The Year 2000 Problem - Aetna Inc. ("Aetna") has recognized for some time the seriousness of the potential impact of the transition to the Year 2000. Deceptively simple to describe, the Year 2000, or "Millennium Bug," issue is a significant global challenge for all public and private
sector entities that use computers to do their work or include them in their products. Any
computer calculation that involves a date could yield incorrect answers with potentially
devastating results. Year 2000 is a management problem and not just a technological problem.
Clear direction from leaders in industry and government on a global basis is required if the
problem is to be solved in time. Aetna is committed to managing its transition to the Year 2000
comprehensively, prudently and without adverse effect on our customers or business partners.
Aetna's Year 2000 Program Office - Aetna, along with many other leading companies, has established an overall Year 2000 Program Office to direct the efforts of its individual business
segments in addressing Year 2000 risk. As the leader of the Year 2000 Program Office at Aetna,
I report directly to our CEO. Aetna's Program Office comprises expertise from a variety of
disciplines, among them Legal, Financial, Audit, Program Management, Technology, and
Communications. We are addressing the problem in partnership with leaders in every Aetna line
of business, including Aetna U.S. Healthcare, Aetna Retirement Services, and Aetna
International. Our effort includes Aetna's 22 affiliates in 16 countries primarily in the Americas
and Asia. I report on our progress on a regular basis to the CEO, the Board of Directors, and
As leader of our Program Office, I am responsible for management of the overall risk to Aetna of the Year 2000 problem. This includes oversight of our progress regarding:
Assessment of the Magnitude of the Year 2000 Problem
The Year 2000 problem is a global one and, while it has been characterized as a technology
problem, this greatly understates its magnitude. We believe that the Year 2000 problem poses a
comprehensive project management challenge to businesses and governments world-wide. The
sheer size of the effort, coupled with the fact that the deadline cannot be moved, is a test of our
collective management skills requiring planning, resource management, and communications, on
a scale not often encountered. The task of accounting for and addressing the vast web of
technologically interconnected relationships that characterize business in a "wired society" adds
an additional complicating dimension. The global cost to fix the Year 2000 problem is estimated
by Gartner Group to range between $300 and $600 billion whereas the litigation cost is estimated
by some to be between $1.5 and $3 trillion. There have been statements that downplay or
trivialize the Year 2000 issue. That is clearly not Aetna's view.
Associated Business Risks
The certainty of the century change, the magnitude of the effort and the complexity of the interrelationships means that all required Year 2000 remediation and testing may not get done by everyone. Aetna, like all businesses, would be affected by the failure of others, however well we achieve our own Year 2000 objectives. The risks we face fall into the following three categories: Operational, Market and Regulatory.
Operational Risks - Aetna is one of the country's largest health care benefits and financial
services organizations. Aetna U.S. Healthcare is the largest provider of managed health care
benefits. We provide health care benefits, specialty health, and group life and disability products
and services to 13.7 million members. More than 320,000 providers and 2,500 hospitals
comprise our health networks. The subsidiaries of Aetna Retirement Services serve more than 2
million members and 30,000 plan sponsors. Aetna International has more than 13 million
customers, primarily in Latin America and the Pacific Rim.
For Aetna as well as other large financial institutions, the impact of computer,
telecommunications, or utility failures because of Year 2000 on our world-wide operations could
be devastating. If there were telecommunications and computer failures, we could not transfer
funds (benefits claim and premium payments; investments; commissions; etc.) to and from our
health and retirement services customers, medical providers, plan sponsors or third party
administrators. We could not determine member eligibility. If our printing companies'
computers failed, we could not print checks, policies or periodic healthcare and retirement
services statements. If utility companies failed, it could be difficult if not impossible for us to
operate our physical premises.
Market Risks - As with all other insurance companies, Aetna's primary product across all our businesses is customer service. Any Year 2000 failures which impact our ability to serve our
customers could damage our reputation for quality service and our competitive position. We
have recently seen how sensitive the market is to the ability of health care companies to process
claims promptly. In our pharmacy business alone, we process over 44 million annual claims
transactions electronically. That means millions of healthcare insurance consumers could be
negatively affected by Year 2000 problems. The implications for healthcare diagnostic and
delivery procedures that are computer dependent are potentially much more serious.
In our retirement services business, we serve mostly customers who have tax-favored asset accumulation and retirement savings funds invested with us through state, municipal, or non-profit plan sponsors. More than $5 billion of these assets are invested by Aetna's retirement
services products in unaffiliated mutual funds such as Fidelity, Janus, etc. Aetna supports 34
mutual fund families and approximately 200 individual funds. We process 840,000 electronic
collections and payments annually and I 0,000 annual wire transfers through the Federal
Reserve's wire transfer system. An inability to transfer funds because of Year 2000 failures
could cause us and our customers serious financial harm.
Aetna also has substantial investments in real estate. Building systems and utility company
failures could subject Aetna to business interruption claims diminishing the value of our
Regulatory Risks - Many of Aetna's products are regulated at a state and/or federal level. It would be extremely difficult in the face of internal and external Year 2000 failures for any length
of time to meet the stringent reporting and transactional information requirements required of our
products. For example, most of our retirement services product customers contribute to their
accounts monthly and we are required to process their contributions promptly. Similarly, SEC
regulations require us to send our customers account statements and confirmations under
stringent time deadlines. Year 2000 failures would jeopardize our ability to meet these
Adequacy of Remediation and Risk Management Efforts Being Undertaken by Aetna
Program Management - Aetna has been working on a company-wide solution to the Year 2000
issue since early 1996 and is actively implementing a plan for a transition to the next millennium
with little or no disruption to our customers or other trading partners. We are well along in
identifying and implementing the critical changes necessary for Year 2000 compliance across all
areas of the company's operations and are confident we will have systems and business
funnctionality into and beyond the Year 2000.
The Year 2000 Program Office provides management oversight to the technical process of
repairing and testing code to make Aetna's systems Year 2000 compliant. We use a risk
management and reporting tool for assessment of progress against our Year 2000 plan. This tool
was developed by a nationally known consulting firm with a specialized practice in the Year
2000. Progress reports from this tool are regularly reviewed by senior management. The reach
of the Year 2000 Program Office is further extended by including people from all of our business
lines, domestic and international, to address issues and establish priorities for the Year 2000
Methodology - In a company as large as Aetna, there are thousands of computer systems, running millions of lines of code. To keep systems in operation through the Year 2000 and beyond, all this code must be reviewed and assessed to identify the need for remediation, the appropriate code must be modified, and then the modifications must be tested and implemented in order of business priority. The methodology we are using to prepare our systems to operate in the Year 2000 is as follows:
Millennium Test Environment - Aetna's millennium test environment is used for readiness testing after initial testing is completed in our quality assurance environment. The system date in
the millennium test environment is changed several times to make sure both software and hardware work with a particular application. The fact that the Year 2000 is a leap year also is accounted for in our millennium date testing. A dedicated testing staff is in place to manage this stand-alone millennium test environment for Year 2000 readiness.
Code Remediation Services - Since sufficient programming resources are essential to a
successful outcome, we have augmented our staff with Year 2000 code remediation services of
four widely known technology firms. As these companies are in great demand, we have assessed
our needs and have each firm under contract. We are orchestrating the remediation effort
company-wide and that includes helping our businesses deal with their internal and external
External Relationships - Year 2000 is much more than an internal systems issue. It impacts our facilities as well as those of critical third parties (e.g., providers, hospitals, pharmacies, banks,
printers, telephone and mail services) with whom we interact in the conduct of our business. No
business can address its Year 2000 issues in a vacuum. Aetna has hundreds of business partners
on which it depends to varying degrees to conduct its business. We have to be certain that these
critical external interfaces are taking this issue as seriously as we are and that they have
appropriate action plans in place to address their Year 2000 experience. We will monitor closely
the progress of our critical external relationships towards Year 2000 compliance. Accordingly,
we have developed a model for assessing our external relationships. The model determines the
degree of dependence we have with each of our business partners and assigns a level of criticality
to each. A Year 2000 action plan is then established for critical relationships that is monitored on an ongoing basis.
Progress to Date - Aetna's Year 2000 progress has been significant.
Contingency Plans - Aetna is developing a wide range of contingency plans which cover all
operational areas. As part of our contingency planning, we have reviewed all of our operations,
and are assessing our risks and prioritizing our needs. In addition, we are taking appropriate
steps to identify potential problems that may exist with the readiness of our most important
business partners and to monitor their progress in resolving them.
Financial Impact - Management is committed to providing whatever resources are necessary to
make certain Aetna's systems and operations are uninterrupted due to system malfimction or
inability of critical vendors to perform as contracted. Our Form 10-K will be available next
month and will provide additional detail on Aetna's Year 2000 cost estimates.
Aetna's Commitment - Aetna is committed to addressing our Year 2000 issues and risks in a
prudent, comprehensive and time-sensitive fashion and will dedicate the resources necessary to
achieve success in resolving those Year 2000 issues which impact our ability to serve our customers.
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