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AETNA HEALTH INC.
(a Maine corporation)

 

REPORT OF EXAMINATION

AS OF

DECEMBER 31, 2007

 

December 19, 2008

Honorable Mila Kofman
Superintendent of Insurance
Bureau of Insurance
34 State House Station
Augusta, Maine 04333

Dear Madam:

Pursuant to your instructions, in compliance with 24-A M.R.S.A. §4215, the Maine Bureau of Insurance (hereinafter, "Bureau") conducted an examination, as of December 31, 2007, of the financial condition of

AETNA HEALTH INC.
(a Maine corporation)

The examination, performed at the local office of Aetna Health Inc. (a Maine corporation) (hereinafter, "Company") located at 175 Running Hill Road, Suite 301, South Portland, Maine, was made in accordance with the standards and procedures established by the Bureau and the National Association of Insurance Commissioners (hereinafter, "NAIC") and for that reason, included tests of the accounting records and certain other procedures considered necessary.

The accompanying financial statements have been prepared pursuant to statutory accounting principles prescribed or permitted by the Bureau and the NAIC. These principles differ in certain respects from generally accepted accounting principles.

The following report is respectfully submitted.

 

 

TABLE OF CONTENTS

SCOPE OF EXAMINATION

DESCRIPTION OF THE COMPANY

HISTORY
ORGANIZATIONAL STRUCTURE
MANAGEMENT AND CONTROL
CORPORATE RECORDS
PLAN OF OPERATION

INTER-COMPANY AGREEMENTS

ADMINISTRATIVE SERVICES AGREEMENT
DRUG REBATE PROGRAM
GUARANTY AGREEMENT
TAX SHARING AGREEMENT
REINSURANCE AGRESMENT

REINSURANCE

LITIGATION

FINANCIAL STATEMENTS

STATUTORY STATEMENT OF ADMITTED ASSETS. LIABILITIES AND SURPLUS
STATUTORY STATEMENT OF OPERATIONS
STATUTORY STATEMENT OF CAPITAL AND SURPLUS

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - BONDS
NOTE 2 - CASH & CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
NOTE 3 - PREMIUMS RECEIVABLE
NOTE 4 - FEDERAL AND FOREIGN INCOME TAXES
NOTE 5 - AMOUNTS DUE FROM PARENT & AFFILIATES
NOTE 6 - HEALTH CARE RECEIVABLE
NOTE 7 - UNPAID CLAIMS, UNPAID CLAIM EXPENSES AND CLAIM RESERVES
NOTE 8 - CAPITAL AND SURPLUS

COMMENTS AND RECOMMENDATIONS

CONCLUSION

 

SCOPE OF EXAMINATION

The NAIC recently supplanted the Specific Risk Assessment approach with the Risk- Focused approach. The previous examination covered the period from January 1, 2002 through December 31, 2004 and was performed in accordance with the Specific Risk Assessment approach set forth in the Financial Examiners Handbook. This examination, covering the period from January 1, 2005 through December 31, 2007 was performed in accordance with the Risk- Focused approach set forth in the Financial Examiners Handbook.

The examination consisted of a survey of the Company's business policies and underwriting practices; a review of corporate minutes; a verification of assets and a determination of liabilities at December 31, 2007 in conformity with statutory accounting practices, NAIC guidelines, and the laws, rules and regulations prescribed by the Bureau.

 

DESCRIPTION OF THE COMPANY

History

The Company was incorporated in the State of Maine on October 3, 1995. In accordance with 24-A M.R.S.A. §4203, the Company was organized as a for-profit, privately held health maintenance organization (hereinafter, "HMO") to provide health care benefits and managed care services. The Company was established as a direct subsidiary of NYLCare Health Plans, Inc. with the ultimate parent being New York Life Insurance Company. The Company was licensed to conduct business as an HMO on April 10, 1996.

On July 15, 1998, Aetna Inc. acquired all the outstanding common stock of the Company’s immediate parent, NYLCare Health Plans, Inc. and transferred ownership to Aetna U.S. Healthcare Inc., a Pennsylvania corporation (PA), whose ultimate parent was Aetna Inc., a Connecticut corporation (CT). Effective December 28, 1998, the Company's name was changed from NYLCare Health Plans of Maine, Inc. to Aetna U.S. Healthcare Inc., and its ultimate parent remained Aetna Inc. (CT).

On December 13, 2000, Aetna Inc. (CT) simultaneously sold its non health business and spun-off the health care business to shareholders in the form of cash and shares in Aetna U.S. Healthcare (PA). Aetna U.S. Healthcare a Pennsylvania corporation (PA) was then renamed Aetna Inc., a Pennsylvania corporation (PA).

On June 14, 2002, the Company’s name was changed from Aetna U.S. Healthcare Inc. to Aetna Health Inc. (a Maine corporation)

Organizational Structure

The Company is a member of an insurance holding company system and has filed annual Form B registration statements, as required under 24-A M.R.S.A §222 (8)(B). Due to the number of entities within the holding company system, the abbreviated December 31, 2007 organizational chart presents only the Company’s immediate and ultimate parents and the affiliates with whom it has agreements.

Aetna Health Organizational Chart

Management and Control

The Company is governed by a three-member Board of Directors. The people identified below are the duly elected members of the Board of Directors and the Officers serving at December 31, 2007:

 

Directors  
Michael Edward Morris  
Margaret Ann Spann  
David Andrew Swords  
   
Name of Officer Position Held
Michael Wayne Hudson President
Edward Chung-I Lee Vice President & Secretary
Alicia Helene Bolton Principal Financial Officer and Controller
Mary Therese McCluskey, MD Senior Medical Director
Elaine Rose Cofrancesco Treasurer
Gregory Stephen Martino Vice President
Kevin James Casey Senior Investment Officer
Dawn Marie Schoen Assistant Controller


Conflict of Interest

Each Director and Officer of the Company completes a conflict of interest statement. The conflict of interest statement discloses any material interest or affiliation which is likely to be in conflict with his/her official duties and responsibilities with the Company.

Corporate Records

The Company's Articles of Incorporation and Bylaws were reviewed. The minutes of the Company's Board of Directors' meetings, held from the period January 1, 2005 to the completion of field work, were reviewed. The minutes of Aetna Inc.'s Board of Directors' meetings of were also reviewed for the same period.

Plan of Operation

The Company received its license to operate as an HMO in the Cumberland, York and Sagadahoc counties in the State of Maine on April 10, 1996. As of September 24, 1996, the Company was authorized to operate in all counties except Oxford County. On April 10, 1997, the Company was licensed to provide HMO benefits in all counties of the State of Maine.

In addition to providing managed care, the Company participated in the Medicare program regulated by the Health Care Financing Administration (hereinafter, "HCFA") and the Medicaid program administered by the State of Maine. The Company discontinued participation in the Medicare and Medicaid programs effective January 1, 2001 and November 11, 2000 respectively.

The Company maintains networks of providers for its HMO products. The Company’s providers consisted of the following types: primary care physicians, specialist physicians, ancillary services and hospital services. Title 24-A M.R.S.A. §4204(6) requires that a “hold harmless” provision be included in HMO provider contracts. Title 24-A M.R.S.A. §4204 (6) requires that a "hold harmless" provision be included in HMO provider contracts. Title 24-A M.R.S.A. §4204 (7) requires that a provision for continuation of benefits be included in provider contracts. (See Comment and Recommendation)

INTER-COMPANY AGREEMENTS

The Company had the following agreements with affiliates in effect at December 31, 2007:

Administrative Services Agreement

The Company entered into an Administrative Services Agreement with Aetna Inc. dated April 1, 2000. Under the terms of the agreement, Aetna Inc. provides administrative services and resources to the Company. Administrative services include all services related to the day to day administration, operation and overall management of the Company. In consideration of these services, the Company pays Aetna Inc. a fee.

Effective January 1, 2003, Aetna Inc's responsibility for the Administration Services Agreement with the Company was assigned to and assumed by, Aetna Health Management, LLC (hereinafter, "AHM").

Effective January 1, 2004, the Company and AHM terminated the Administration Services Agreement. A new administrative services agreement between the Company and AHM became effective on May 27, 2004.

Drug Rebate Program

The Company participated in a drug rebate program administered by an affiliate, AHM. Disclosure of this arrangement was included in the Company’s Form B filing dated April 29, 2002. This agreement was incorporated as part of the Administrative Services Agreement. The new administrative services agreement between the Company and AHM, dated May 27, 2004, includes provisions maintaining the drug rebate program.

Guaranty Agreement

A guaranty by U.S. Healthcare Inc, (a Pennsylvania corporation), predecessor of Aetna, Inc., dated February 22, 2000, became effective on September 27, 2000. This guaranty obligates the guarantor, now Aetna, Inc., to maintain minimum capital and surplus in the Company as required by Maine Law. This guaranty was amended, effective January 1, 2005 to update the corporate names on the guaranty.

Tax Sharing Agreement

The Company, its ultimate parent and other affiliates file a consolidated Federal Income Tax Return and are parties to an inter-company tax sharing agreement. The agreement has been effective since July 5, 2000.

Reinsurance Agreement

Effective through December 31, 2007, the Company had a reinsurance agreement in place with an affiliate, Corporate Health Insurance Company (PA) (hereinafter, "CHI"). This agreement was terminated effective December 31, 2007.

 

REINSURANCE

The Company had one reinsurance contract in effect through December 31, 2007. The contract with CHI became effective January 1, 2001. The contract indemnifies the Company for 100% of the loss for any member during the contract year paid in excess of $500,000. Premium balances due CHI are settled monthly. Loss recoveries from CHI are due within 90 days of receipt by CHI of the proof of loss.

As of December 31, 2007, the CHI reinsurance contract was terminated. Effective January 1, 2008 an Insolvency Agreement was executed whereby Aetna Health Insurance Company (hereinafter, "AHIC"), formerly known as CHI guarantees that in the event of insolvency of the Company, AHIC will continue plan benefits for its members.

LITIGATION

The Company does not use outside counsel. The Company's internal legal counsel advised the Bureau that it is not involved in any actual, pending or threatened non-claims litigation at this time that would result in a material judgment against the Company.

FINANCIAL STATEMENTS

The accompanying financial statements fairly present, in all material respects, the Company's statutory financial position as of December 31, 2007 and statutory results of operations for the period then ended. The financial statements as of December 31, 2006 and December 31,2005 are unexamined and are presented for comparative purposes only.

STATUTORY STATEMENT OF ADMITTED ASSETS, LIABILITIES AND SURPLUS

as of December 31, 2007, 2006 and 2005

 

  2007
2006
(unexamined)
2005
(unexamined)
Admitted Assets:      
Bonds (Note 1) $ 34,380,358 $ 32,824,853 $ 22,913,697
Cash Equivalents and Short-term Investments -Note 2 7,472,951 9,853,004 12,167,432
Investment Income Due and Accrued 418,272 404,603 185,245
Premiums in the Course of Collection - Note 3 1,447,968 1,112,954 1,550,998
Reinsurance Recoverable 66,504 264,185 0
Net Deferred Tax Asset - Note 4 1,515,821 1,132,748 1,069,916
Amounts Due from Parent and Affiliates -Note 5 150,391 0 0
Health Care Receivables - Note 6 208,931 226,065 261,586
Aggregate Write-ins for Other than Invested Assets 480,632 0 72,788
Total Admitted Assets $46,141,828 $45,818,412 $38,221,662
 
Liabilities and Surplus:
Unpaid Claims -Note 7 $ 14,079,779 $ 15,378,714 $ 14,759,343
Unpaid Claims Adjustment Expenses 279,470 319,821 314,639
Aggregate Health Policy Reserves 144,730 267,057 266,235
Aggregate Health Claim Reserves 360,400 520,347 675,324
General Expenses Due and Accrued   125 0
Federal Income Tax - Note 4 748,250 1,610,770 122,982
Net Deferred Tax Liability 24,203    
Ceded Reinsurance Premiums Payable   30,190 31,926
Amounts Due to Parent and Affiliates - Note 5   472,943 976,020
Total Liabilities 15,636,832 18,599,967 17,146,469
 
Common Capital Stock 1,000,000 1,000,000 1,000,000
Gross Paid-in and Contributed Capital 9,700,000 9,700,000 9,700,000
Unassigned Surplus 19,804,996 16,518,445 10,375,193
Total Capital and Surplus - Note 8 30,504,996 27,218,445 21,075,193
Total Liabilities, Capital and Surplus $46,141,828 $45,818,412 $38,221,662

 

STATUTORY STATEMENT OF OPERATIONS

Years Ended December 31, 2007, 2006 and 2005

  2007
2006
(unexamined)
2005
(unexamined)
Member Months 446,621 532,147 550,081
Revenue:      
Net Premium Income $159,046,046 $175,273,029 $174,723,291
Change in Unearned Premium Reserves 42,725 (822) 51,863
Total Revenue 159,088,771 175,272,207 174,775,154
       
Expenses:      
Hospital/Medical Benefits 108,532,309 115,434,719 106,846,820
Outside Referrals 1,125,018 1,335,370 1,801,306
Emergency Room and Out-of-area 7,474,782 7,581,983 6,575,208
Prescription Drugs 16,243,459 18,263,572 16,148,651
Subtotal 133,375,568 142,615,644 131,371,985
Less Reinsurance Recoveries (247,599) (880,726) (81,196)
Total Hospital and Medical 133,127,969 141,734,918 131,290,789
 
Claims Adjustment Expenses 2,800,886 3,137,544 3,021,556
General Administrative Expenses 14,778,460 23,811,642 20,639,514
Increase in Reserves (79,602) 0 100,000
Total Underwriting Deductions 150,627,713 168,684,104 155,051,859
Net Underwriting Gain 8,461,058 6,588,103 19,723,295
 
Net Investment Income 2,232,768 1,831,532 1,574,804
Earned Net Realized Capital Gains/(Losses) (546,440) (6,932) (22,733)
Net Investment Gains/(Losses) 1,686,328 1,824,600 1,552,071
       
Net Income Before Taxes 10,147,386 8,412,703 21,275,366
Federal Income Taxes (3,668,315) (2,130,202) (6,757,086)
Net Income $6,479,071 $6,282,501 $14,518,280

STATUTORY STATEMENT OF CAPITAL AND SURPLUS

Years Ended December 31, 2007, 2006 and 2005

  2007
2006
(unexamined)
2005
(unexamined)
Capital and Surplus, Beginning of Year $27,218,445 $21,075,193 $18,621,685
 
Net income 6,479,071 6,282,501 14,518,280
Change in Unrealized Capital Gains 0 0 0
Change in Net Deferred Income Tax (173,150) (747,692) (722,913)
Change in Non-admitted Assets 1,380,630 608,443 758,141
Dividends to Stockholders - Note 8 (4,400,000)   (12,100,000)
Change in Surplus as Regards to Policyholders 3,286,551 6,143,252 2,453,508
 
Capital and Surplus, End of Year $30,504,996 $27,218,445 $21,075,193

 

NOTES TO FINANCIAL STATEMENTS

Note 1 – Bonds

Bonds are stated at amortized value and, at December 31, 2007, consisted of the following:

  Cost Par
Value
Market
Value
Amortized
Value
Government $ 19,869,537 $ 20,300,000 $ 20,740,964 $ 19,926,620
States, Territories & Possessions 3,955,500 4,000,000 4,106,360 3,992,333
Special Revenue 6,121,884 6,132,455 6,168,277 6,119,661
Industrial & Miscellaneous 4,340,110 4,500,000 4,356,306 4,341,744
Total $ 34,287,031 $ 34,932,455 $ 35,371,907 $ 34,380,358

 

As required by 24-A M.R.S.A §412, the Company has maintained the required security deposit with the Treasurer of Maine.

Note 2 – Cash & Cash Equivalents and Short-term Investments

The Company properly reports investments with original maturities of three months or less as cash equivalents, and all other investments with original maturities of less than one year as short-term investments.

The Company's reporting of cash and cash equivalents is substantially in compliance with the NAIC's Accounting Practices and Procedures Manual.

Note 3 - Premiums Receivable

The Company's affiliate, AHM, provided the premium billing and collection for the Company's small group and multi-option business.

The aging of premiums receivable and non-admission of certain receivables is substantially in compliance with the NAIC's Practices and Procedures Manual.

Note 4 - Federal and Foreign Income Taxes

The Company is party to an inter-company tax sharing agreement. Current federal and foreign income tax recoverable and payable is based upon separate return calculations with credit for net losses that can be used on a consolidated basis.

The deferred tax asset estimation is substantially in compliance with the Statement of Statutory Accounting Principles No. 10.

Note 5 - Amounts Due from Parent & Affiliates

Amounts due from parent & affiliates represent the net amounts receivable from Aetna Inc. (PA) under the Administrative Services and Tax Agreements.

Note 6 – Health Care Receivable

Health care receivable represents the Company’s best estimate of amounts receivable pursuant to pharmacy rebates.

The receivable for pharmaceutical rebates was determined to be in substantial compliance with the Statement of Statutory Accounting Principle No. 84.

Note 7 - Unpaid Claims, Unpaid Claim Expenses and Claim Reserves

The Company properly reports unpaid claims, unpaid claims adjustment expenses and aggregate health claim reserves and estimates of incurred but not reported claims and claim expenses unpaid. The adequacy of the reserves is attested to by a qualified actuary employed by the Company. An actuarial opinion attesting to reserve adequacy is submitted to the Bureau annually.

The Company's methodology for estimating and reporting unpaid claims, unpaid claim expenses and claim reserves appears reasonable.

Note 8 – Capital and Surplus

As of December 31, 2007, the Company had authorized 1,000,000 shares of common stock, par value $1, all of which were issued and outstanding. NYLCare Health Plans, Inc. owns 100% of the Company's common stock.

During the period under examination the Company return capital and paid dividends. Specifically, the Company returned $12,100,000 in paid-in-capital in 2005 and issued an ordinary dividend of $4,400,000 in 2007.

Capital and surplus amounts were in compliance with the minimum net worth requirement set forth in 24-A M.R.S.A. §4204-A (4) for each year examined.

Subsequent to year end, in June 2008, the Company issued an extraordinary dividend of $9,000,000.

 

COMMENT AND RECOMMENDATION

Comment:

As noted in the Plan of Operation section of this report, certain of the provider contracts reviewed either did not contain a continuation of benefits clause, or the contract language was insufficient to meet the requirements of 24-A M.R.S.A. Chapter 56 §4204 (7). Provider contracts so noted included Redington Fairview General Hospital, Integrated Healthcare Corporation, Nordx Northern Diagnostic Labs, Fresenius Medical Care Holdings, Inc., Northeast Cardiology Associates, Neurobehavioral Services of New England, Transitions Counseling Inc. and Penobscot Bay Medical Center

Recommendation:

The Company should review all provider contracts to ensure they include a continuation of benefits clause in compliance with all terms and conditions of 24-A M.R.S.A. Chapter 56 §4204 (7).

CONCLUSION

The Company's financial condition, as disclosed by this examination, is reflected in the statements and the supporting exhibits contained in this report. The basis of preparation of such statements conforms to laws, rules and regulations prescribed and or permitted by the Bureau.

Acknowledgement of cooperation and assistance is extended to the examiners by all Company personnel is hereby expressed.

 

I hereby certify that the attached report of examination dated December 19, 2008 shows the condition and affairs of AETNA HEALTH INC. (a Maine corporation) of South Portland, Maine as of December 31, 2007 and has been filed in the Bureau of Insurance as a public document.


This report has been reviewed.


______________________________
Stuart E. Turney, CPA
Director of Examination


Dated this 14 day of May, 2009

 

STATE OF MAINE
COUNTY OF KENNEBEC, SS

Kendra L. Godbout, CPA, CFE, being duly sworn according to law, deposes and says that in accordance with the authority vested in her by Mila Kofman, Superintendent of Insurance, pursuant to the Insurance Laws of the State of Maine, has made an examination of the conditions and affairs of

AETNA HEALTH INC.
(a Maine corporation)

of South Portland, Maine as of December 31, 2007 and that the foregoing report of examination, subscribed to by her, is true to the best of her knowledge and belief.


The following examiners from the Bureau of Insurance assisted:

Graham S. Payne
Margaret S. Boghosian, CPA, CFE
Debra L. Blaisdell
Vanessa J. Leon

 

______________________________
Kendra L. Godbout, CPA, CFE
Director of Financial Affairs and Solvency

 

Subscribed and sworn to before me

this 14th day of May, 2009

Linda Gomeau_____________
Notary Public
My commission expires:

LINDA M. GOMEAU
Notary Public, Maine
My Commission Expires September 26, 2013

 

Last Updated: October 22, 2013