Cigna 2013 Annual Report Download - page 66

PART II
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
shareholders’ net income. For our Medicare business, although we
Medicare Advantage Reimbursement Rates
expect to partially mitigate the effect of the fee through benefit
On April 1, 2013, the Centers for Medicare and Medicaid Services changes and prices, we anticipate that the earnings impact will be
(CMS) issued the final Announcement of Calendar Year 2014 more significant than it will be for our commercial business.
Medicare Advantage Benchmark Rates and Payment Policies. We
Reinsurance fee. Beginning in 2014, this fee will be a fixed dollar per
submitted bids to CMS in the second quarter of 2013 that
customer levy on all commercial business, including ASO, and is tax
incorporated the 2014 rates and that continue to provide programs
deductible. It will be used to fund the reinsurance program for
with attractive benefits to seniors. We expect 2014 earnings in our
non-grandfathered individual business sold either on or off the public
Government operating segment to be lower than prior years. The
exchanges beginning in 2014. The amount of this fee is expected to be
magnitude of this earnings impact will depend largely on our ability to
approximately $110 million in 2014. Because we anticipate
manage medical costs.
recovering most of it through rate increases, the impact of this fee on
On February 21, 2014, CMS issued its Advance Notice for Calendar shareholders’ net income is not expected to be material.
Year 2015 (the ‘‘Notice’’). The final terms are expected to be published
Medicare Advantage and Medicare Part D requirements beginning
on April 7, 2014. While the terms contained within the Notice are
in 2014. Under the rules proposed by HHS, if the MLR for a
within the range of our expectations, there remain numerous open
Medicare Advantage or Medicare Part D contract is less than the
issues and substantial uncertainties regarding the final terms of the
required 85% minimum, the contractor is required to pay a penalty to
Notice. We expect that CMS will receive a significant number of
CMS and could be subject to additional sanctions if the MLR
comments from interested parties (including Cigna) prior to issuance
continues to be less than 85% for successive years. We currently expect
of the final terms; however, there can be no assurance that CMS will
that our Medicare Advantage and Medicare Part D plan offerings will
amend its current positions. Given the uncertainty regarding the final
meet these MLR requirements.
terms of the Notice, we cannot reliably estimate the impact on our
business, revenues or results of operations in 2015 and beyond; under Public Health Exchanges. Beginning in 2014, we are offering
certain circumstances, it is possible that the impact could be materially coverage on five public health insurance exchanges (Arizona,
adverse. In addition, we expect to adjust our programs and services in Colorado, Florida, Tennessee, and Texas). The enrollment process
response to the proposed 2015 terms. began on October 1, 2013. Based on our preliminary enrollment data
from the exchanges and the effect of the reinsurance, risk corridor and
risk adjustment programs (see the ‘‘Regulation’’ section of this
Health Care Reform
Form 10-K for additional information) we do not expect public
For additional information regarding the specific provisions of Health exchange-based enrollments to have a material effect on our medical
Care Reform affecting us, see the ‘‘Regulation’’ section of this customer base, revenues, operating cash flows or results of operations
Form 10-K. Outlined below are the reported and expected future in 2014.
financial effects of various provisions of Health Care Reform.
Commercial minimum medical loss ratio (‘‘MLR’’). We record our
Disability Claims Regulatory Matter
rebate accrual based on estimated medical loss ratios calculated as
During the second quarter of 2013, we finalized an agreement with
prescribed by the U.S. Department of Health and Human Services
the Departments of Insurance for Maine, Massachusetts,
(‘‘HHS’’) using full-year premium and claim information by state and
Pennsylvania, Connecticut and California (together, the ‘‘monitoring
market segment for each legal entity that issues comprehensive
states’’) related to our long-term disability claims handling practices.
medical coverage. In 2013, we accrued an estimated rebate of
In connection with the terms of the agreement, the Company
$12 million pre-tax ($8 million after-tax), compared with an accrual
recorded a charge of $77 million before-tax ($51 million after-tax) in
of $37 million pre-tax ($24 million after-tax) in 2012. We paid
the first quarter of 2013. The charge is comprised of two elements:
$15 million in 2013, lower than the estimated rebate accrual of
(1) $48 million of benefit costs and reserves from reassessed claims
$37 million, primarily due to refinements to the MLR rebate
expected to be reopened, including $925,000 in fines, $750,000 in
calculation, that also contributed to the lower 2013 rebate accrual
regulatory surcharges and $9.5 million in claims handling expenses;
when compared to 2012.
and (2) $29 million in additional costs for open claims as a result of
Health insurance industry fee. This fee, totaling $8 billion for the the claims handling changes being implemented. This charge is
industry in 2014 and increasing to $13.9 billion by 2017, will not be reported in the Group Disability and Life segment. We will be subject
tax deductible. Our effective tax rate is expected to increase beginning to re-examination 24 months after the execution date of the
in 2014 as a result of this fee. Our share of this industry fee will be agreement. If the monitoring states find material non-compliance
determined based on our proportion of premiums to the industry with the terms of the agreement upon re-examination, we may be
total. The amount of this fee is expected to be approximately subject to additional fines or penalties. In addition to the monitoring
$230 million in 2014: $130 million related to our commercial states, most other jurisdictions have joined the agreement as
business and $100 million related to our Medicare business. For our participating, non-monitoring states.
commercial business, we anticipate recovering most of the industry fee
through rate increases, resulting in an immaterial effect on
34 CIGNA CORPORATION - 2013 Form 10-K