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 effective January 1, 2014, including a permanent risk adjustment program and temporary risk corridor and reinsurance programs, which we collectively refer to as the 3Rs. The 3Rs are applicable to certain of our commercial medical insurance products as further discussed in Note 2 to our 2015 Form 10-K. Operating results for our individual commercial medical business compliant with the Health Care Reform Law were challenged in 2014 and 2015 primarily due to unanticipated modifications in the program subsequent to the passing of the Health Care Reform Law, resulting in higher covered population morbidity and the ensuing enrollment and claims issues causing volatility in claims experience. We took a number of actions in 2015 to improve the profitability of our individual commercial medical business in 2016. These actions were subject to regulatory restrictions in certain geographies and included premium increases for the 2016 coverage year related generally to the first half of 2015 claims experience, the discontinuation of certain products as well as exit of certain markets for 2016, network improvements, enhancements to claims and clinical processes and administrative cost control. Despite these actions, the deterioration in the second half of 2015 claims experience together with 2016 open enrollment results indicating the retention of many high-utilizing members for 2016 resulted in a probable future loss. As a result of our then assessment of the profitability of our individual medical policies compliant with the Health Care Reform Law, in the fourth quarter of 2015, we recorded a provision for probable future losses (premium deficiency reserve, or PDR) for the 2016 coverage year of $176 million in benefits payable in our consolidated balance sheet with a corresponding increase in benefits expense in our consolidated statement of income. As noted in the table below, in the second quarter of 2016, we increased the premium deficiency reserve for the 2016 coverage year and recorded a change in estimate of $208 million with a corresponding increase in benefits expense in our condensed consolidated statement of income primarily as a result of current and projected unfavorable claims experience.

Changes in the premium deficiency reserve for the 2016 coverage year for the nine months ended September 30, 2016 were as follows:



	Premium Deficiency Reserve
	(in millions)
Balance at January 1, 2016	$	176
Current period results applied to the PDR liability for the 2016 coverage year	(178		)
Change in full year 2016 estimate recorded in benefits expense	208
Balance at September 30, 2016	$	206

The accompanying condensed consolidated balance sheets include the following amounts associated with the 3Rs at September 30, 2016 and December 31, 2015. Amounts classified as long-term represent settlements that we expect to exceed 12 months at September 30, 2016.



	September 30, 2016							December 31, 2015
	Risk Adjustment Settlement			Reinsurance Recoverables		Risk Corridor Settlement		Risk Adjustment Settlement			Reinsurance Recoverables		Risk Corridor Settlement
	(in millions)
Prior Coverage Years
Premiums receivable	$	54		$	—	$	—	$	126		$	—	$	—
Other current assets	—			58		—		—			610		—
Trade accounts payable and accrued expenses	—			—		—		(223		)	—		—
Net current asset (liability)	54			58		—		(97		)	610		—
Other long-term assets	—			—		423		10			—		459
Total prior coverage years' net asset (liability)	54			58		423		(87		)	610		459
Current Coverage Year
Trade accounts payable and accrued expenses	(107		)	—		—		—			—		—
Other long-term assets	197			157		168		—			—		—
Total 2016 coverage year net asset	90			157		168		—			—		—
Total net asset (liability)	$	144		$	215	$	591	$	(87	)	$	610	$	459

Changes in estimate of the net 3Rs receivable for prior coverage years during the nine months ended September 30, 2016 primarily result from the June 30, 2016 notification from CMS of risk adjustment and reinsurance settlement amounts for 2015.

During the nine months ended September 30, 2016, we paid $240 million in risk adjustment charges and received $471 million for reinsurance recoverables and $84 million for risk adjustment settlements, in each case associated with the 2015 coverage year. In 2015, primarily during the nine months ended September 30, 2015, we paid $186 million in risk adjustment charges and received $521 million for reinsurance recoverables and $57 million for risk adjustment settlements, in each case associated with the 2014 coverage year.

We have collected approximately $30 million from the Department of Health and Human Services, or HHS, primarily received in the fourth quarter of 2015, for our interim settlement associated with our risk corridor receivables for the 2014 coverage year. The interim settlement, representing approximately 12.6% of risk corridor receivables for the 2014 coverage year, was funded by HHS in accordance with previous guidance, utilizing funds HHS collected from us and other carriers under the 2014 risk corridor program. 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. In September 2016, HHS announced that based on preliminary analysis, they anticipate that all 2015 coverage year risk corridor collections by HHS will be applied toward 2014 coverage year payments owed to issuers. 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 HHS and collections received for the 2014 coverage year, we classified our remaining gross risk corridor receivables for all coverage years as long-term because settlement is expected to exceed 12 months at September 30, 2016. However, to the extent certain provisions of the Health Care Reform Law are successfully challenged in court or there are changes in legislation or the application of legislation, there can be no guarantee that receivables established under the reinsurance, risk corridor or risk adjustment provisions of the Health Care Reform Law will ultimately be collected.

In September 2016, we paid the federal government $916 million for our portion of the annual health insurance industry fee attributed to calendar year 2016 in accordance with the Health Care Reform Law. This fee is not deductible for tax purposes. Each year on January 1, we record a liability for this fee in trade accounts payable and accrued expenses 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 $231 million for the three months ended September 30, 2016 and $687 million for the nine months ended September 30, 2016. For the three and nine months ended September 30, 2015 there was approximately $217 million and $650 million, respectively, of operating cost expense resulting from the amortization of the 2015 annual health insurance industry fee. The remaining deferred cost asset balance was approximately $229 million at September 30, 2016. The Consolidated Appropriations Act, 2016, enacted on December 18, 2015, included a one-time one year suspension in 2017 of the health insurer fee.