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 have been challenged 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 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. Historically, this business has reported profit in the first quarter of the year due to benefit designs. Because we continue to anticipate a loss associated with this business for the full year 2016, the seasonal earnings generated during the three months ended March 31, 2016 were offset by an increase in the premium deficiency reserve as noted in the table that follows.

Changes in the premium deficiency reserve for the three months ended March 31, 2016 were as follows:



	Premium Deficiency Reserve
	(in millions)
Balance at January 1, 2016	$	176
Current period results applied to the PDR liability	13
Balance at March 31, 2016	$	189

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



	March 31, 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	$	136		$	—	$	—	$	126		$	—	$	—
Other current assets	—			402		—		—			610		—
Trade accounts payable and accrued expenses	(258		)	—		—		(223		)	—		—
Net current (liability) asset	(122		)	402		—		(97		)	610		—
Other long-term assets	—			—		369		10			—		459
Other long-term liabilities	—			—		—		—			—		—
Net long-term asset	—			—		369		10			—		459
Total prior coverage years' net (liability) asset	(122		)	402		369		(87		)	610		459
Current Coverage Year
Other long-term assets	—			25		97		—			—		—
Other long-term liabilities	(12		)	—		—		—			—		—
Net long-term (liability) asset	(12		)	25		97		—			—		—
Total 2016 coverage year net (liability) asset	(12		)	25		97		—			—		—
Total net (liability) asset	$	(134	)	$	427	$	466	$	(87	)	$	610	$	459

Changes in estimate of the net 3Rs receivable for prior coverage years during the three months ended March 31, 2016 primarily result from prior period medical claims reserve development as well as updates to third party studies and tax estimates.

During the three months ended March 31, 2016, the Department of Health and Human Services, or HHS, provided issuers with an early payment for a portion of the estimated full year reinsurance recoverables for the 2015 coverage year, with the remainder expected in the third and fourth quarters of 2016. During the three months ended March 31, 2016, we received payments of $213 million for reinsurance recoverables associated with the 2015 coverage year. In 2015, commercial reinsurance recoveries associated with the 2014 coverage year primarily were collected in the third quarter of 2015.

We have collected approximately $30 million from HHS for our interim settlement associated with our risk corridor receivables for the 2014 coverage year. The interim settlement of approximately 12.6% of risk corridor receivables for the 2014 coverage year primarily was received in fourth quarter of 2015 and 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. 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 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 March 31, 2016.

In September 2016, we expect to pay the federal government an estimated $908 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 $227 million for the three months ended March 31, 2016 and $220 million for the three months ended March 31, 2015.