HEALTH CARE REFORM

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (which we collectively refer to as the Health Care Reform Law) established risk spreading premium stabilization programs including a permanent risk adjustment program and temporary risk corridor and reinsurance programs, which we collectively refer to as the 3Rs, effective January 1, 2014. The 3Rs are applicable to certain of our commercial medical insurance products as further discussed in Note 2 to our 2014 Form 10-K. On June 30, 2015 we received notification from CMS of risk adjustment and reinsurance settlement amounts for 2014. We revised our 2014 coverage year estimates to reflect actual amounts and also made a corresponding adjustment to our risk corridor estimate based on these results. As expected, the change in estimate for risk adjustment was substantially offset by the corresponding change in estimate for risk corridor, both of which are reflected as changes in premiums revenue in our condensed consolidated statements of income. The change in estimate related to the 3Rs for the 2014 coverage year was a decline in the estimated net receivable of approximately $43 million for the nine months ended September 30, 2015. In addition, we revised our 3Rs estimates for the 2015 coverage year based on the data from CMS for 2014.

During the three months ended September 30, 2015, we paid $186 million in risk adjustment charges and received payments of $481 million for reinsurance recoverables and $50 million for risk adjustment settlements associated with the 2014 coverage year. We expect to collect the remaining reinsurance recoverable and risk adjustment receivable for the 2014 coverage year of approximately $50 million in the aggregate in the fourth quarter of 2015.

On October 1, 2015, we and other industry participants received notification from CMS that 12.6% of risk corridor receivables for the 2014 coverage year would be paid between December 2015 and January 2016 based on expected risk corridor collections under the program for the 2014 coverage year. The risk corridor program is a three year program and HHS guidance provides that risk corridor collections over the life of the three year program will first be applied to any shortfalls from previous benefit years before application to current year obligations. Risk corridor payables to issuers are obligations of the United States Government under the Health Care Reform law which requires the Secretary of HHS to make full payments to issuers. In the event of a shortfall at the end of the three year program, HHS has asserted it will explore other sources of funding for risk corridor payments, subject to the availability of appropriations. Based on the notice from CMS, we classified 12.6%, or $31 million, of our gross risk corridor receivable for the 2014 coverage year as current and classified our remaining gross risk corridor receivables for both the 2014 and 2015 coverage years as long-term because settlement is expected to exceed 12 months at September 30, 2015.

The accompanying condensed consolidated balance sheets include the following amounts associated with the 3Rs at September 30, 2015 and December 31, 2014. Amounts classified as long-term represent settlements that we expect to exceed 12 months at September 30, 2015.



	September 30, 2015								December 31, 2014
	Risk Adjustment Settlement			Reinsurance Recoverables		Risk Corridor Settlement			Risk Adjustment Settlement			Reinsurance Recoverables		Risk Corridor Settlement
	(in millions)
2014 Coverage Year
Premiums receivable	$	10		$	—	$	—		$	131		$	—	$	—
Other current assets	—			40		31			—			586		55
Trade accounts payable and accrued expenses	—			—		(1		)	(89		)	—		(4		)
Net current asset	10			40		30			42			586		51
Other long-term assets	—			—		211			—			—		—
Other long-term liabilities	—			—		—			—			—		—
Net long-term asset	—			—		211			—			—		—
Total 2014 coverage year net asset	10			40		241			42			586		51
2015 Coverage Year
Premiums receivable	88			—		—			—			—		—
Other current assets	—			344		—			—			—		—
Trade accounts payable and accrued expenses	(154		)	—		(1		)	—			—		—
Net current (liability) asset	(66		)	344		(1		)	—			—		—
Other long-term assets	7			27		206			—			—		—
Other long-term liabilities	—			—		—			—			—		—
Net long-term asset	7			27		206			—			—		—
Total 2015 coverage year net (liability) asset	(59		)	371		205			—			—		—
Total net (liability) asset	$	(49	)	$	411	$	446		$	42		$	586	$	51

Our portion of the annual health insurance industry fee attributed to calendar year 2015 and payable to the federal government in 2015 in accordance with the Health Care Reform Law was approximately $867 million. This fee is not deductible for tax purposes. Each year on January 1, we record a liability for this fee in other current liabilities which we carry until the fee is paid. We record a corresponding deferred cost in other current assets in our condensed consolidated financial statements which is amortized ratably to expense over the calendar year. Amortization of the deferred cost resulted in operating cost expense of approximately $217 million for the three months ended September 30, 2015 and $650 million for the nine months ended September 30, 2015. For the three and nine months ended September 30, 2014 there was approximately $141 million and $421 million, respectively, of operating cost expense resulting from the amortization of the 2014 annual health insurance fee of $562 million. The remaining deferred cost asset balance was approximately $217 million at September 30, 2015.