicare IPFFS business, the operating
expense ratio improved from 29.3% in 2009 to 27.7% in 2010, driven
largely by continued focus on cost reduction initiatives including
stang, real estate and pension changes, as well as strong revenue
growth in the commercial risk businesses. ese favorable eects were
partially oset by investment in segment expansion, compliance and
higher management incentive compensation. On a reported basis, the
operating expense ratio decreased from 29.3% in 2009 to 26.7% in
2010 primarily due to the signicant revenue growth in the Medicare
IPFFS business in 2010. Since Medicare IPFFS was a fully-insured
business, it had a lower expense ratio than the business mix in 2009
that was more heavily weighted toward fee-based products.
Other Items Affecting Health Care Results
Health Care Medical Claims Payable
Medical claims payable decreased by 12% in 2011, primarily reecting
the run-out of the Medicare IPFFS business that the Company exited
in 2011. Medical claims payable increased 35% for the year ended
December31,2010 largely driven by medical membership growth,
particularly in the Medicare IPFFS and commercial risk businesses.
See Note5 to the Consolidated Financial Statements for additional
information regarding the Health Care Medical Claims Payable.
Medical Membership
A medical member reported within the Health Care segment (excluding
members in the International and Disability and Life segments) is
dened as a person who falls within one of the following categories:
•is covered under an insurance policy or service agreement issued by
the Company;
•
has access to the Company’s provider network for covered services
under their medical plan;
•has medical claims that are administered by the Company; or
•
is covered under an insurance policy that is (i) marketed by the
Company and (ii) for which the Company assumes reinsurance of
at least 50%.
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