Exhibit 13
Results of Operations
1999 FINANCIAL PERFORMANCE HIGHLIGHTS
1999 was the strongest year in the history of UnitedHealth Group, resulting from
business growth and continued productivity improvements. Financial performance
highlights include(1):
- Record earnings from operations, net earnings applicable to common
shareholders, and diluted net earnings per common share of $943 million, $568
million and $3.20 per share, respectively, representing increases over 1998 of
10%, 12% and 22%, respectively.
- Record revenues of $19.6 billion, a 13% increase over 1998.
- Segment operating earnings of $953 million, up 20% over 1998, with each
segment delivering strong year-over-year gains.
- Record cash flows of $1.2 billion generated from operating activities, an
11% increase over 1998.
- Continued financing initiatives to achieve a more efficient capital
structure, including the repurchase of 19.4 million shares of our common
stock.
- 1999 return on equity of 14.1%, up from 11.9% in 1998.
(1) Where applicable, 1998 results exclude special operating charges.
Following is a five-year summary of selected financial data:
Results of Operations should be read together with the accompanying Consolidated
Financial Statements and Notes.
1 Excluding the operational realignment and other charges of $725 million, $175
million of charges related to contract losses associated with certain Medicare
markets and other increases to commercial and Medicare medical costs payable
estimates, and the $20 million convertible preferred stock redemption premium
from 1998 results, earnings from operations and net earnings applicable to
common shareholders would have been $858 million and $509 million, or $2.62
diluted net earnings per common share.
2 Excluding the merger costs associated with the acquisition of HealthWise of
America, Inc. of $15 million ($9 million after tax, or $0.05 diluted net
earnings per common share) and the provision for future losses on two large
multi-year contracts of $45 million ($27 million after tax, or $0.15 diluted net
earnings per common share), 1996 earnings from operations and net earnings would
have been $641 million and $392 million, or $1.96 diluted net earnings per
common share.
3 Excluding restructuring charges associated with the acquisition of The
MetraHealth Companies, Inc. of $154 million ($97 million after tax, or $0.55
diluted net earnings per common share), 1995 earnings from operations and net
earnings would have been $615 million and $383 million, or $2.12 diluted net
earnings per common share.
4 During 1998, we issued debt totaling $708 million and redeemed $500 million of
convertible preferred stock.
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1999 RESULTS COMPARED TO 1998 RESULTS
CONSOLIDATED FINANCIAL RESULTS
REVENUES
Revenues are comprised of: 1) premium revenues associated with risk-based
products (those where we assume financial responsibility for health care costs);
2) management services and fees associated with administrative services, managed
health plans, and our Specialized Care Services and Ingenix businesses; and 3)
investment and other income.
Consolidated revenues increased 13% in 1999 to $19.6 billion, reflecting
balanced growth across all business segments. Following is a discussion of 1999
consolidated revenue trends for each of our three revenue components.
PREMIUM REVENUES
Consolidated premium revenues in 1999 totaled $17.6 billion, an increase of $2.0
billion, or 13%, compared to 1998. This increase was driven by
UnitedHealthcare's average year-over-year premium yield increases on risk-based
commercial groups of approximately 9%. The balance of the increase is
attributable to growth in individuals served by United Behavioral Health, and
our acquisitions of HealthPartners of Arizona, Inc. in October 1998 and Dental
Benefit Providers, Inc. in June 1999.
MANAGEMENT SERVICES AND FEE REVENUES
Management services and fee revenues in1999 totaled $1.8 billion, representing
an increase of $203 million, or 13%, over 1998. The overall increase in
management services and fee revenues is primarily the result of strong growth in
Uniprise's multi-site customer base, price increases in fee business, and
acquisitions and growth from our Ingenix business.
INVESTMENT AND OTHER INCOME
Investment and other income during the year ended December 31, 1999, totaled
$219 million, representing a decrease of $30 million from 1998. This decrease is
primarily the result of net realized capital losses from the sale of investments
in 1999 as opposed to net realized capital gains in 1998, along with decreases
in cash and investments and associated investment income resulting from our
stock repurchase activities and business acquisitions. Rising interest rates
during 1999 resulted in declines in the fair value of fixed income investments
and we realized net capital losses of $6 million during 1999, excluding the gain
on the transfer of Healtheon Corporation (Healtheon) common stock to
UnitedHealth Foundation (see Note 7 to the financial statements). For the year
ended December 31, 1998, we realized net capital gains of $26 million.
OPERATING EXPENSES
MEDICAL COSTS
The combination of our pricing and care coordination efforts is reflected in the
medical care ratio (medical costs as a percentage of premium revenues).
Our consolidated medical care ratio decreased from 87.2% in 1998 to 85.7% in
1999. Excluding the AARP business and the effects of 1998 special charges, on a
year-over-year basis, the medical care ratio decreased 10 basis points to 84.2%.
On an absolute dollar basis, the increase of $1.5 billion, or 11%, in
medical costs over 1998 is driven by a combination of growth in individuals
served with risk-based products, medical cost inflation, benefit changes and
product mix changes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses as a percent of total
revenues (the operating cost ratio) was 17.1% in 1999, consistent with 1998.
SG&A reductions in 1999 were partially offset by $39 million of incremental
expenses over 1998 expense levels related to core process improvement
initiatives and platform system conversions. Additionally, changes in revenue
mix affect our operating cost ratio. Our fastest growing businesses (Uniprise,
Specialized Care Services and Ingenix) maintain proportionately higher SG&A
costs as the majority of their direct costs of revenue are included in SG&A
expenses, not medical costs. On a comparable revenue mix basis, the operating
cost ratio would have decreased 30 basis points to 16.8%.
On an absolute dollar basis, SG&A expenses increased by $379 million, or
13%, over 1998. This increase reflects the additional costs to support the
corresponding 13% increase in consolidated revenues in 1999, and the incremental
core process improvement expenses described above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $233 million in 1999 and $185 million in 1998.
This increase resulted from a combination of increased levels of capital
expenditures in 1998 and 1999 to support business growth and technology
enhancements and amortization of goodwill and other intangible assets related to
acquisitions.
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BUSINESS SEGMENTS
The following summarizes the operating results of our business segments for the
years ended December 31 (in millions):
(a) Excludes $725 million of operational realignment and other charges and $175
million of charges related to contract losses associated with certain Medicare
markets and other increases to commercial and Medicare medical costs payable
estimates.
(b) Calculated as percentage change between 1999 results and 1998 results, as
adjusted.
nm - not meaningful
HEALTH CARE SERVICES
The Health Care Services segment consists of the UnitedHealthcare and Ovations
businesses. UnitedHealthcare designs and operates network-based health and
well-being services, including commercial, Medicare and Medicaid products for
locally based employers and individuals in six broad regional markets. Ovations,
which administers Medicare Supplement benefits on behalf of AARP (American
Association of Retired Persons), offers health and well-being services for
Americans age 50 and older.
The Health Care Services segment posted record revenues of $17,581 million,
representing an increase of $1,969 million, or 13%, over 1998. This increase is
primarily attributable to UnitedHealthcare's average net premium yield increases
on commercial business of approximately 9% and the acquisition of HealthPartners
of Arizona, Inc. in October 1998.
The Health Care Services segment contributed earnings from operations of
$578 million in 1999, an increase of $75 million, or 15%, over 1998. The
increase is primarily due to growth in the average number of individuals served
by UnitedHealthcare during 1999 and reduced operating costs as a percentage of
revenues driven by our realignment process improvement initiatives.
The following table summarizes UnitedHealthcare's medical care ratios by
product line for the years ended December 31:
(a) Excludes the effects of $175 million of contract losses associated with
certain Medicare markets and other increases to commercial and Medicare medical
costs payable estimates.
UnitedHealthcare's commercial medical care ratio improved on a year-over-year
basis, driven by net premium yield increases in excess of underlying medical
costs. Commercial health plan premium rates are established based on anticipated
benefit costs. During 1999, our total cost of benefits, including the effects of
medical cost inflation, benefit changes and product mix, increased at a rate of
approximately 8% while average premium yield increases were approximately 9%.
For 2000, we are pricing renewal commercial business with average 9% to 10%
premium yield increases, while our projected total cost of benefits increase is
8.0% to 8.5%.
UnitedHealthcare's Medicare medical care ratio increased in 1999 compared to
1998 (excluding 1998 special charges). We continue to evaluate Medicare markets
and alter benefit designs to further improve our Medicare product margins.
Our year-over-year Medicare enrollment decreased 9% as a result of actions
taken to better position this program for long-term success. Effective January
1, 1999, we withdrew Medicare+Choice product offerings from 86 counties,
affecting approximately 60,000, or 12%, of our Medicare members as of December
31, 1998. On July 1, 1999, we announced plans to withdraw, effective January 1,
2000, from the Medicare+Choice product program in another 49 counties affecting
40,000 existing members, and also filed significant benefit adjustments. Annual
revenues for 1999 from the Medicare markets we exited effective January 1, 2000,
were approximately $230 million. These actions are expected to further reduce
Medicare enrollment, but better position this program in the long term in terms
of profitability relative to its cost of capital and required resource
management.
We will continue to evaluate the markets we serve and, where necessary, take
actions that may result in further withdrawals of Medicare product offerings or
reductions in membership, when and as permitted by our contracts with the Health
Care Financing Administration (HCFA).
The following table summarizes individuals served by UnitedHealthcare, by
product and funding arrangement, as of December 31 (in thousands)(1):
(1) Excludes individuals served through UnitedHealthcare platforms located in
Puerto Rico and Pacific Coast regions. The company is transitioning these
markets.
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UNIPRISE
Uniprise provides network-based health and well-being services,
business-to-business transactional infrastructure services, consumer
connectivity and service, and technology support for large employers and health
plans. Uniprise's revenues increased by $241 million, or 15%, over 1998 driven
primarily by continued growth in its large multi-site customer base, as
demonstrated by 11% growth in individuals served, and price increases on
fee-based business. Uniprise served 5,980,000 and 5,400,000 individuals as of
December 31, 1999 and 1998, respectively. Uniprise's earnings from operations
grew by $61 million, or 38%, over 1998 as a result of the increased revenues,
ongoing process improvement initiatives, and improved operating margins on
risk-based products.
SPECIALIZED CARE SERVICES
Specialized Care Services is an expanding portfolio of health and well-being
companies, each serving a specialized market need with a unique blend of
benefits, provider networks, services and resources. Specialized Care Services'
revenues increased by $108 million, or 17%, over 1998. This increase was driven
primarily by an increase in the number of individuals served by United
Behavioral Health, our mental health and substance abuse services business, and
the acquisition of Dental Benefit Providers, Inc. in June 1999. Earnings from
operations of $128 million increased by 17% compared with 1998, commensurate
with 1999 revenue growth.
INGENIX
Ingenix is a leading health care information and research company that offers a
comprehensive line of health care knowledge and information products and
services to pharmaceutical companies, health insurers and payers, care
providers, large employers and governments. Revenues increased by $74 million,
or 40%, over 1998 primarily as a result of acquisitions during the last half of
1998 and during 1999. Earnings from operations of $25 million increased by 25%
compared with 1998.
CORPORATE AND ELIMINATIONS
Corporate includes investment income derived from cash and investments not
assigned to operating segments and the company-wide costs associated with core
process improvement initiatives. The decrease of $75 million in 1999 Corporate
earnings is attributable to $39 million of incremental core process improvement
costs over 1998 levels and a decline in the level of unassigned cash and
investments and associated investment income, primarily resulting from share
repurchases and business acquisitions.
OPERATIONAL REALIGNMENT AND OTHER CHARGES
In conjunction with our operational realignment initiatives, we developed
and, in the second quarter of 1998, approved a comprehensive plan (the Plan)
to implement our operational realignment. We recognized corresponding charges
to operations of $725 million in the second quarter of 1998, which reflected
the estimated costs to be incurred under the Plan. The charges included costs
associated with asset impairments; employee terminations; disposing of or
discontinuing business units, product lines and contracts; and consolidating
and eliminating certain claim processing operations and associated real
estate obligations.
The asset impairments consisted principally of: 1) purchased in-process
research and development associated with our acquisition of Medicode, Inc; 2)
goodwill and other long-lived assets including fixed assets, computer hardware
and software, and leasehold improvements associated with businesses we intend to
dispose of or markets where we plan to curtail operations or change our
operating presence; and 3) other realignment initiatives. Activities associated
with the Plan will result in the reduction of approximately 5,200 positions,
affecting approximately 6,400 people in various locations. Through December 31,
1999, we had eliminated approximately 3,900 positions, affecting approximately
3,700 people, pursuant to the Plan. The remaining positions are expected to be
eliminated by December 31, 2000.
In August 1999, we completed the sale of our managed workers' compensation
business. During the second half of 1998 and the first half of 1999, we also
completed the sale of our medical provider clinics and reconfigured our small
group insurance business and a non-strategic health plan market. The balances
accrued in our operational realignment and other charges were sufficient to
cover actual costs associated with the disposition and reconfiguration of these
businesses.
Remaining markets where we plan to curtail or make changes to our operating
presence include two health plan markets that are in non-strategic markets. In
Puerto Rico, we expect to complete the sale of this business prior to April 30,
2000. In the Pacific Coast region, we will be exiting our operations related to
small and mid-sized customer groups with anticipated completion in 2000. We
believe the balances accrued in our operational realignment and other charges
will be sufficient to cover expenses incurred in the sale and exit of these
markets.
Our accompanying financial statements include the operating results of
businesses and markets to be disposed of or discontinued in connection with the
operational realignment. The carrying value of the net assets held for sale or
disposal was approximately $20 million as of December 31, 1999. Our accompanying
Consolidated Statements of Operations for the years ended December 31, 1999 and
1998, include revenues of $689 million and $964 million, respectively, and
losses from operations of $41 million and $52 million, respectively, from
businesses disposed of or to be disposed of and markets we plan to exit.
The revenues and operating losses described above do not include operating
results from the counties where we withdrew our Medicare product offerings,
effective January 1, 1999, and where we are withdrawing our Medicare product
offerings, effective January 1, 2000. Annual revenues for 1998 for Medicare
counties we exited in January 1999 were approximately $225 million. Annual
revenues for 1999 from the Medicare counties we are exiting in January 2000 were
approximately $230 million.
The operational realignment and other charges do not cover certain aspects
of the Plan, including new information systems, data conversions, process
re-engineering and employee relocation and training. These costs are charged to
expense as incurred or capitalized, as appropriate. During 1999 and 1998, we
incurred expenses of approximately $52 million and $13 million, respectively,
related to these activities.
The Plan provided for substantial completion in 1999. However, some
initiatives, including the consolidation of certain claim and administrative
processing functions and certain divestitures and market realignment activities
are requiring additional time in order to complete them in the most effective
manner and will extend through 2000. Based on current facts and circumstances,
we believe the remaining realignment reserve is adequate to cover the costs to
be incurred in executing the remainder of the Plan. However, as we proceed with
the execution of the Plan and more current information becomes available, it may
be necessary to adjust our estimates for severance, lease obligations on exited
facilities, and losses on disposition of businesses.
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The table below summarizes accrued operational realignment and other charges
through December 31, 1999 (in millions):
1998 RESULTS COMPARED TO 1997 RESULTS
CONSOLIDATED FINANCIAL RESULTS
REVENUES
PREMIUM REVENUES
Consolidated premium revenues in 1998 totaled $15.5 billion, an increase of $5.4
billion, or 53%, compared to 1997. On January 1, 1998, our Health Care Services'
Ovations business began delivering Medicare Supplement insurance and other
medical insurance coverage to approximately 4 million AARP members. Premium
revenues from our portion of the AARP insurance offerings during 1998 were $3.5
billion.
Excluding the AARP business, 1998 consolidated premium revenues totaled $12
billion, an increase of 19% over 1997. This increase was primarily the result of
growth in our Health Care Services' UnitedHealthcare business. On a
year-over-year same-store basis, UnitedHealthcare's premium revenues increased
$1.7 billion, or 18%, during 1998. The increase reflected same-store commercial
health plan enrollment growth of 10% and average year-over-year premium yield
increases on renewing commercial health plan groups of approximately 5% to 6%.
Growth in UnitedHealthcare's Medicare programs also contributed to the
increase in premium revenues, with same-store growth of 33% in Medicare
enrollment. Significant growth in Medicare enrollment affects year-over-year
comparability. The Medicare product generally has per member premium rates three
to four times higher than average commercial premium rates because Medicare
members typically use proportionately more medical services. On a
year-over-year, same-store basis, UnitedHealthcare's commercial health plan and
Medicare products accounted for $1.8 billion of premium revenue growth during
1998.
MANAGEMENT SERVICES AND FEE REVENUES
Management services and fee revenues during 1998 totaled $1.6 billion,
representing an increase of approximately $160 million over 1997. The increase
was primarily the result of acquisitions by Ingenix during 1997 and 1998.
Additionally, our Specialized Care Services business - most notably in United
Behavioral Health and Optum-Registered Trademark-, our telephone- and
Internet-based health information and services business increased the number of
individuals it serves.
INVESTMENT AND OTHER INCOME
Investment and other income increased to $249 million in 1998 from $231 million
in 1997. The increase of $18 million was primarily attributable to an increase
in average cash and investments from $3.6 billion in 1997 to $4.1 billion in
1998. Net realized capital gains were $26 million in both 1998 and 1997.
OPERATING EXPENSES
MEDICAL COSTS
The following table summarizes our medical care ratio by product line for the
years ended December 31:
(1) Excludes the effects of contract losses associated with certain Medicare
markets and other increases to commercial and Medicare medical costs payable
estimates.
Our consolidated medical care ratio increased to 87.2% in 1998 from 84.3% in
1997. The year-over-year increase includes the effects of the AARP business on
our medical care ratio. We experience a medical care ratio of approximately 92%
related to our portion of the AARP insurance offerings, which we began
delivering on January 1, 1998. Excluding the AARP business, on a year-over-year
basis, the medical care ratio increased to 85.8%.
The increase in the 1998 medical care ratio was primarily due to average
Medicare premium rate increases of 2.5%, which were more than offset by
increased medical utilization reflected mostly in hospital costs. In 13 of our
24 Medicare markets, representing half of our annual Medicare premiums of $2.4
billion, we incurred contract losses of $111 million. Six of these 13 markets
were generally newer markets where we had been unable to achieve the scale of
operations necessary to achieve profitability. In numerous counties in the other
seven markets, we experienced increased medical costs that exceeded the fixed
Medicare premiums, which only increased 2.5% on average.
Despite increasing commercial medical cost trends in certain health plan
markets, UnitedHealthcare's commercial medical care ratio improved slightly to
85.6% in 1998 from 85.7% in 1997.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percent of total revenues
(the operating cost ratio) decreased from 20.0% in 1997 to 17.1% in 1998. The
improvement in the year-over-year operating cost ratio principally reflected
the operating leverage we gained with the addition of the AARP business. On
an absolute dollar basis, selling, general and administrative costs increased
by $600 million, or 25%, over 1997. The increase primarily reflected the
additional infrastructure needed to support the $5.4 billion, or 53%,
increase in premium-based business.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $185 million in 1998, and $146 million in
1997. This increase resulted from a combination of higher levels of capital
expenditures to support business growth and amortization of goodwill and other
intangible assets related to recent acquisitions.
FINANCIAL CONDITION AND LIQUIDITY AT DECEMBER 31, 1999
During 1999, we generated $1.2 billion in cash from operating activities. We
continued to maintain a strong financial condition and liquidity position, with
cash and investments of $4.7 billion at December 31, 1999, an increase of $295
million from December 31, 1998.
Cash and investments included $484 million and $111 million of equity
securities as of December 31, 1999 and 1998, respectively. The increase in
equity securities is primarily attributable to unrealized gains of $318 million
during 1999, largely resulting from our investment in Healtheon common stock,
which increased in value subsequent to Healtheon's initial public stock offering
in February 1999.
As further described under "Regulatory Capital and Dividend Restrictions,"
many of our subsidiaries are subject to various government regulations. After
taking into account these regulations, approximately $300 million (excluding
equity securities of $484 million) of our $4.7 billion of cash and investments
at December 31, 1999, was available for general corporate use, including share
repurchases, acquisitions and working capital needs. Of this amount,
approximately $200 million was maintained at year-end as part of our Year 2000
risk mitigation planning. Our operating cash flows and financing capability also
provide us with funds, as needed, for general corporate use.
During 1999, we issued commercial paper and, as of December 31, 1999, we had
$591 million outstanding, with interest rates ranging from 5.5% to 6.3%.
In November 1999, we also issued a $150 million two-year floating rate note.
The interest rate for the initial three-month period is 6.65%.
We used the proceeds from the commercial paper and the floating rate note to
repay $400 million of unsecured notes in December 1999.
In August 1999, we increased our commercial paper program and our
supporting credit arrangements with a group of banks to an aggregate of $900
million. The supporting credit arrangements are composed of a $300 million
revolving credit facility, expiring in December 2003, and a $600 million 364-day
facility, expiringin August 2000. We also have the capacity to issue
approximately $180 million of extendible commercial notes (ECNs). At December
31, 1999, we had no amounts outstanding under our credit facilities or ECN
programs.
Our debt arrangements and credit facilities contain various covenants, the
most restrictive of which place limitations on secured and unsecured borrowings
and require us to exceed minimum interest coverage levels. We are in compliance
with the requirements of all debt covenants.
Our senior debt is rated "A" by Standard & Poor's and Duff & Phelps, and
"A3" by Moody's. Our commercial paper and ECN programs are rated "A-1" by
Standard & Poor's, "D-1" by Duff & Phelps, and "P-2" by Moody's.
The aggregate issuing capacity of all securities covered by shelf
registration statements for common stock, preferred stock, debt securities and
other securities is $1.25 billion. We may publicly offer such securities from
time to time at prices and terms to be determined at the time of offering.
Under the board of directors' authorization, we are operating a common stock
repurchase program. Repurchases may be made from time to time at prevailing
prices, subject to certain restrictions on volume, pricing and timing. During
1999, we repurchased 19.4 million shares for an aggregate of $983 million. Since
inception of our stock repurchase activities in November 1997 and through
December 31, 1999, we have repurchased 30.9 million shares for an aggregate of
$1.4 billion. As of December 31, 1999, we have board of directors' authorization
to purchase up to an additional 13.9 million shares of our common stock.
In the second quarter of 1998, we recognized special charges to operations
of $725 million associated with implementing our operational realignment plan.
We believe our remaining after-tax cash outlay associated with these charges
will be approximately $80 million over the next 12 months.
We expect our available cash and investment resources, operating cash flows
and financing capability will be sufficient to meet our current operating
requirements and other corporate development initiatives. A substantial portion
of our long-term investments ($2.6 billion as of December 31, 1999) is
classified as available for sale. Subject to the previously described
regulations, these investments may be sold prior to their maturity to fund
working capital or for other purposes.
Currently, we do not have any other material definitive commitments that
require cash resources; however, we continually evaluate opportunities to expand
our operations. This includes internal development of new products and programs
and may include acquisitions.
During 1999, we formed and initiated funding of the UnitedHealth Foundation
using a portion of our investment in Healtheon common stock valued at
approximately $50 million. UnitedHealth Foundation is dedicated to improving
Americans' health and well-being by supporting consumer and physician education
and awareness programs, generating objective information that will contribute to
improving health care delivery, and sponsoring community-based health and
well-being activities.
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
Our operations are conducted through our wholly-owned subsidiaries, which
include health maintenance organizations (HMOs) and insurance companies. HMOs
and insurance companies are subject to state regulations that, among other
things, may require the maintenance of minimum levels of statutory capital, as
defined by each state, and restrict the timing and amount of dividends and other
distributions that may be paid to their respective parent companies. Generally,
the amount of dividend distributions that may be paid by regulated insurance and
HMO companies, without prior approval by state regulatory authorities, is
limited based on the entity's level of statutory net income and statutory
capital and surplus.
As of December 31, 1999, our regulated subsidiaries had aggregate statutory
capital and surplus of approximately $1.5 billion, compared with their aggregate
minimum statutory capital and surplus requirements of approximately $350
million.
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The National Association of Insurance Commissioners has adopted rules which,
to the extent that they are implemented by the states, will set new minimum
capitalization requirements for insurance companies, HMOs and other entities
bearing risk for health care coverage. The requirements take the form of
risk-based capital rules. The change in rules for insurance companies was
effective December 31, 1998. The new HMO rules are subject to state-by-state
adoption, but not many states had adopted the rules as of December 31, 1999. The
HMO rules, if adopted by the states in their proposed form, would significantly
increase the minimum capital required for certain of our subsidiaries. However,
we believe we can redeploy capital among our regulated entities to minimize the
need for incremental capital investment of general corporate financial resources
into regulated subsidiaries. As such, we do not anticipate a significant impact
on our aggregate capital or investments in regulated subsidiaries.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial instrument
caused by fluctuations in interest rates and equity prices.
Approximately $4.2 billion of our cash and investments at December 31, 1999,
was invested in fixed income securities. We manage our investment portfolio
within risk parameters approved by our board of directors; however our fixed
income securities are subject to the effects of market fluctuations in interest
rates. Assuming a hypothetical and immediate 1% increase in rates applicable to
our fixed income portfolio at December 31, 1999, the fair value of our fixed
income investments would decrease by approximately $110 million.
As of December 31, 1999, we owned approximately 7.8 million shares of
Healtheon common stock. With Healtheon's public stock offering in February 1999
and subsequent increases to the fair value of Healtheon's stock, we have
recorded a $283 million unrealized gain, or $178 million net of income tax
effects, in shareholders' equity as of December 31, 1999. Assuming an immediate
decrease of 25% in Healtheon's stock price, the hypothetical reduction in
shareholders' equity related to these holdings is estimated to be $45 million
(net of income tax effects), or 1% of total shareholders' equity at December 31,
1999.
INFLATION
Although the general rate of inflation has remained relatively stable and health
care cost inflation has stabilized in recent years, the national health care
cost inflation rate still exceeds the general inflation rate. We use various
strategies to mitigate the negative effects of health care cost inflation,
including setting commercial premiums based on anticipated health care costs,
care coordination with various health care providers, and various health care
cost containment measures. Specifically, health plans try to control medical and
hospital costs through contracts with independent providers of health care
services. Through these contracted care providers, our health plans emphasize
preventive health care and appropriate use of specialty and hospital services.
While we currently believe our strategies to mitigate health care cost
inflation will continue to be successful, competitive pressures, new health care
and pharmaceutical product introductions, demands from health care providers and
customers, applicable regulations or other factors may affect our ability to
control the impact of health care cost increases. In addition, certain
non-network-based products do not have health care cost containment measures
similar to those in place for network-based products. As a result, there is
added health care cost inflation risk with these products, which constitute
approximately 4% of our consolidated risk-based membership. We consider these
inflation risks when determining prices for those products.
YEAR 2000 INFRASTRUCTURE MODIFICATION ACTIVITIES
Our Year 2000 infrastructure remediation efforts were successful and, during
2000, we have not experienced any business disruptions or system failures.
LEGAL MATTERS
See Note 13 to the accompanying consolidated financial statements for a
discussion of legal matters.
CAUTIONARY STATEMENT REGARDING "FORWARD-LOOKING" STATEMENTS
The statements contained in Results of Operations, and other sections of this
annual report to shareholders, include forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (the PSLRA).
When used herein, the words or phrases "believes," "expects," "anticipates,"
"intends," "will likely result," "estimates," "projects" or similar expressions
are intended to identify such forward-looking statements. Any of these
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. Statements that are not strictly historical are
"forward-looking" statements under the safe harbor provisions of the PSLRA.
Forward-looking statements involve known and unknown risks, which may cause
actual results and corporate developments to differ materially from those
expected. Factors that could cause results and developments to differ materially
from expectations include, without limitation: the effects of state and federal
regulations, the effects of acquisitions and divestitures, and other risks
described from time to time in each of UnitedHealth Group's SEC reports,
including quarterly reports on Form 10-Q, annual reports on Form 10-K, and
reports on Form 8-K.
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Consolidated Statements of Operations UNITEDHEALTH GROUP
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CONSOLIDATED BALANCE SHEETS UNITEDHEALTH GROUP
See notes to consolidated financial statements.
29
Consolidated Statements of Changes in Shareholders' Equity UNITEDHEALTH GROUP
See notes to consolidated financial statements.
30
Consolidated Statements of Cash Flows UnitedHealth Group
See notes to consolidated financial statements.
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Notes to Consolidated Financial Statements UnitedHealth Group
(1) DESCRIPTION OF BUSINESS
UnitedHealth Group Incorporated (also referred to as "UnitedHealth Group," "the
Company," "we," "us," "our") is a national leader in forming and operating
orderly, efficient markets for the exchange of high quality health and
well-being services. Through five distinct but strategically aligned businesses
operating in separate market segments, we offer health care coverage and related
services to help people achieve improved health and well-being.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
We have prepared the consolidated financial statements in accordance with
generally accepted accounting principles and have included the accounts of
UnitedHealth Group and its subsidiaries. We have eliminated all significant
intercompany balances and transactions.
USE OF ESTIMATES
These financial statements include some amounts that are based on our best
estimates and judgments. The most significant estimates relate to medical costs
payable and other policy liabilities, intangible asset valuations and
integration reserves relating to acquisitions, and liabilities and asset
impairments relating to our operational realignment activities. These estimates
may be adjusted as more current information becomes available, and any
adjustment could be significant.
REVENUE RECOGNITION
Premium revenues are recognized in the period enrolled members are entitled to
receive health care services. Premium payments received from our customers prior
to such period are recorded as unearned premiums. Management services and fee
revenues are recognized in the period the related services are performed.
Premium revenues related to Medicare and Medicaid programs as a percentage of
total premium revenues were 21% in 1999, 20% in 1998, and 22% in 1997.
MEDICAL COSTS AND MEDICAL COSTS PAYABLE
Medical costs include claims paid, claims adjudicated but not yet paid,
estimates for claims received but not yet adjudicated, and estimates for claims
incurred but not yet received.
The estimates of medical costs and medical costs payable are developed using
actuarial methods based upon historical data for payment patterns, cost trends,
product mix, seasonality, utilization of health care services and other relevant
factors including product changes. The estimates are subject to change as
actuarial methods change or as underlying facts upon which estimates are based
change. We did not change our actuarial methods during 1999, 1998 or 1997. The
impact of any changes in estimates is included in the determination of earnings
in the period of change. Management believes that the amount of medical costs
payable is adequate to cover the company's liability for unpaid claims as of
December 31, 1999.
CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents are highly liquid investments with an original
maturity of three months or less. The fair value of cash and cash equivalents
approximates their carrying value because of the short maturity of the
instruments. Investments with a maturity of less than one year are classified as
short-term.
Investments held by trustees or agencies according to state regulatory
requirements are classified as held-to-maturity based on our ability and intent
to hold these investments to maturity. Such investments are reported at
amortized cost and are included in long-term investments. All other investments
are classified as available for sale and reported at fair value based on quoted
market prices and are classified as short-term or long-term depending on their
maturity term. Periodically, we sell investments classified as long-term prior
to their maturity to fund working capital or for other purposes.
Unrealized gains and losses on investments available for sale are excluded
from earnings and reported as a separate component of shareholders' equity, net
of income tax effects. To calculate realized gains and losses on the sale of
investments available for sale, we use the specific cost of each investment
sold. We have no investments classified as trading securities.
ASSETS UNDER MANAGEMENT
Under our 10-year agreement with AARP, we are administering certain aspects of
AARP's insurance program that were transferred from the program's previous
carrier (see Note 6). Pursuant to our agreement with AARP, the associated assets
are managed separately from our general investment portfolio and are used to
fund expenditures associated with the AARP Program. These assets are invested at
our discretion, within certain investment guidelines approved by the AARP. At
December 31, 1999, the assets were invested in marketable debt securities.
Interest earnings and realized investment gains and losses on these assets
accrue to the AARP policyholders and, as such, are not included in our
determination of earnings. Assets under management are reported at their fair
value. Unrealized gains and losses are included in the rate stabilization fund
associated with the AARP Program (see Note 6). As of December 31, 1999, the AARP
investment portfolio included net unrealized losses of $34 million compared with
net unrealized gains of $12 million as of December 31, 1998.
OTHER POLICY LIABILITIES
Other policy liabilities include the rate stabilization fund associated with the
AARP Program (see Note 6) and retrospective rate credit liabilities and customer
balances related to experience-rated indemnity products.
Retrospective rate credit liabilities represent premiums we received in
excess of amounts contractually owed by customers based on actual claim
experience. Liabilities established for closed policy years are based on actual
experience, while liabilities for open years are based on estimates of premiums,
claims and expenses incurred.
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Customer balances consist principally of deposit accounts and reserves that
have accumulated under certain experience-rated contracts. At the customer's
option, these balances may be returned to the customer or used to pay future
premiums or claims under eligible contracts.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful life of the respective assets,
ranging from three years to 30 years. The weighted-average useful life of
property and equipment at December 31, 1999, was approximately four years.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the purchase price and transaction costs associated with
businesses we have acquired in excess of the estimated fair value of the net
assets of these businesses. To the extent possible, a portion of the excess
purchase price and transaction costs is assigned to identifiable intangible
assets. Goodwill and other intangible assets are being amortized on a
straight-line basis over useful lives ranging from three years to 40 years, with
a weighted-average useful life of 34 years at December 31, 1999.
The useful lives of goodwill and other intangible assets have been assigned
based on our best judgment. We periodically evaluate whether certain
circumstances may affect the estimated useful lives or the recoverability of the
unamortized balance of goodwill or other intangible assets.
The most significant components of goodwill and other intangible assets are
composed of goodwill of $2.1 billion at December 31, 1999, and $1.8 billion at
December 31, 1998, and employer group contracts, supporting infrastructure,
distribution networks and institutional knowledge of $550 million at December
31, 1999, and $570 million at December 31, 1998, net of accumulated
amortization.
LONG-LIVED ASSETS
We review long-lived assets for events or changes in circumstances that would
indicate we may not recover their carrying value. We consider a number of
factors, including estimated future undiscounted cash flows associated with the
long-lived asset, to make this decision. We record assets held for sale at the
lower of their carrying amount or fair value, less any costs associated with the
final settlement.
INCOME TAXES
Deferred income tax assets and liabilities are recognized for the differences
between the financial and income tax reporting bases of assets and liabilities
based on enacted tax rates and laws. The deferred income tax provision or
benefit generally reflects the net change in deferred income tax assets and
liabilities during the year. The current income tax provision reflects the tax
consequences of revenues and expenses currently taxable or deductible on various
income tax returns for the year reported.
STOCK-BASED COMPENSATION
We use the intrinsic value method for determining stock-based compensation
expenses. Under the intrinsic value method, we do not recognize compensation
expense when the exercise price of an employee stock option equals or exceeds
the fair market value of the stock on the date the option is granted.
Information on what our stock-based compensation expenses would have been had we
calculated those expenses using the fair market values of outstanding stock
options is included in Note 11.
NET EARNINGS (LOSS) PER COMMON SHARE
Basic net earnings (loss) per common share is computed by dividing net earnings
(loss) applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted net earnings (loss) per
common share is determined using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of common stock
equivalents, consisting of shares that might be issued upon exercise of common
stock options. In periods where losses are reported, the weighted-average number
of common shares outstanding excludes common stock equivalents, since their
inclusion would be anti-dilutive.
COMPREHENSIVE INCOME
Comprehensive income and its components are reported in the Consolidated
Statements of Changes in Shareholders' Equity. Comprehensive income is defined
as changes in the equity of our business excluding changes resulting from
investments and distributions to our shareholders.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, a new standard on accounting for derivative financial instruments
and hedging activities was issued. This new standard will not materially affect
our financial results or disclosures based upon our current investment
portfolio.
RECLASSIFICATIONS
Certain 1998 and 1997 amounts in the consolidated financial statements have been
reclassified to conform to the 1999 presentation. These reclassifications have
no effect on net earnings (loss) or shareholders' equity as previously reported.
(3) ACQUISITIONS
In September 1999, our Ingenix business segment acquired Worldwide Clinical
Trials, Inc. (WCT), a leading contract research organization. We paid $214
million in cash in exchange for all outstanding shares of WCT. We accounted for
the purchase using the purchase method of accounting, which means the purchase
price was allocated to assets and liabilities acquired based on their estimated
fair values at the date of acquisition and only the post-acquisition results of
WCT are included in our consolidated financial statements. The purchase price
and costs associated with the acquisition exceeded the preliminary estimated
fair value of net assets acquired by $214 million, which has been assigned to
goodwill and is being amortized over its estimated useful life of 30 years. The
pro forma effects of the WCT acquisition on our consolidated financial
statements were not material.
In June 1999, our Specialized Care Services business segment acquired Dental
Benefit Providers, Inc. (DBP), one of the largest managed dental care services
companies in the United States. We paid $105 million in cash, and we accounted
for the acquisition using the purchase method of accounting. The purchase price
and costs associated with the acquisition exceeded the preliminary estimated
fair value of net assets acquired by $105 million, which has been assigned to
goodwill and is being amortized over its estimated useful life of 40 years. The
pro forma effects of the DBP acquisition on our consolidated financial
statements were not material.
In October 1998, our Health Care Services segment acquired HealthPartners of
Arizona, Inc. (HPA), with 509,000 members as of the acquisition date. We paid
$235 million in cash in exchange for all outstanding shares of HPA. We accounted
for the acquisition using
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the purchase method of accounting. The purchase price and costs associated with
the acquisition exceeded the estimated fair value of net assets acquired by $223
million, which has been assigned to goodwill and is being amortized over its
estimated useful life of 40 years. The pro forma effects of the HPA acquisition
on our consolidated financial statements were not material.
During 1998, our Ingenix segment acquired Kern McNeill International, Inc.
(KMI), a leading contract research organization, and St. Anthony Publishing,
Inc. (St. Anthony), a leader in the health care coding and reimbursement
publications market. In the aggregate, we paid $188 million in cash and assumed
liabilities of $17 million in exchange for all of the common stock of KMI and
St. Anthony. We accounted for these acquisitions using the purchase method of
accounting. The purchase price and costs associated with these acquisitions
exceeded the preliminary fair value of net assets acquired by $205 million,
which has been assigned to trade names and goodwill and is being amortized over
their estimated useful lives ranging from 15 to 40 years. The pro forma effects
of these acquisitions on our consolidated financial statements were not
material.
On December 31, 1997, our Ingenix segment acquired Medicode, Inc.
(Medicode), a leading provider of health care information products. We issued
2.4 million shares of common stock and 507,000 common stock options with a total
fair value of $127 million in exchange for all outstanding shares of Medicode.
We accounted for the acquisition using the purchase method of accounting. The
purchase price and costs associated with the acquisition exceeded the
preliminary estimated fair value of net assets acquired by $123 million, which
was originally assigned entirely to goodwill. During the second quarter of 1998,
the Company completed the valuation of the intangible assets acquired in the
Medicode transaction. Pursuant to the valuation, we expensed $68 million of the
excess purchase price representing purchased in-process technology that
previously had been assigned to goodwill. In management's judgment, this amount
reflects the amount we would reasonably expect to pay an unrelated party for
each project included in the technology. The value of in-process research and
development of $68 million represented approximately 48% of the purchase price
and was determined by estimating the costs to develop the purchased technology
into commercially viable products, then estimating the resulting net cash flows
from each project that was incomplete at the acquisition date, and discounting
the resulting net cash flows to their present value. As of the date of our
acquisition, Medicode had invested $8.5 million in in-process research and
development projects. An additional $5 million was expended through September
30, 1999, at which time all projects that were in-process as of the acquisition
date were complete. The $68 million charge is included as a component of
Operational Realignment and Other Charges in the accompanying Consolidated
Statements of Operations for the year ended December 31, 1998. Based on the
final valuation, the remaining excess purchase price of $55 million was assigned
to existing technologies, trade names and goodwill and is being amortized over
their estimated useful lives, averaging 13 years. The pro forma effects of the
Medicode acquisition on our consolidated financial statements were not material.
(4) SPECIAL OPERATING CHARGES
OPERATIONAL REALIGNMENT AND OTHER CHARGES
In conjunction with our operational realignment initiatives, we developed and,
in the second quarter of 1998, approved a compre hensive plan (the Plan) to
implement our operational realignment. We recognized corresponding charges to
operations of $725 million in the second quarter of 1998, which reflected the
estimated costs to be incurred under the Plan. The charges included costs
associated with asset impairments; employee terminations; disposing of or
discontinuing business units, product lines and contracts; and consolidating and
eliminating certain claim processing operations and associated real estate
obligations.
The asset impairments consisted principally of: 1) purchased in-process
research and development associated with our acquisition of Medicode, Inc.; 2)
goodwill and other long-lived assets including fixed assets, computer hardware
and software, and leasehold improvements associated with businesses we intend to
dispose of or markets where we plan to curtail our operations or change our
operating presence; and 3) other realignment initiatives. Activities associated
with the Plan will result in the reduction of approximately 5,200 positions,
affecting approximately 6,400 people in various locations. Through December 31,
1999, we had eliminated approximately 3,900 positions, affecting approximately
3,700 people, pursuant to the Plan. The remaining positions are expected to be
eliminated by December 31, 2000.
In August 1999, we completed the sale of our managed workers' compensation
business. During the second half of 1998 and the first half of 1999, we also
completed the sale of our medical provider clinics and the reconfiguration of
our small group insurance business and a non-strategic health plan market. The
balances accrued in our operational realignment and other charges were
sufficient to cover actual costs associated with the disposition and
reconfiguration of these businesses.
Remaining markets where we plan to curtail or make changes to our operating
presence include two health plan markets that are in non-strategic markets. In
Puerto Rico, we expect to complete the sale of this business prior to April 30,
2000. In the Pacific Coast region, we will be exiting our operations related to
small and mid-sized customer groups with anticipated completion in 2000. We
believe the balances accrued in our operational realignment and other charges
will be sufficient to cover expenses incurred in the sale and exit of these
markets.
Our accompanying financial statements include the operating results of
businesses and markets to be disposed of or discontinued in connection with the
operational realignment. The carrying value of the net assets held for sale or
disposal is approximately $20 million as of December 31, 1999. Our accompanying
Consolidated Statements of Operations include revenues and operating losses from
businesses disposed of or to be disposed of, and markets we plan to exit for the
years ended December 31 as follows (in millions):
The table above does not include operating results from the counties where
we withdrew our Medicare product offerings, effective January 1, 1999, and where
we will be withdrawing our Medicare product offerings, effective January 1,
2000. Annual revenues for 1998 for Medicare counties we exited in January 1999
were approximately $225 million. Annual revenues for 1999 from the Medicare
counties we are exiting in January 2000 were approximately $230 million.
The operational realignment and other charges do not cover certain aspects
of the Plan, including new information systems, data conversions, process
re-engineering, and employee relocation and training. These costs are charged to
expense as incurred or capitalized, as appropriate. During 1999 and 1998, we
incurred expenses of approximately $52 million and $13 million, respectively,
related to these activities.
The Plan provided for substantial completion in 1999. However, some
initiatives, including the consolidation of certain claim and
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administrative processing functions and certain divestitures and market
realignment activities are requiring additional time in order to complete them
in the most effective manner and will extend through 2000. Based on current
facts and circumstances, we believe the remaining realignment reserve is
adequate to cover the costs to be incurred in executing the remainder of the
Plan. However, as we proceed with the execution of the Plan and more current
information becomes available, it may be necessary to adjust our estimates for
severance, lease obligations on exited facilities, and losses on disposition of
businesses.
The accrual for operational realignment and other charges is included in
Accounts Payable and Accrued Liabilities in the accompanying Consolidated
Balance Sheets. The table below summarizes accrued operational realignment and
other charges through December 31, 1999 (in millions):
MEDICAL COSTS
During the second quarter of 1998, we recorded $175 million of medical cost
charges. Of this amount, $101 million related to Medicare contract losses, $19
million related to other increases to Medicare medical costs payable estimates,
and $55 million related to increases to commercial medical costs payable
estimates.
The $101 million of contract losses were incurred in 13 of our 24 Medicare
markets. These plans contributed half of our annual Medicare premiums of $2.4
billion in 1998. Six of these markets were generally newer markets where we had
been unable to achieve the scale of operations necessary to achieve
profitability. In numerous counties in the other seven markets, we experienced
increased medical costs that exceeded the fixed Medicare premiums, which only
increased 2.5% on average.
(5) PROVISION FOR FUTURE LOSSES
In the second quarter of 1996, we recorded a provision to medical costs of $45
million to cover estimated losses we expected to incur through the remaining
terms of two large multi-year contracts in our St. Louis health plan. One of the
contracts expired in December 1998 and contained a premium rate increase cap of
2.5% per year. The other contract expires in December 2000 and generally limits
premium rate increases to annual Consumer Price Index adjustments. As of
December 31, 1999, there were 40,000 members covered under this contract. During
1999 and 1998, we utilized $6 million and $8 million, respectively, of the
accrual for future losses. At December 31, 1999, we had $7 million remaining in
the accrual for future losses, which is included in Medical Costs Payable in the
accompanying Consolidated Balance Sheets. We expect this accrual will be
sufficient to cover expected future losses from the remaining contract.
(6) AARP (AMERICAN ASSOCIATION OF RETIRED PERSONS)
On January 1, 1998, we entered into a 10-year contract to provide insurance
products and services to members of the AARP. Under the terms of the contract,
we are compensated for claim administration and other services as well as for
assuming underwriting risk. We are also engaged in product development
activities to complement the insurance offerings under this program. AARP has
also contracted with certain other vendors to provide other member and marketing
services. We report premium revenues associated with the AARP Program net of the
administrative fees paid to these vendors and an administrative allowance we pay
to AARP. Premium revenues from our portion of the AARP insurance offerings were
approximately $3.5 billion during both 1999 and 1998.
The underwriting results related to the AARP business are recorded as an
increase or decrease to a rate stabilization fund (RSF). The primary components
of the underwriting results are premium revenue, medical costs, investment
income, administrative expenses, member service expenses, marketing expenses and
premium taxes. To the extent underwriting losses exceed the balance in the RSF,
we would be required to fund the deficit. Any deficit we fund could be recovered
by underwriting gains in future periods of the contract. The RSF balance was
$713 million as of December 31, 1999, and $509 million as of December 31, 1998,
and is included in Other Policy Liabilities in the accompanying Consolidated
Balance Sheets. We believe the RSF balance is sufficient to cover potential
future underwriting or other risks associated with the contract.
We assumed the policy and other policy liabilities related to the AARP
program and received cash and premium receivables from the previous insurance
carrier equal to the carrying value of the liabilities assumed as of January 1,
1998. The following AARP Program-related assets and liabilities are included in
our Consolidated Balance Sheets (in millions):
The effects of changes in balance sheet amounts associated with the AARP
Program accrue to AARP policyholders through the RSF balance. Accordingly, we do
not include the effect of such changes in our Consolidated Statements of Cash
Flows.
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(7) CASH, CASH EQUIVALENTS AND INVESTMENTS
As of December 31, the amortized cost, gross unrealized holding gains and
losses, and fair value of cash, cash equivalents, and investments were as
follows (in millions):
Gross realized gains of $9 million, $31 million and $37 million and gross
realized losses of $15 million, $5 million and $11 million were recognized in
1999, 1998 and 1997, respectively, and are included in Investment and Other
Income in the accompanying Consolidated Statements of Operations.
During 1999, we contributed approximately 1.2 million shares of Healtheon
Corporation common stock valued at approximately $50 million to the UnitedHealth
Foundation. The difference between the realized gain of approximately $49
million on the stock transfer and the related contribution expense of $50
million was $1 million. The net effect of this transaction is included in
Investment and Other Income in the accompanying Consolidated Statement of
Operations for 1999.
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(8) DEBT
Debt consisted of the following as of December 31(in millions):
As of December 31, 1999, we had $591 million of commercial paper outstanding,
with interest rates ranging from 5.5% to 6.3%. In November 1999, we also issued
a $150 million two-year floating rate note. The interest rate is adjusted
quarterly to the three-month LIBOR (London Interbank Offered Rate) plus 0.5%,
which was 6.65% as of December 31, 1999.
The repayment of the $400 million unsecured note in December 1999 was
financed with the $150 million floating rate note and commercial paper issuance.
In August 1999, we increased our commercial paper program and our supporting
credit arrangements with a group of banks to an aggregate of $900 million. The
supporting credit arrangements are comprised of a $300 million revolving credit
facility, expiring in December 2003, and a $600 million 364-day facility,
expiring in August 2000. We also have the capacity to issue approximately $180
million of extendible commercial notes (ECNs) under our ECN program. At December
31, 1999, we had no amounts outstanding under our credit facilities or ECN
program.
Our debt agreements and credit facilities contain various covenants, the
most restrictive of which place limitations on secured and unsecured borrowings
and require us to exceed minimum interest coverage levels. We are in compliance
with the requirements of all debt covenants.
Maturities of long-term debt for the years ending December 31 are as follows
(in millions):
We made cash payments for interest of $43 million in 1999.
(9) CONVERTIBLE PREFERRED STOCK
In December 1998, we redeemed all 500,000 outstanding shares of 5.75% Series A
Convertible Preferred Stock (Preferred Stock). This Preferred Stock was issued
to certain former shareholders of The MetraHealth Companies, Inc. (MetraHealth)
as a portion of the total consideration of our 1995 acquisition of MetraHealth.
The redemption price per share of stock was $1,040 per share, or $520 million in
the aggregate, which included a redemption premium of $40 per share or $20
million in the aggregate. The redemption premium of $20 million is deducted from
Net Earnings (Loss) to arrive at Net Earnings (Loss) Applicable to Common
Shareholders in the accompanying Consolidated Statement of Operations for 1998.
(10) SHAREHOLDERS' EQUITY
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
Our operations are conducted through our wholly-owned subsidiaries, which
include health maintenance organizations (HMOs) and insurance companies. HMOs
and insurance companies are subject to state regulations that, among other
things, may require the maintenance of minimum levels of statutory capital, as
defined by each state, and restrict the timing and amount of dividends and other
distributions that may be paid to their respective parent companies. Generally,
the amount of dividend distributions that may be paid by regulated insurance and
HMO companies, without prior approval by state regulatory authorities, is
limited based on the entity's level of statutory net income and statutory
capital and surplus.
As of December 31, 1999, the Company's regulated subsidiaries had aggregate
statutory capital and surplus of approximately $1.5 billion, compared with their
aggregate minimum statutory capital and surplus requirements of approximately
$350 million.
The National Association of Insurance Commissioners has adopted rules which,
to the extent that they are implemented by the states, will set new minimum
capitalization requirements for insurance companies, HMOs and other entities
bearing risk for health care coverage. The requirements take the form of
risk-based capital rules. The change in rules for insurance companies was
effective December 31, 1998. The new HMO rules are subject to state-by-state
adoption, but not many states had adopted the rules as of December 31, 1999. The
HMO rules, if adopted by the states in their proposed form, would significantly
increase the minimum capital required for certain of our subsidiaries. However,
we believe we can redeploy capital among our regulated entities to minimize the
need for incremental capital investment of general corporate financial resources
into regulated subsidiaries. As such, we do not anticipate a significant impact
on our aggregate capital or investments in regulated subsidiaries.
STOCK REPURCHASE PROGRAM
Under the board of directors' authorization, we are operating a common stock
repurchase program. Repurchases may be made from time to time at prevailing
prices, subject to certain restrictions on volume, pricing and timing. During
1999, we repurchased 19.4 million shares for an aggregate of $983 million. Since
inception of our stock repurchase activities in November 1997 and through
December 31, 1999, we have repurchased 30.9 million shares for an aggregate of
$1.4 billion. As of December 31, 1999, we have board of directors' authorization
to purchase up to an additional 13.9 million shares of our common stock.
DIVIDENDS
On February 10, 2000, the board of directors approved an annual dividend for
2000 of $0.03 per share to holders of common stock.
(11) STOCK-BASED COMPENSATION PLANS
We have stock and incentive plans (the Stock Plans) for the benefit of eligible
employees. As of December 31, 1999, the Stock Plans allowed for the future
granting of up to 7.2 million shares as incentive or non-qualified stock
options, stock appreciation rights, restricted stock awards and performance
awards to employees.
In 1995, we adopted the Non-employee Director Stock Option Plans (the 1995
Plan) to benefit members of the board of directors who are not employees. As of
December 31, 1999, 479,000 shares were available for future grants of
non-qualified stock options under the 1995 Plan.
Stock options are granted at an exercise price not less than the fair market
value of the common stock at the date of grant. They may be exercised over
varying periods and up to 10 years from the date of grant.
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A summary of the activity under our Stock Plans and the 1995 Plan during 1999,
1998 and 1997 is presented in the table below (shares in thousands):
The following table summarizes information about stock options outstanding at
December 31, 1999 (shares in thousands):
We increased additional paid-in capital $23 million in 1999, $47 million in
1998, and $37 million in 1997 to reflect the tax benefit we received upon the
exercise of non-qualified stock options.
We do not recognize compensation expense in connection with stock option
grants related to the Stock Plans and the 1995 Plan because we grant stock
options at exercise prices that equal or exceed the fair market value of the
stock at the time options are granted. If we had determined compensation expense
using fair market values for the stock options, net earnings (loss) per common
share would have been reduced to the following pro forma amounts:
To determine compensation cost under the fair value method, the fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. Principal assumptions used in applying the Black-Scholes
model were as follows:
Because we did not apply the fair value method of accounting to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of what can be expected in future years.
EMPLOYEE STOCK OWNERSHIP PLAN
We have a non-leveraged Employee Stock Ownership Plan (ESOP) for the benefit of
all eligible employees. Company contributions to the ESOP are made at the
discretion of the board of directors. We made contributions to the ESOP of $5
million in 1999, $4 million in 1998 and $4 million in 1997.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan (ESPP) allows all eligible employees to
purchase shares of common stock on semiannual offering dates at a price that is
the lesser of 85% of the fair market value of the shares on the first day or the
last day of the semiannual period. Employee contributions to the ESPP were $19
million for 1999, $19 million for 1998 and $17 million for 1997. Through the
ESPP, we issued to employees 460,000 shares for 1999, 206,000 shares for 1998,
and 422,000 for 1997. As of December 31, 1999, 2.5 million shares were available
for future issue.
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(12) INCOME TAXES
Components of the Provision (Benefit) for Income Taxes
Reconciliation of the Tax Provision at the U.S. Federal Statutory Rate to the
Provision for Income Taxes
Components of Deferred Income Tax Assets and Liabilities
Valuation allowances are provided when it is considered unlikely that deferred
tax assets will be realized. The valuation allowance primarily relates to future
tax benefits on certain purchased domestic and foreign net operating losses.
We made cash payments for income taxes of $214 million in 1999, $245 million
in 1998 and $124 million in 1997.
Consolidated income tax returns for fiscal years 1997 and 1996 are currently
being examined by the Internal Revenue Service. We do not believe any
adjustments that may result will have a significant impact on our consolidated
operating results or financial position.
(13) COMMITMENTS AND CONTINGENCIES
LEASES
We lease facilities, computer hardware and other equipment under long-term
operating leases that are noncancelable and expire on various dates through
2011. Rent expense under all operating leases was $129 million in 1999, $119
million in 1998 and $104 million in 1997.
At December 31, 1999, future minimum annual lease payments under all
noncancelable operating leases were as follows (in millions):
SERVICE AGREEMENTS
On June 1, 1996, and November 16, 1995, we entered into two separate contracts
with nonaffiliated third parties for information technology services, each with
an approximate term of 10 years. Under the terms of the contracts, the third
parties assumed responsibility for certain data center operations and support.
On September 19, 1996, we entered into a 10-year contract with a third party for
certain data network and voice communication services. Future payments under all
of these contracts are estimated to be $1.3 billion; however, the actual timing
and amount of payments will vary based on usage. Expenses incurred in connection
with these agreements were $172 million in 1999, $162 million in 1998 and $125
million in 1997.
39
LEGAL MATTERS
Because of the nature of our business, we are routinely subject to suits
alleging various causes of action. Some of these suits may include claims for
substantial noneconomic or punitive damages. We do not believe that any such
actions, or any other types of actions, currently threatened or pending will,
individually or in the aggregate, have a material adverse effect on our
financial position or results of operations.
On February 4, 2000, we entered into a settlement agreement with the
attorneys representing the plaintiff classes that assert claims under the U.S.
securities laws against UnitedHealth Group and certain of its current and former
officers and directors. The proposed settlement agreement is subject to court
approval. Our insurers have agreed to cover the cost of this settlement.
GOVERNMENT REGULATION
Our business is regulated on a federal, state and local level. The laws and
rules governing our business are subject to ongoing change, and latitude is
given to the agencies administering those regulations. Existing or future laws
and rules could affect how we do business, increase our health care and
administrative costs and capital requirements, and increase our obligations.
Further, we must obtain and maintain regulatory approvals to market many of our
products.
State legislatures and Congress continue to focus on health care issues. In
Congress, managed health care has been the subject of proposed legislation. Any
such legislation could expand health plan liability and could have an impact on
the costs and revenues of our health plans. Proposed federal bills and
regulations may also impact other aspects of our business.
We are also subject to various governmental reviews, audits and
investigations. However, we do not believe the results of any of the current
audits, individually or in the aggregate, will have a material adverse effect on
our financial position or results of operations.
CONCENTRATIONS OF CREDIT RISK
Investments in financial instruments such as marketable securities and
commercial premiums receivable may subject UnitedHealth Group to concentrations
of credit risk. Our investments in marketable securities are managed under an
investment policy authorized by the board of directors. These policies limit the
amounts that may be invested in any one issuer. Concentrations of credit risk
with respect to commercial premiums receivable are limited to the large number
of employer groups that constitute our customer base. As of December 31, 1999,
there were no significant concentrations of credit risk.
40
(14) SEGMENT FINANCIAL INFORMATION
Our accounting policies for business segment operations are the same as those
described in the Summary of Significant Accounting Policies (see Note 2).
Transactions between business segments are recorded at their estimated fair
value, as if they were purchased from or sold to third parties. All intersegment
transactions are eliminated in consolidation. In accordance with generally
accepted accounting principles, segments with similar economic characteristics
may be combined. The financial results of UnitedHealthcare and Ovations have
been combined in the Health Care Services segment column in the tables presented
below.
(1) Total Assets and Net Assets exclude, where applicable, debt and accrued
interest of $1,002 million and $708 million, income tax-related assets of
$163 million and $266 million, and income tax-related liabilities of $167
million and $4 million as of December 31, 1999 and 1998, respectively. In
1997, Total Assets and Net Assets exclude, where applicable, redeemable
preferred stock of $500 million, income tax-related assets of $41 million,
and income tax-related liabilities of $52 million.
(2) For comparability purposes, 1998 results are adjusted to exclude $725
million of operational realignment and other charges and $175 million of charges
related to contract losses associated with certain Medicare markets and other
increases to commercial and Medicare medical costs payable estimates. Including
these charges, 1998 segment earnings (loss) from operations were as follows:
41
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 1999 and 1998 (in millions, except per share data):
(1) Includes a net permanent tax benefit primarily related to the contribution
of Healtheon Corporation common stock to the UnitedHealth Foundation. Excluding
this benefit, Net Earnings Applicable to Common Shareholders and Diluted Net
Earnings per Common Share were $152 million and $0.88 per share, respectively.
(2) Includes $725 million of operational realignment and other charges and $175
million of charges related to contract losses associated with certain Medicare
markets and other increases to commercial and Medicare medical costs payable
estimates. Excluding these charges, Net Earnings Applicable to Common
Shareholders would have been $132 million, or $0.66 Diluted Net Earnings per
Common Share.
(3) Includes $20 million convertible preferred stock redemption premium.
Excluding the effects of the convertible preferred stock redemption premium, Net
Earnings Applicable to Common Shareholders would have been $125 million, or
$0.67 Diluted Net Earnings per Common Share.
42
Report of Independent
Public Accountants
TO THE SHAREHOLDERS AND DIRECTORS
OF UNITEDHEALTH GROUP INCORPORATED:
We have audited the accompanying consolidated balance sheets of UnitedHealth
Group Incorporated (a Minnesota Corporation) and Subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of UnitedHealth Group
Incorporated and its Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 10, 2000
Report of Management
The management of UnitedHealth Group is responsible for the integrity and
objectivity of the consolidated financial information contained in this annual
report. The consolidated financial statements and related information were
prepared according to generally accepted accounting principles and include some
amounts that are based on management's best estimates and judgments.
To meet its responsibility, management depends on its accounting systems and
related internal accounting controls. These systems are designed to provide
reasonable assurance, at an appropriate cost, that financial records are
reliable for use in preparing financial statements and that assets are
safeguarded. Qualified personnel throughout the organization maintain and
monitor these internal accounting controls on an ongoing basis. Internal
auditors review the accounting practices, systems of internal control and
compliance with these practices and controls.
The Audit Committee of the board of directors, composed entirely of
directors who are not employees of the Company, meets periodically and privately
with the Company's independent public accountants and its internal auditors, as
well as management, to review accounting, auditing, internal control, financial
reporting and other matters.
William W. McGuire, M.D.
Chairman and Chief Executive Officer
Stephen J. Hemsley
President and Chief Operating Officer
Arnold H. Kaplan
Chief Financial Officer
43
Investor Information UnitedHealth Group
MARKET PRICE OF COMMON STOCK
The following table shows the range of high and low sales prices for the
Company's stock as reported on the New York Stock Exchange Composite Tape for
the calendar periods shown through February 25, 2000. These prices do not
include commissions or fees associated with purchasing or selling this security.
As of February 25, 2000, the Company had 11,271 shareholders of record.
ACCOUNT QUESTIONS
Our transfer agent, Norwest Bank Minnesota, N.A., can help you with a variety of
shareholder-related services, including:
Change of address
Lost stock certificates
Transfer of stock to another person
Additional administrative services
You can call our transfer agent at (800) 468-9716
or locally at (651) 450-4064.
You can write to them at:
Norwest Shareowner Services
P.O. Box 64854
St. Paul, MN 55164-0854
Or you can e-mail our transfer agent at:
stocktransfer@norwest.com.
INVESTOR RELATIONS
You can contact UnitedHealth Group's Investor Relations group any time to order,
without charge, financial documents, such as the annual report and Form 10-K.
You can write to us at:
Investor Relations
UnitedHealth Group
P.O. Box 1459, Route MN008-8092
Minneapolis, MN 55440-1459
ANNUAL MEETING
We invite UnitedHealth Group shareholders to attend our annual meeting, which
will be held on Wednesday, May 10, 2000, at 3:00 p.m., at the Lutheran
Brotherhood Building, 625 Fourth Avenue South, Minneapolis, Minnesota.
DIVIDEND POLICY
UnitedHealth Group's dividend policy was established by the board of directors
in August 1990. The policy requires the board to review the Company's audited
consolidated financial statements following the end of each fiscal year and
decide whether it is advisable to declare a dividend on the outstanding shares
of common stock. Shareholders of record on April 1, 1999, received an annual
dividend for 1999 of $0.03 per share. On February 10, 2000, the Company's board
of directors announced an annual dividend for 2000 of $0.03 per share. The
dividend will be paid on April 19, 2000, to shareholders of record at the close
of business on April 3, 2000.
STOCK LISTING
The Company's common stock is traded on the New York Stock Exchange under the
symbol UNH.
INFORMATION ONLINE
You can view our annual report and obtain more information about UnitedHealth
Group and its businesses via the Internet. Our Internet address is:
www.unitedhealthgroup.com.
46
Corporate and Business Leaders
UNITEDHEALTH GROUP
WILLIAM W. MCGUIRE, M.D.
Chairman and
Chief Executive Officer
STEPHEN J. HEMSLEY
President and
Chief Operating Officer
ARNOLD H. KAPLAN
Chief Financial Officer
DAVID J. LUBBEN
General Counsel
ROBERT J. BACKES
Senior Vice President
Human Resources
JOHN S. PENSHORN
Director of Capital Markets
Communications and Strategy
UNITEDHEALTHCARE
JEANNINE M. RIVET
Chief Executive Officer
OVATIONS
LOIS QUAM
Chief Executive Officer
UNIPRISE
R. CHANNING WHEELER
Chief Executive Officer
SPECIALIZED CARE SERVICES
RONALD B. COLBY
Chief Executive Officer
INGENIX
KEVIN W. PEARSON
Chief Executive Officer
Ingenix Health Information
KEVIN H. ROCHE
Chief Executive Officer
Ingenix International
UNITEDHEALTH TECHNOLOGIES
JAMES B. HUDAK
Chief Executive Officer
44
Board of Directors
WILLIAM C. BALLARD, JR.
Of Counsel
Greenbaum,
Doll & McDonald
Louisville, Kentucky, law firm
RICHARD T. BURKE
Chief Executive Officer
and Governor
Phoenix Coyotes
National Hockey League team
STEPHEN J. HEMSLEY
President and
Chief Operating Officer
UnitedHealth Group
JAMES A. JOHNSON
Chairman and
Chief Executive Officer
Johnson Capital Partners
Private investment company
THOMAS H. KEAN
President
Drew University
DOUGLAS W. LEATHERDALE
Chairman and
Chief Executive Officer
The Saint Paul Companies, Inc.
Insurance and related services
WILLIAM W. MCGUIRE, M.D.
Chairman and
Chief Executive Officer
UnitedHealth Group
WALTER F. MONDALE
Partner
Dorsey & Whitney LLP
Minneapolis, Minnesota, law firm
MARY O. MUNDINGER
Dean and Professor, School of
Nursing, and Associate Dean,
Faculty of Medicine
Columbia University
ROBERT L. RYAN
Senior Vice President and
Chief Financial Officer
Medtronic, Inc.
Medical devices company
WILLIAM G. SPEARS
Managing Partner
W. G. Spears Grisant &
Brown LLC
New York City-based investment
counseling and management firm
GAIL R. WILENSKY
Senior Fellow
Project HOPE
International health foundation
AUDIT COMMITTEE
WILLIAM C. BALLARD, JR.
JAMES A. JOHNSON
DOUGLAS W. LEATHERDALE
ROBERT L. RYAN
COMPENSATION AND HUMAN
RESOURCES COMMITTEE
THOMAS H. KEAN
MARY O. MUNDINGER
WILLIAM G. SPEARS
COMPLIANCE AND GOVERNMENT
AFFAIRS COMMITTEE
RICHARD T. BURKE
WALTER F. MONDALE
GAIL R. WILENSKY
EXECUTIVE COMMITTEE
WILLIAM C. BALLARD, JR.
DOUGLAS W. LEATHERDALE
WILLIAM W. MCGUIRE, M.D.
WILLIAM G. SPEARS
NOMINATING COMMITTEE
WILLIAM C. BALLARD, JR.
THOMAS H. KEAN
DOUGLAS W. LEATHERDALE
WILLIAM W. MCGUIRE, M.D.
WILLIAM G. SPEARS
45