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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
Commission file number: 1-10864
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UNITED HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1321939
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
300 OPUS CENTER 55343
9900 BREN ROAD EAST (Zip Code)
MINNETONKA, MINNESOTA
(Address of principal executive offices)
Registrant's telephone number, including area code: (612)936-1300
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Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 8, 1999, was approximately $8,512,536,866 (based on the
last reported sale price of $51.75 per share on March 8, 1999, on the New York
Stock Exchange).
As of March 8, 1999, 180,782,384 shares of the registrant's Common Stock,
$.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Shareholders of Registrant to be
held on May 12, 1999. Certain information therein is incorporated by reference
into Part III hereof.
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*Only shares of common stock held beneficially by directors and executive
officers of the Company and persons or entities holding more than 10% of the
common stock filing Schedules 13G received by the Company have been excluded in
determining this number.
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PART I
ITEM 1. BUSINESS
UnitedHealth Group is a national leader offering health care coverage and
related services to help people achieve improved health and well-being through
all stages of life. The Company operates in all 50 states, the District of
Columbia, Puerto Rico and internationally. UnitedHealth Group's products and
services reflect a number of core capabilities, including medical information
management, health benefit administration, care coordination, risk assessment
and pricing, health benefit design and provider contracting. With these
capabilities, United is able to provide comprehensive health care management
services through organized health systems and insurance products, including
health maintenance organizations ("HMOs"), point-of-service plans ("POS"),
preferred provider organizations ("PPO") and managed indemnity programs. The
Company also offers specialized health care management services and products
such as behavioral health services, workers compensation and disability
services, utilization review services, specialized provider networks, employee
assistance programs, and knowledge and information services.
UnitedHealth Group is a Minnesota corporation, incorporated in January 1977.
Unless the context otherwise requires, the terms "United," "UnitedHealth Group"
or the "Company" refer to United HealthCare Corporation and its subsidiaries,
which operate under the name of, and is sometimes referred to in this Form 10-K
as, UnitedHealth Group. United's executive offices are located at 300 Opus
Center, 9900 Bren Road East, Minnetonka, Minnesota 55343; telephone (612)
936-1300.
BUSINESS OPERATIONS
The Company operates in the health and well-being marketplace. In late 1997,
the Company announced an internal realignment that established strategic
business units for each of the Company's six key business lines. These
businesses include UnitedHealthcare, Unimerica, Uniprise, Ovations, Specialized
Care Services and Ingenix. While the Company's general management and various
operational aspects, including information systems and certain administrative
functions, remain interrelated, the realignment allows each business to focus
fully on its specific set of customers and markets. The Unimerica business line
provides insurance services to the other businesses of UnitedHealth Group, and
its results are reported in the segment that originates the business. The
results of UnitedHealthcare and Ovations are combined in one segment.
UNITEDHEALTHCARE
UnitedHealthcare operates organized health systems. As of December 31, 1998,
UnitedHealthcare held a majority ownership interest in health plans operating in
approximately 40 markets nationwide and in Puerto Rico. UnitedHealthcare also is
engaged in a joint venture that operates a health plan in the Republic of South
Africa and provides consulting services in Germany, Hong Kong and the
Philippines through this business unit.
For organized health systems it owns, UnitedHealthcare assumes the risk for
health care and administrative costs in return for premium revenue.
UnitedHealthcare's owned health systems usually are licensed as health
maintenance organizations ("HMOs") or insurers. These plans provide
comprehensive health care coverage for a fixed fee or premium that usually does
not vary with the extent of medical services received by the member. Most of
UnitedHealthcare's owned health plans contract with independent providers of
health care services for medical and hospital services. UnitedHealthcare's
health plans that employ health care providers strive for cost-effective
delivery of health care services by emphasizing appropriate use of these
services, promoting preventive health services, and encouraging the use of
clinically proven treatments and best medical practices. UnitedHealthcare also
provides administrative and other management services to a limited number of
health plans in which UnitedHealthcare has no ownership interest.
UnitedHealthcare receives an administrative fee for providing its services to
these plans and generally assumes no responsibility for health care costs.
POINT-OF-SERVICE PRODUCTS. UnitedHealthcare's point-of-service products are
one of its most popular coverage options. Unlike some traditional HMO products,
which only cover non-emergency services
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received from contracted providers, point-of-service products also provide
coverage, usually at a lower level, for services received from non-contracted
providers. Sometimes, this out-of-network coverage is offered directly by the
health plan, but more often it is provided by an insurance policy "wrapped
around" the health plan benefit contract. The insurance policy usually is
provided through one of Unimerica's insurance subsidiaries.
SELF-FUNDED PRODUCTS. UnitedHealthcare has developed self-funded products
for employers who want the cost containment aspects of an organized health
system while self-insuring the health care cost risk. UnitedHealthcare uses the
provider networks it has developed for its health plan or insurance products for
its self-funded products, many of which include a point-of-service feature. The
provider contracts for these products are with individual physicians, groups of
physicians and health care facilities and are generally on a standard
fee-for-service basis. With self-funded products, employers and other sponsoring
groups have access to a provider network and the administrative and care
coordination services associated with an organized health system product, but
the sponsoring company or group generally bears the financial costs associated
with the health care.
MEDICARE+CHOICE PLANS. Several of UnitedHealthcare's owned health plans
contract with the federal Health Care Financing Administration ("HCFA") to
provide coverage for Medicare-eligible individuals. Under these contracts, plans
receive a fixed monthly payment from HCFA for each enrolled individual and must
provide at least the benefits that would be covered under traditional Medicare.
The plans provide a significantly higher level of coverage and may, but often do
not, charge an additional monthly premium to the members for the greater
benefits. The health plans generally use a subset of their commercial product
provider network as the provider network for the Medicare products. Any
Medicare-eligible person in a plan's service area may enroll in the Medicare
product without underwriting or health screening. Features such as United Health
Passport allow members to travel to other UnitedHealthcare Medicare sites and
receive their same benefits.
Some of UnitedHealthcare's health plans also offer these Medicare products
to or through employer groups as a way of providing retiree health care
coverage.
MEDICAID PRODUCTS. Several of UnitedHealthcare's health plans offer
coverage to Medicaid-eligible individuals. These plans typically contract with a
state agency to provide such coverage and receive a fixed monthly payment for
each enrolled individual. The level of benefits generally is set by contract,
and few additional benefits are offered. Enrollment usually must be offered to
all eligible individuals without underwriting or health screening. Generally,
the provider network for commercial products is used, but some providers may
refuse to participate in the Medicaid product and the network may have a
different number or set of providers for other reasons.
OVATIONS
Ovations includes the Company's operations that target the market segment
comprised of people age 50 and older. These operations include Medigap and
Medicare supplement products, the EverCare-Registered Trademark- program and the
Company's relationship with AARP.
AARP. In early 1997, the Company finalized a 10-year agreement with the
American Association of Retired Persons ("AARP") to underwrite Medicare and
hospital supplement insurance products effective January 1, 1998. During 1997,
the Company coordinated the transfer of the operations from AARP's existing
vendor and prepared to implement this contract. As of January 1, 1998, the
Company's insurance subsidiaries assumed the underwriting risk, and Ovations
assumed the claim administration associated with the business.
EVERCARE-REGISTERED TRADEMARK-. The EverCare-Registered Trademark- program
coordinates the provision of a broad spectrum of health care services primarily
to permanent nursing home residents through employed and contracted physicians
and nurse practitioners. EverCare is participating in a demonstration project
with HCFA to offer health care services to the elderly nursing home residents in
several separate locations throughout the country.
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UNIMERICA
Unimerica is UnitedHealth Group's insurance arm, which serves as the legal
insurer for insurance products offered through UnitedHealth Group businesses.
Unimerica's insurance subsidiaries are licensed in all 50 states, the District
of Columbia, Puerto Rico, Guam and the Virgin Islands.
UnitedHealth Group reports the revenues from insurance products in the
segments that originate the business, not in Unimerica. Through these insurance
subsidiaries, Unimerica offers Options PPO, a national preferred provider
organization product. Options PPO combines access to UnitedHealthcare's
commercial health plan networks and certain specialty services with managed
indemnity coverage. Individuals covered under the Options PPO product have lower
out-of-pocket costs when they obtain covered services from contracted providers,
but also have the option to go outside of the network for covered services.
For customers with less than 50 employees, Unimerica typically sells its
products on an insured basis for a fixed premium, with no experience adjustments
made to the premium. This type of business often has been subject to sudden and
unpredictable changes in health care costs and generally has high administrative
and marketing expenses. In addition, these products are subject to extensive
state regulations. For larger customers, Unimerica sells these products on both
an insured and self-funded basis. The insured products often are sold on an
experience-rated basis, and the self-funded products usually are sold on an
administrative fee basis. In some cases, the agreement with the customer
includes penalties or rewards related to administrative service standards and/or
health care costs.
Unimerica's insurance subsidiaries also offer several health insurance
products in conjunction with health plan products. These products help employers
replace multiple health care policies and vendors with a single health care
plan. These subsidiaries also offer reinsurance and other insured products on a
selective basis to most of UnitedHealthcare's health plans and to employers and
other sponsoring groups offering self-funded health care benefit plans. Under an
agreement with Metropolitan Life Insurance Company ("MetLife"), UnitedHealth
Group businesses offers MetLife's life, dental, accidental death and
dismemberment and short-term disability products to customers, and MetLife
offers UnitedHealth Group's health care coverage products to MetLife customers.
This agreement with MetLife also contains certain exclusivity and
non-competition provisions.
UNIPRISE
Uniprise focuses on UnitedHealth Group's business with large employers. Its
core competencies include sales and account management, benefits administration
and customer services, including government-related operations, and care
management.
Uniprise provides sales and account management services to more than 200
customers, approximately 50 percent of which are Fortune 500 companies.
UnitedHealth Group's network-based medical and insurance products and
specialized care services are available to these customers, with various types
of funding arrangements. Uniprise specializes in serving the needs of large
multi-site employers, and offers long-term strategic health care coverage
planning to its customers.
The operations unit of Uniprise provides benefits administration services
and customer services to UnitedHealth Group customers in its other business
lines. Benefits administration services include enrollment, eligibility, claims
processing, and billing. Customer services include telephonic information,
provider directories and identification card production, and oversight of the
government operations and care management centers divisions.
The government operations division provides Medicare Part A services for
hospitals and nursing homes in Connecticut, New York and Michigan and Medicare
Part B services for beneficiaries and providers in Connecticut, Minnesota,
Mississippi and Virginia. This division also provides specialized claims
processing services for durable medical equipment in 10 northeastern states.
This unit serves as the national Medicare Part B carrier for the Railroad
Retirement Board. In addition, at the request of the Office of Personnel
Management and HCFA, the government operations division contracts with all
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insurance carriers involved in the administration of the Federal Employee Health
Benefit Plan ("FEHBP").
The care management centers division offers customers medical management
programs designed to improve patients' clinical outcomes, reduce medical
expenses, and increase consumer satisfaction. These services include utilization
review, review of hospital-based services, and the administration of high-impact
medical programs based upon customer-specific demographic and claims data.
SPECIALIZED CARE SERVICES
Specialized Care Services is a portfolio of businesses that focus on
specific aspects of health and well-being. These businesses sell its products
and services to and through other UnitedHealth Group businesses as well as to
independent entities such as HMOs, PPOs, insurers, Blue Cross/Blue Shield plans,
third-party administrators, employers, labor unions and/or government agencies.
These businesses generally receive fees for the services they provide, which are
primarily administrative in nature. Specialized Care Services assumes no
responsibility for health care costs except for certain behavioral health
products. These businesses assume some responsibility for health care costs
related to providing mental health/substance abuse services.
BEHAVIORAL HEALTH SERVICES. Specialized Care Services provides behavioral
health services through United Behavioral Health ("UBH"), which offers
behavioral health care management services, employer assistance programs, and
psychiatric disability management services through specialized provider networks
and behavioral health care managers. UBH customers include most of
UnitedHealthcare's health plans, private and public sector employers and
government agencies. These services are provided by a national network of
contracted providers. United assumes the responsibility for health care costs
related to some of these services. UBH serves approximately 14 million
individuals.
HEALTH INFORMATION, EDUCATION AND SUPPORT SERVICES. Specialized Care
Services provides health information, education and related services through
Optum-Registered Trademark-. Optum offers a full spectrum of counseling, access
and consumer information services for helping individuals manage their health
and well-being. Its services are available via 24-hour telephone information
lines, publications, audiotapes, face-to-face meetings and the Internet. Optum
services are available to approximately 15 million individuals.
TRANSPLANT SERVICES. Specialized Care Services offers transplant services
through United Resource Networks. United Resource Networks offers clients access
to a network of health care facilities for transplant-related services and
transplant care management services. United Resource Networks negotiates fixed,
competitive rates for high-cost, low-frequency health care services such as
organ and tissue transplants. United Resource Networks serves 450 clients,
representing approximately 37 million individuals.
INGENIX
Ingenix builds upon UnitedHealth Group's heritage of using its large
database and expertise to provide knowledge and information services to
providers, drug and device manufacturers, the government, payers, employers and
other interested organizations. It was formed by combining UnitedHealth Group's
information-related businesses and capabilities and expanded through several
acquisitions, as well as internal growth.
Ingenix provides four broad types of products and services:
CONSULTING. Ingenix provides consulting services to providers, payers,
employers and other health system participants focusing on actuarial and
financial matters, product development, provider contracting, and medical policy
and management.
PHARMACEUTICAL SERVICES. Ingenix performs clinical trials services and
outcomes and pharmacoeconomic research for pharmaceutical and medical device
manufacturers globally. Services
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include helping find and train investigators and recruit patients, developing
research protocols, providing regulatory assistance, data collection and
management, biostatistics, and general project management.
PUBLISHING. Ingenix's publications unit sells print and electronic media
products that provide information regarding coding, reimbursement, billing,
compliance and other general health care issues.
SOFTWARE, DATA AND SERVICES. Ingenix's software, data and services include
databases for benchmarking, software to analyze and report cost and utilization
of services, data management services, HEDIS reporting, fraud and abuse
services, claims editing software, and reimbursement systems audits.
EXPANSION AND DIVESTITURE OF OPERATIONS
United continually evaluates expansion opportunities and often considers
whether to divest or stop offering certain of its businesses or products.
Expansion opportunities may include acquiring specialized care services programs
or insurance and health plan operations. United also devotes significant
attention to developing new products and techniques for managing health care
costs, measuring the outcomes and efficiency of health care delivered, and
coordinating and managing health care delivery systems. As part of its expansion
efforts, in 1998 the Company earmarked $35 million from the Company's corporate
usable cash reserves to invest in and help develop small but promising ventures.
During 1998, the Company completed several acquisitions and also sold or
terminated certain lines of business and ceased offering some products, all as
part of its ongoing emphasis on its strategic focus. If the Company were to make
numerous acquisitions, it may affect its ability to integrate and manage its
overall business effectively. Integration activities relating to acquisitions
may increase costs, affect membership, affect revenue and earnings growth and
adversely affect United's financial results.
GOVERNMENT REGULATION
United's primary business, offering health care coverage and health care
management services, is heavily regulated at both the federal and state level.
United believes it complies in all material respects with the various federal
and state regulations that apply to its current operations. To maintain
compliance, United or a subsidiary may make occasional changes in its services,
products, organizational or capital structure, or marketing methods.
Government regulation of health care coverage products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Regulatory
agencies generally have broad discretion to issue regulations and interpret and
enforce laws and rules. Changes in applicable laws and regulations are
continually being considered, and the interpretation of existing laws and rules
also may change periodically. These regulatory revisions could affect United's
operations and financial results. Certain proposed changes in Medicare and
Medicaid programs may improve opportunities to enroll people under products
developed for the senior populations. Other proposed changes may limit available
reimbursement and increase competition in those programs, with adverse effects
on United's financial results. Also, it may be more difficult for United to
control medical costs if federal and state bodies continue to consider and enact
significant and sometimes onerous managed care laws and regulations. Examples of
such laws are medical malpractice liability laws for health plans; mandates
requiring health plans to offer point-of-service plans and other benefits such
as direct access and formulary restrictions; limits on contractual terms with
providers, including termination provisions; implementation of a mandatory third
party review process for certain coverage denials and other laws and limits on
utilization management.
HIPPAA. The Health Insurance Portability and Accountability Act of 1996
("HIPAA") may represent the most significant federal reform of employee benefits
law since the enactment of the Employee Retirement Income Security Act ("ERISA")
in 1974. HIPAA's federal standards apply to both the group and individual health
insurance markets, including self-insured employee benefit plans. Some of
HIPAA's significant provisions include guarantees of the availability of health
insurance for certain employees and individuals; limits on the use of
preexisting condition exclusions; prohibitions against discriminating on the
basis of health status; and requirements which make it easier to continue
coverage in cases where an
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employee is terminated or changes employers. While United currently believes
that it is in material compliance with the requirements of HIPAA, the law is far
reaching and complex, and the federal agencies involved in the enforcement of
HIPAA's provisions have been slow to provide guidance regarding HIPAA's
requirements in the form of final rules and regulations. Consequently, United's
efforts to measure, monitor, and adjust its business practices to comply with
HIPAA are ongoing. Further, significant enforcement responsibilities for HIPAA's
provisions have been given to the states. It is likely that United will
encounter different interpretations of HIPAA's provisions in the different
states as well as varying enforcement philosophies which may inhibit United's
ability to standardize its products and services across state lines. Ultimately,
under HIPAA and other state laws, cost control through provider contracting and
coordinating care may become more important, and United believes its experience
in these areas will allow it to compete effectively.
FRAUD AND ABUSE. Health care fraud and abuse have become a top priority for
the nation's law enforcement entities. The funding of such law enforcement
efforts has increased dramatically in the past few years and is expected to
continue. The focus of these efforts has been directed at participants in
federal government health care programs such as Medicare, Medicaid and FEHBP.
United participates extensively in these programs. The regulations and
contractual requirements applicable to participants in these programs are
extremely complex and ever changing. In light of this environment, United has
re-emphasized its regulatory compliance efforts for these programs; however, the
programs are subject to highly technical rules. When combined with law
enforcement intolerance for any level of noncompliance, these rules mean that
compliance efforts in this arena continue to be challenging.
AUDITS AND INVESTIGATIONS. United also is subject to governmental audits,
investigations and enforcement actions. These include possible government
actions relating to ERISA, which regulates insured and self-insured health
coverage plans offered by employers and United's services to such plans and
employers; FEHBP; federal and state fraud and abuse laws; state insurance or
licensing laws; laws relating to utilization management and the delivery of
health care; and laws relating to Medicare, including ACR development, special
payment status, payments for emergency room visits, and various other areas. Any
such government actions could result in assessment of damages, civil or criminal
fines or penalties, or other sanctions, including exclusion from participation
in government programs. United is currently involved in various government
investigations, audits and reviews, some of which are under FEHBP, ERISA, and
the authority of state departments of insurance. United does not believe the
results of current audits, individually or in the aggregate, will have a
material adverse effect on its financial position or results.
HMOS. All of the states in which United's health plans offer HMO products
regulate the activities of those health plans. Most states require periodic
financial reports from entities licensed to operate as HMOs in their states and
impose minimum capital or reserve requirements. Some of United's health plan and
insurance subsidiaries must maintain specified capital levels to support their
operations. In addition, state regulatory agencies require some United health
plans and insurance subsidiaries to maintain restricted cash reserves
represented by interest-bearing instruments, which are held by trustees or state
regulatory agencies to ensure that each subsidiary maintains adequate financial
reserves. Some state regulations allow agencies to review all contracts entered
into by HMOs, including management contracts and agreements between affiliates,
for reasonableness of fees charged and other provisions.
United's health plans that have Medicare risk contracts are regulated by
HCFA. HCFA has the right to audit health plans operating under Medicare risk
contracts to determine each health plan's compliance with HCFA's contracts and
regulations and the quality of care being given to the health plan's members. To
enter into Medicare risk contracts, a health plan must be either federally
qualified or considered a Competitive Medical Plan under HCFA's requirements.
Health plans that offer a Medicare risk product also must comply with
requirements established by peer review organizations ("PROs"), which are
organizations under contract with HCFA to monitor the quality of health care
Medicare beneficiaries receive. PRO requirements relate to quality assurance and
utilization review procedures. United's health plans that have Medicare cost
contracts are subject to similar regulatory requirements. In addition, these
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health plans must file certain cost reimbursement reports with HCFA, which are
subject to audit and revision.
United's health plans that have Medicaid contracts are subject to federal
and state regulation regarding services to be provided to Medicaid enrollees,
payment for those services, and other aspects of the Medicaid program. Both
Medicare and Medicaid have, or have proposed, regulations relating to fraud and
abuse, physician incentive plans, and provider referrals that could affect
United's operations.
Many of United's health plans have contracts with FEHBP. These contracts are
subject to extensive regulation, including complex rules regarding premiums
charged. FEHBP is authorized to audit the rates charged retroactively and seek
premium refunds or institute other sanctions against health plans that
participate in the program, depending on the outcome of such audits.
INSURANCE REGULATION. United's insurance subsidiaries and most of the
Company's health plans are regulated by the department of insurance or
equivalent agency in each state or other jurisdiction in which the entity is
licensed. Regulatory authorities have extensive supervisory power regarding:
licensing; the amount of reserves that must be maintained; the approval of
insurance policy forms; the nature of, and limits on, insurance company
investments; periodic examination of insurance company operations; the form and
content of annual statements and other required reports on the financial
condition of insurance companies; and the capital requirements for insurance
companies. United's insurance company subsidiaries must file periodic statutory
financial statements in each jurisdiction in which they are licensed.
Additionally, these companies are periodically examined by the insurance
departments or equivalent agencies of the jurisdictions in which they are
licensed to do business.
INSURANCE HOLDING COMPANY REGULATIONS. Many of United's health plans and
each of United's insurance subsidiaries are regulated under state insurance
holding company regulations. Insurance holding company laws and regulations
generally require registration with the state department of insurance and the
filing of certain reports that describe capital structure, ownership, financial
condition, certain intercompany transactions and general business operations.
Various notice, reporting and pre-approval requirements generally apply to
transactions between companies within an insurance holding company system,
depending on the size and nature of the transactions. Some state insurance
holding company laws and regulations require prior regulatory approval or, in
certain circumstances, prior notice of acquisitions, and certain material
intercompany transfers of assets, as well as certain transactions between the
regulated companies and their parent holding companies or affiliates.
TPAS. Certain subsidiaries of United also are licensed as third-party
administrators ("TPAs") where required. TPA regulations differ greatly from
state to state, but generally contain certain required administrative
procedures, periodic reporting obligations and minimum financial requirements.
PPOS. Some United subsidiaries or products may be subject to PPO regulation
in a particular state. PPO regulations generally contain network, contracting,
financial and reporting requirements, which vary from state to state.
UTILIZATION REVIEW REGULATIONS. Many states have enacted laws and/or
adopted regulations governing utilization review activities, and these laws may
apply to some United operations. Generally, these laws and regulations set
specific standards for delivery of services, confidentiality, staffing and
policies and procedures of private review entities, including the credentials
required of personnel.
MCOS. Many states have enacted laws that allow self-insured employers
and/or insurance carriers to use a state-certified managed care organization
("MCO") to apply medical management and other managed care techniques to the
medical benefit portion of workers' compensation. United's subsidiaries
generally have sought MCO certification in states where it is available and
where they market managed care workers compensation products. MCO laws differ
significantly from state to state, but generally address network and utilization
review activities.
ERISA. ERISA regulates how goods and services are provided to or through
certain types of employee health benefit plans. ERISA is a complex set of laws
and regulations that is subject to periodic
8
interpretation by the United States Department of Labor. ERISA places controls
on how United's business units may do business with employers covered by ERISA,
particularly employers that maintain self-funded plans. The Department of Labor
has an ongoing ERISA enforcement program, which may result in additional
constraints on how ERISA-governed benefit plans conduct their activities. There
recently have been legislative attempts to limit ERISA's preemptive effect on
state laws. Such limitations could increase United's liability exposure under
state law-based suits relating to employee health benefits offered by United's
health plans and specialty businesses and permit greater state regulation of
other aspects of those businesses' operations.
YEAR 2000 ACTIVITIES
Our business depends significantly on effective information systems, and we
have many different information systems for our various businesses. Our
information systems require ongoing enhancements to keep pace with the
continuing changes in information technology, evolving industry standards, and
customer preferences. We have been modifying our computer systems to accommodate
the Year 2000. The Year 2000 problem exists throughout the global marketplace,
as many computer systems and applications were developed to recognize the year
as a two-digit number, with the digits "00" being recognized as the year 1900.
Starting in 1995, our formal Year 2000 Project Office began implementing a
remediation plan to ensure that critical information systems applications,
end-user developed application tools, and critical business interfaces remain
intact, and can function properly through the century change. We are on schedule
to complete, test, and certify our Year 2000 remediation efforts by September
30, 1999. A more detailed description and current status of our Year 2000
activities follows.
TECHNICAL INFRASTRUCTURE
MAINFRAME TECHNOLOGY. In conjunction with our two vendors that provide
support for our data center operations, we have completed, tested and certified
99% of our remediation efforts for the hardware, operating system and supporting
software remediation efforts on our two primary mainframe computer systems. In
addition, we are in the process of reviewing some of our smaller mainframe
systems and making modifications as necessary. We expect to be 100% complete
with all mainframe hardware and software technology Year 2000 modifications by
March 31, 1999. We also have installed separate test environments (both
mainframe and distributed) to test our business applications in a simulated Year
2000 environment.
DESKTOP HARDWARE & SOFTWARE. We have inventoried all of our desktop
hardware and software--over 40,000 computing devices of multiple makes and
models. All non-compliant desktop hardware and software have been identified and
are being modified or replaced with compliant systems by September 30, 1999.
TELECOMMUNICATIONS. We have inventoried all of our telecommunication
systems--more than 28,000 telecommunication devices, including traffic routers
and phone switches. We are using two outside vendors to assist us in modifying
or replacing non-compliant telecommunication systems. As of December 31, 1998,
we were approximately 75% Year 2000 compliant with our data and voice networks.
We expect all our telecommunication networks and devices will be Year 2000
compliant by September 30, 1999.
BUSINESS APPLICATIONS
SOFTWARE APPLICATIONS. We use 500 different software applications that
include over 80 million lines of computer code. We have surveyed our software
applications and have identified systems that will not be used after December
31, 1999, and systems that will be modified for Year 2000 compliance. We have
determined that 36% of our software applications will not be used after December
31, 1999 due to conversions, consolidations and software replacements. Of the
remaining applications, over 90% have been made Year 2000 compliant, tested and
certified or are scheduled to be certified for compliance. The
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balance of the applications are yet to be tested. We expect all critical Year
2000 software modifications to be completed by March 31, 1999, with further
testing and certification during the remainder of 1999.
END-USER DEVELOPED APPLICATIONS. End-user developed applications are
analysis tools that have been internally developed by individual employees or
operating segments primarily running on personal computers or client servers.
The Year 2000 Project Office has continuously communicated with all employees
explaining the risks of non-compliant applications and provided tools and
techniques to make them compliant. We have identified and are tracking and
assessing Year 2000 compliance issues with respect to all potentially critical
end-user applications.
OTHER YEAR 2000 MATTERS
NON-INFORMATION TECHNOLOGY SYSTEMS. We have approximately 300 owned or
leased facilities throughout the world. We have contacted all of our facility
managers regarding Year 2000 compliance issues. In addition, we have contracted
with a real estate management company to assist in our Year 2000 compliance
efforts. All facilities are scheduled to be Year 2000 compliant by September 1,
1999.
DEPENDENCE ON THIRD PARTIES. We have a contractual relationship with
approximately 300,000 different medical providers and more than 92,000 vendors.
Approximately 2,000 vendors have been identified as critical business partners
and suppliers. We are currently in communication with these critical business
partners to analyze their Year 2000 compliance efforts. We expect to complete
our analysis of critical vendor readiness and identify alternative vendors,
where necessary, by July 31, 1999. We will not be individually contacting all of
the 300,000 medical providers we conduct business with regarding Year 2000
compliance issues. However, we will be testing and verifying the electronic
collection of data with these providers through our EDI (electronic data
interface) clearinghouse vendors.
COSTS OF YEAR 2000 COMPLIANCE. The projected costs of our Year 2000
compliance efforts and the date on which we plan to complete the necessary Year
2000 remediation efforts are based on management's best estimates, which were
derived utilizing various assumptions of future events. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
significantly from our current plans. Specific factors that might cause
significant differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct the
relevant computer codes, and the ability of our significant vendors, providers,
customers and others with whom we conduct business to identify and resolve their
own Year 2000 issues.
Costs associated with modifying internal use software for Year 2000
compliance are charged to expense as incurred. Purchases of hardware or software
that replace existing hardware or software that is not Year 2000 compliant are
capitalized and amortized over their useful lives. As of December 31, 1998, our
historical and projected costs to complete our Year 2000 remediation plan are as
follows (in millions):
COST INCURRED TO DATE PROJECTED COSTS
---------------------------- ----------------------------
YEAR RESOURCES AMORTIZATION RESOURCES AMORTIZATION TOTAL
- ---------------------------------- ----------- --------------- ----------- --------------- ---------
1996.............................. $ 1 $ -- $ -- $ -- $ 1
1997.............................. 12 -- -- -- 12
1998.............................. 18 -- 18
1999.............................. -- -- 18 7 25
2000.............................. -- -- 3 9 12
2001.............................. -- -- -- 9 9
2002.............................. -- -- -- 2 2
----- ----- ----- ----- ---------
$ 31 $ -- $ 21 $ 27 $ 79
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
BUSINESS RISKS OF NON-COMPLIANT SYSTEMS. Although we are committed to
completing and testing our remediation plan well in advance of the Year 2000,
there are risks if we do not meet our objectives by December 31, 1999.
Operationally, the most severe risk is business interruption. Specific examples
of
10
situations that could cause business interruption include, but are not limited
to: 1) computer hardware or application software processing errors or failures,
2) facilities or infrastructure failures, or 3) critical outside providers,
suppliers, or customers who may not be Year 2000 compliant. Depending on the
extent and duration of business interruption resulting from non-compliant Year
2000 systems, such interruption may have a material adverse effect on our
results of operations, liquidity, and financial condition.
CONTINGENCY PLANS. Each area of our Year 2000 compliance effort is
currently developing contingency plans to mitigate the risk of failure, and to
provide for a speedy recovery from possible failures associated with the century
change. The contingency plans detail strategies to implement in 1999 to prepare
for the century rollover, and actions to execute if problems arise. The target
date for completion of the initial contingency plans is April 1, 1999.
Contingency plans will be final by July 31, 1999.
MARKETING
The Company's marketing strategy is defined and coordinated by each
functional business unit's dedicated marketing staff. Within these business
units, primary marketing responsibility generally resides with a marketing
director and a direct sales force. In addition, several of the business units
rely upon independent insurance agents and brokers to sell some of the Company's
health plan, insurance, self-funded and specialized care products. Marketing
efforts also include public relations efforts and advertising programs that may
use television, radio, newspapers, magazines, billboards, direct mail and
telemarketing.
COMPETITION
The managed health care industry evolved primarily because of health care
buyers' concerns about rising health care costs. The industry has brought
greater cost effectiveness and accountability into the health care system
through managed care products, including health plans, PPOs, and specialized
services such as mental health or pharmacy benefit programs. The industry also
has helped increase the accessibility and quality of health care services.
United operates in a highly competitive environment. Significant
consolidation has occurred within the managed care industry, creating stronger
and more diverse competitors. At the same time, new competitors have entered the
marketplace, which also may increase competitive pressures. In certain areas,
current competition may limit United's ability to price its products at levels
United believes appropriate. These competitive factors could adversely affect
United's financial results.
As managed health care penetration of the health care market and the effects
of health care reforms continue to increase nationwide, the Company expects it
may become increasingly difficult to obtain new contracts for its health plans
with large employer and government groups. The Company also expects competition
for smaller employer groups to intensify. In addition, employers increasingly
may choose to self-insure the health care risk, while seeking benefit
administration and utilization review services from third parties to help them
control and report health care costs.
The Company's business lines compete for group and individual membership
with other health insurance plans, Blue Cross/Blue Shield plans, health plans,
HMOs, PPOs, third party administrators, health care management companies, and
employers or groups that elect to self-insure. The Company also faces
competition from hospitals, health care facilities, and other health care
providers who have formed their own networks to contract directly with employer
groups and other prospective customers for the delivery of health care services.
The number and strength of the Company's competitors varies for each particular
business unit and geographic area. The Company believes that the principal
competitive factors affecting the Company and its products include price, the
level and quality of products and service, provider network capabilities, market
share, the offering of innovative products, product distribution systems,
efficient administration operations, financial strength and marketplace
reputation.
The Company currently believes that its competitive strengths include the
breadth of its product line, its geographic scope and diversity, the strength of
its underwriting and pricing practices and staff, its significant market
position in certain geographic areas, the strength of its distribution network,
its financial
11
strength, its generally large provider networks that provide more member choice,
its point-of-service products and experience, and its generally favorable
marketplace reputation. In some markets, however, the Company may be at a
disadvantage because of competitors with larger market shares, broader networks,
narrower networks (which may allow greater cost control and lower prices) or a
more-established marketplace name and reputation. The Company believes its
recent operational realignment will allow the individual business units to more
effectively compete in their respective markets.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 29,226
individuals. As of December 31, 1998, approximately 239 of the Company's
employees were represented by a union. The Company believes its employee
relations are good.
CAUTIONARY STATEMENTS
The statements contained in this Form 10-K, and the Management's Discussion
and Analysis of Financial Condition and Results of Operation and other sections
of the Company's annual report to shareholders incorporated by reference in this
document, include forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "PSLRA"). When used in this Form
10-K and in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases, presentations to securities
analysts or investors, and in oral statements made by or with the approval of an
executive officer of the Company, the words or phrases "believes,"
"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.
The following discussion contains certain cautionary statements regarding
our business that investors and others should consider. This discussion is
intended to take advantage of the "safe harbor" provisions of the PSLRA. In
making these cautionary statements, we are not undertaking to address or update
each factor in future filings or communications regarding our business or
results, and are not undertaking to address how any of these factors may have
caused results to differ from discussions or information contained in previous
filings or communications. In addition, any of the matters discussed below may
have affected the Company's past, as well as current, forward-looking statements
about future results. The Company's actual results in the future may differ
materially from those expressed in prior communications.
HEALTH CARE COSTS. We use a large portion of our revenue to pay the costs
of health care services or supplies delivered to our members. Total health care
costs we incur are affected by the number of individual services rendered and
the cost of each service. Much of our premium revenue is priced before services
are delivered and the related costs are incurred, usually on a prospective
annual basis. Although we try to base the premiums we charge in part on our
estimate of future health care costs over the fixed premium period, competition,
and regulations and other circumstances may limit our ability to fully base
premiums on estimated costs. In addition, many factors may and often do cause
actual health care costs to exceed what was estimated and reflected in premiums.
These factors may include increased use of services, increased cost of
individual services, catastrophes, epidemics, the introduction of new or costly
treatments, general inflation, new mandated benefits or other regulatory
changes, and insured population characteristics. In addition, the earnings we
report for any particular quarter include estimates of covered services incurred
by our enrollees during that period for claims that have not been received or
processed. Because these are estimates, our earnings may be adjusted later to
reflect the actual costs. Relatively insignificant changes in the medical care
ratio, because of the narrow margins of our health plan business, can create
significant changes in our earnings.
Our medical care ratio has generally increased over the past several fiscal
periods. We are addressing the medical care ratio by altering benefit designs,
recontracting with providers, and aggressively increasing
12
both our contemporaneous and retrospective claim management activities. Our
inability to implement these changes successfully could lead to further
increases in our medical care ratio.
In addition, our operating results may be affected by the seasonal changes
in the level of health care use during the calendar year. Although there are no
assurances, per member medical costs generally have been higher in the first
half than in the second half of each year.
INDUSTRY FACTORS. The managed care industry receives significant negative
publicity. This publicity has been accompanied by increased legislative
activity, regulation and review of industry practices. These factors may
adversely affect our ability to market our products or services, may require us
to change our products and services, and may increase the regulatory burdens
under which we operate, further increasing the costs of doing business and
adversely affecting profitability.
COMPETITION. In many of our geographic or product markets, we compete with
a number of other entities, some of which may have certain characteristics or
capabilities that give them a competitive advantage. We believe the barriers to
entry in these markets are not substantial, so the addition of new competitors
can occur relatively easily, and consumers enjoy significant flexibility in
moving to new managed care providers. Certain Company customers may decide to
perform functions or services we provide for themselves, which would decrease
our revenues. Certain Company providers may decide to market products and
services to our customers in competition with us. In addition, significant
merger and acquisition activity has occurred in the industry in which we operate
as well as in industries that act as suppliers to us, such as the hospital,
physician, pharmaceutical and medical device industries. To the extent that
there is strong competition or that competition intensifies in any market, our
ability to retain or increase customers or providers, or maintain or increase
our revenue growth, pricing flexibility, control over medical cost trends and
our marketing expenses may be adversely affected.
AARP CONTRACT. Under our long-term contract with the American Association
of Retired Persons ("AARP"), we provide Medicare supplemental, hospital
indemnity health insurance and other products to AARP members. As a result of
the agreement, the number of members we serve, products we offer, and services
we provide has grown significantly. Our portion of the AARP's insurance program
represents approximately $3.5 billion in annual net premium revenue from
approximately 4 million AARP members. The success of the AARP arrangement will
depend, in part, on our ability to service these new members, develop additional
products and services, price the products and services competitively, and
respond effectively to federal and state regulatory changes. Additionally,
events that adversely affect the AARP could have an adverse effect on the
success of our arrangement with the AARP.
MEDICARE OPERATIONS. In the second quarter of 1998, we experienced a
significant rise in the medical care ratio for our Medicare operations. The
increase in medical costs was primarily due to the business growth in new
markets with higher and more volatile medical cost trends, coupled with lower
reimbursement rates. In response, we announced in October 1998 our decision to
withdraw Medicare product offerings from 86 of the 206 counties we currently
serve. The decision, effective January 1, 1999, will affect approximately
60,000, or 13%, of current Medicare members. As a consequence of this
withdrawal, we are precluded from re-entering these counties with Medicare
product offerings until 5 years after the effective date.
We will continue to offer Medicare products in strong and economically
viable markets. However, our ability to improve the financial results of all of
our Medicare operations will depend on a number of factors, including future
premium increases, growth in markets where we have achieved sufficient size to
operate efficiently, benefit design, provider contracting, and other factors.
There can be no assurance that we will be able to successfully prevent future
losses on our Medicare operations.
REALIGNMENT OF OPERATIONS. We recognized a charge to earnings in the second
quarter of 1998 for our realignment. In January 1998, we initiated a significant
realignment of our operations into six business lines. As part of the
realignment, we began shifting resources and activities to more directly support
the operations of our businesses. Although we do not expect our realignment
efforts to negatively affect our product offerings, provider relations, billing
and collection disciplines, claims processing and payment
13
activities, or other business functions, there can be no assurance that such
negative effects may not occur. Our second quarter charge to earnings for costs
associated with the realignment was $725 million. Although we believe such
charges are adequate, there can be no assurance that the costs associated with
our realignment efforts will not exceed the charges we have taken for such
costs.
GOVERNMENT PROGRAMS AND REGULATION. Our business is heavily regulated on a
federal, state and local level. The laws and rules governing our business and
interpretations of those laws and rules are subject to frequent change. Broad
latitude is given to the agencies administering those regulations. Existing or
future laws and rules could force us to change how we do business, restrict
revenue and enrollment growth, increase its health care and administrative costs
and capital requirements, and increase our liability for medical malpractice or
other actions. We must obtain and maintain regulatory approvals to market many
of our products. Delays in obtaining or failure to obtain or maintain these
approvals could adversely affect our revenue or the number of our members, or
could increase our costs. A significant portion of our revenues relate to
federal, state and local government health care coverage programs. These types
of programs, such as the federal Medicare program and the federal and state
Medicaid programs, generally are subject to frequent change, including changes
that may reduce the number of persons enrolled or eligible, reduce the amount of
reimbursement or payment levels, or may reduce or increase our administrative or
health care costs under such programs. Such changes have adversely affected our
results and willingness to participate in such programs in the past and may also
do so in the future.
The Company also is subject to various governmental reviews, audits and
investigations. Such oversight could result in the loss of licensure or the
right to participate in certain programs, or the imposition of fines, penalties
and other sanctions. In addition, disclosure of any adverse investigation or
audit results or sanctions could damage our reputation in various markets and
make it more difficult for us to sell our products and services. The National
Association of Insurance Commissioners (the "NAIC") is expected to adopt rules
which, if implemented by the states, will require certain capitalization levels
for health care coverage provided by insurance companies, HMOs and other risk
bearing health care entities. The requirements would take the form of risk-based
capital rules. Currently, similar risk-based capital rules apply generally to
insurance companies. Depending on the nature and extent of the new minimum
capitalization requirements ultimately implemented, there could be an increase
in the capital required for certain of our subsidiaries and there may be some
potential for disparate treatment of competing products. Federal solvency
regulation of companies providing Medicare-related benefit programs may also be
applied.
PROVIDER RELATIONS. One of the significant techniques we use to manage
health care costs and utilization and monitor the quality of care being
delivered is contracting with physicians, hospitals and other providers. Because
our health plans are geographically diverse and most of those health plans
contract with a large number of providers, we currently believe our exposure to
provider relations issues is limited. In any particular market, however,
providers could refuse to contract, demand higher payments, or take other
actions that could result in higher health care costs, less desirable products
for customer and members, or difficulty meeting regulatory or accreditation
requirements. In some markets, certain providers, particularly hospitals,
physician/hospital organizations or multi-specialty physician groups, may have
significant market positions or near monopolies. If these providers refuse to
contract with us, use their market position to negotiate favorable contracts, or
place us at a competitive disadvantage those activities could adversely affect
our ability to market products or to be profitable in those areas.
LITIGATION AND INSURANCE. We may be a party to a variety of legal actions
that affect any business, such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including securities fraud, and
intellectual property related litigation. In addition, because of the nature of
our business, we are subject to a variety of legal actions relating to our
business operations. These could include: claims relating to the denial of
health care benefits; medical malpractice actions; provider disputes over
compensation and termination of provider contracts; disputes related to
self-funded business, including actions alleging claim administration errors and
the failure to disclose network rate discounts and other fee and rebate
arrangements; disputes over copayment
14
calculations; and claims relating to customer audits and contract performance.
Recent court decisions and legislative activity may increase our exposure for
any of these types of claims. In some cases, substantial non-economic or
punitive damages may be sought. We currently have insurance coverage for some of
these potential liabilities. Other potential liabilities may not be covered by
insurance, insurers may dispute coverage, or the amount of insurance may not be
enough to cover the damages awarded. In addition, certain types of damages, such
as punitive damages, may not be covered by insurance and insurance coverage for
all or certain forms of liability may become unavailable or prohibitively
expensive in the future.
INFORMATION SYSTEMS. Our business depends significantly on effective
information systems, and we have many different information systems for its
various businesses. Our information systems require an ongoing commitment of
resources to maintain and enhance existing systems and develop new systems in
order to keep pace with continuing changes in information processing technology,
evolving industry standards, and changing customer preferences. In addition, we
may from time to time obtain significant portions of our systems-related or
other services or facilities from independent third parties, which may make our
operations vulnerable to such third parties' failure to perform adequately. As a
result of our acquisition activities, we have acquired additional systems and
have been taking steps to reduce the number of systems and have upgraded and
expanded our information systems capabilities. Failure to maintain effective and
efficient information systems could cause loss of existing customers, difficulty
in attracting new customers, customer and provider disputes, regulatory
problems, increases in administrative expenses or other adverse consequences.
THE YEAR 2000. We are in the process of modifying our computer systems to
accommodate the Year 2000. We currently expect to complete this modification
enough in advance of the Year 2000 to avoid adverse impacts on our operations.
We are expensing the costs incurred to make these modifications. Our operations
could be adversely affected if we were unable to complete our Year 2000
modifications in a timely manner or if other companies with which we do business
fail to complete their Year 2000 modifications in a timely manner.
ADMINISTRATIVE AND MANAGEMENT. Efficient and cost-effective administration
of our operations is essential to our profitability and competitive positioning.
While we attempt to effectively manage such expenses, staff-related and other
administrative expenses may rise from time to time due to business or product
start-ups or expansions, growth or changes in business, acquisitions, regulatory
requirements or other reasons. These expense increases are not clearly
predictable and may adversely affect results. We believe we currently have an
experienced, capable management and technical staff. The market for management
and technical personnel, including information systems professionals, in the
health care industry is very competitive. Loss of certain managers or a number
of such managers or technical staff could adversely affect our ability to
administer and manage our business.
MARKETING. We market our products and services through both employed sales
people and independent sales agents. Although we have many sales employees and
agents, the departure of certain key sales employees or agents or a large subset
of such individuals could impair our ability to retain existing customers and
members. In addition, certain of our customers or potential customers consider
rating, accreditation or certification of the Company by various private or
governmental bodies or rating agencies necessary or important. Certain of our
health plans or other business units may not have obtained or maintained, or may
not desire or be able to obtain or maintain, such rating accreditation or
certification, which could adversely affect our ability to obtain or retain
business with these customers.
ACQUISITIONS AND DISPOSITIONS. The Company has made several large
acquisitions in recent years and has an active ongoing acquisition and
disposition program under which it may engage in transactions involving the
acquisition or disposition of assets, products or businesses, some or all of
which may be material. These acquisitions may entail certain risks and
uncertainties and may affect ongoing business operations because of unknown
liabilities, unforeseen administrative needs or increased efforts to integrate
the acquired operations. Failure to identify liabilities, anticipate additional
administrative needs or
15
effectively integrate acquired operations could result in reduced revenues,
increased administrative and other costs, or customer confusion or
dissatisfaction.
DATA AND PROPRIETARY INFORMATION. Many of the products that are part of our
knowledge and information services business depend significantly on the
integrity of the data on which they are based. If the information contained in
our databases were found or perceived to be inaccurate, or if such information
were generally perceived to be unreliable, commercial acceptance of our
database-related products would be adversely and materially affected.
Furthermore, the use by our knowledge and information-related business of
patient data is regulated at federal, state, and local levels. These laws and
rules are changed frequently by legislation or administrative interpretation.
These restrictions could adversely affect revenues from these products and, more
generally, affect our business, financial condition and results of operations.
The success of our knowledge and information services business also depends
significantly on our ability to maintain proprietary rights to our products. We
rely on our agreements with customers, confidentiality agreements with
employees, and our trade secrets, copyrights and patents to protect our
proprietary rights. We cannot assure that these legal protections and
precautions will prevent misappropriation of our proprietary information. In
addition, substantial litigation regarding intellectual property rights exists
in the software industry, and we expect software products to be increasingly
subject to third-party infringement claims as the number of products and
competitors in this industry segment grows. Such litigation could have an
adverse affect on the ability of our knowledge and information-related business
to market and sell its products and on our business, financial condition and
results of operations.
STOCK MARKET. The market prices of the securities of the Company and
certain of the publicly-held companies in the industry in which we operate have
shown volatility and sensitivity in response to many factors, including general
market trends, public communications regarding managed care, legislative or
regulatory actions health care cost trends, pricing trends, competition,
earnings or membership reports of particular industry participants, and
acquisition activity. We cannot assure the level or stability of our share price
at any time, or the impact of the foregoing or any other factors may have on our
share price.
16
EXECUTIVE OFFICERS OF THE REGISTRANT
FIRST ELECTED AS
NAME AGE POSITION AT 12/31/98 EXECUTIVE OFFICER
- -------------------------------- --- -------------------------------------------------------- -----------------
President, Chairman, Chief Executive Officer and
William W. McGuire, M.D......... 50 Director 1988
Stephen J. Hemsley.............. 46 Chief Operating Officer 1997
Arnold H. Kaplan................ 59 Chief Financial Officer 1998
David J. Lubben................. 47 General Counsel and Secretary 1996
Lois E. Quam.................... 37 CEO, Ovations 1998
Jeannine R. Rivet............... 50 CEO, UnitedHealthcare 1998
R. Channing Wheeler............. 47 CEO, Uniprise 1998
The Company's Board of Directors elects executive officers annually. The
Company's executive officers serve until their successors are duly elected and
qualified.
Dr. McGuire became a director of UnitedHealth Group in February 1989 and the
Chairman of the Board in May 1991. Dr. McGuire became an Executive Vice
President of the Company in November 1988, was appointed the Company's Chief
Operating Officer in May 1989, the Company's President in November 1989, and the
Company's Chief Executive Officer in February 1991.
Mr. Hemsley joined UnitedHealth Group in May 1997 and became Chief Operating
Officer in September 1998. Prior to that time, he served as Senior Executive
Vice President of the Company. Prior to joining the Company, Mr. Hemsley was
with Arthur Andersen LLP where he served since 1974 in various capacities,
including Chief Financial Officer and Managing Partner, Strategy and Planning.
Mr. Kaplan joined UnitedHealth Group in July 1998 as Chief Financial
Officer. Prior to joining the Company, Mr. Kaplan was associated with Air
Products & Chemical where he served since 1976 in various capacities, including
Senior Vice President, Chief Financial Officer, Vice President Purchasing and
Controller.
Mr. Lubben became UnitedHealth Group's General Counsel and Secretary in
October 1996. Prior to joining the Company, he was a partner in the law firm of
Dorsey & Whitney LLP. Mr. Lubben first became associated with Dorsey & Whitney
in 1977.
Ms. Quam joined UnitedHealth Group in 1989 and became the CEO, Ovations in
April 1998. Prior to April 1998, Ms. Quam served in various capacities including
CEO, AARP Division, Vice President, Public Sector Services and Director,
Research. Prior to joining the Company, Ms. Quam served as Research Director
from 1987-1989 for Partners National Health Plan.
Ms. Rivet joined UnitedHealth Group in June 1990. Ms. Rivet was named CEO,
UnitedHealthcare in April 1998 and has served as Executive Vice President of
UnitedHealthcare since October 1994. She served as the Company's Senior Vice
President, Health Plan Operations from September 1993 to September 1994 and the
Company's Vice President of Health Service Operations from June 1990 to
September 1993.
Mr. Wheeler joined UnitedHealth Group in March 1995 and became CEO, Uniprise
in May 1998. Prior to May 1998, he served in various capacities of the Company,
including CEO, Northeast HealthPlans.
ITEM 2. PROPERTIES
As of December 31, 1998, the Company leased approximately 1.72 million
aggregate square feet of space for its principal administrative offices in the
greater Minneapolis/St. Paul, Minnesota area and in Hartford, Connecticut.
Excluding these areas, as of December 31, 1998, the Company leased approximately
6.38 million aggregate square feet in the United States, and approximately
97,100 aggregate square
17
feet outside of the United States (including Puerto Rico). Such space
accommodates health plans, managed care services, specialty programs or
satellite administrative offices. The Company's leases expire at various dates
through May 31, 2026. As of December 31, 1998, the Company owned approximately
310,700 aggregate square feet of space for administrative offices in various
states and its staff model clinic operations in Florida.
ITEM 3. LEGAL PROCEEDINGS
Because of the nature of its business, United is subject to suits relating
to the failure to provide or pay for health care or other benefits, poor
outcomes for care delivered or arranged under United's programs, nonacceptance
or termination of providers, failure to return withheld amounts from provider
compensation, failure of a self-funded plan serviced by United to pay benefits,
improper copayment calculations and other forms of legal actions. Some of these
suits may include claims for substantial non-economic or punitive damages.
United does 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 United's financial position or results of operations.
However, the likelihood or outcome of current or future suits cannot be
accurately predicted, and they could adversely affect United's financial
results.
Six suits assert claims under the United States securities laws against
United and certain of its current and former officers and directors. The
plaintiffs are stockholders of United who purport to sue on behalf of a class of
purchasers of common shares of United during the period February 12, 1998
through August 5, 1998 (the "Class Period"). Each complaint was filed in the
United States District Court for the District of Minnesota. Each of the six
actions claims violations of Sections 10(b) and 20(a) of the Securities Exchange
Act and SEC Rule 10b-5. In substance, the complaints allege that United made
materially false or misleading statements about the profitability and
performance of the Company's Medicare business during the Class Period. Two of
the complaints also allege that the Company made materially false statements
about its medical costs and the expenses related to the Company's realignment.
The complaints also allege that the statements were made with the intention of
deceiving members of the investing public and with the intention that the price
of United shares would rise, making it possible for insiders at the Company to
profit by selling shares at a time when they knew the Company's true financial
condition, but the investing public did not. The complaints allege that once the
Company's true financial condition was revealed on August 6, 1998, the price of
United common shares fell from a closing price of $52 7/8 on August 5, 1998, to
a closing price of $37 7/8 on August 6, 1998. The complaints seek compensatory
damages in unspecified amounts.
On January 19, 1999, we received a consolidated amended complaint (IN RE
UNITED HEALTHCARE CORPORATION SECURITIES LITIGATION, No. 98-1888 in the United
States District Court for the District of Minnesota) for the six suits which
essentially restates the allegations made in the earlier complaints.
On March 22, 1999, two actions were filed in the United States District
Court for the District of Minnesota by two pension funds against United, certain
current and former officers and directors, and other individuals yet to be
identified. The pension funds wish to "opt-out" of the aforementioned purported
class action suits. These individual actions essentially restate the allegations
made in the purported class actions and claim violations of Sections 10(b),
18(a) and 20 of the Securities Exchange Act. In addition, both actions assert a
claim of negligent misrepresentation and securities claims under state law. In
the aggregate, the plaintiff pension funds seek compensatory damages totaling
approximately $12.1 million.
The defendants intend to defend these actions vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK LISTING
The Company's common stock is traded on the New York Stock Exchange under the
symbol UNH.
The following table shows the range of high and low sales prices for the
Company stock as reported on the New York Stock Exchange Composite Tape for
the calendar periods indicated through February 26, 1999. These prices do not
include commissions or fees associated with the purchase or sale of this
security:
HIGH LOW
- ------------------------------------------------------------------------------
1999
First Quarter 1999
Through February 26, 1999 $ 49.50 $39.4375
- ------------------------------------------------------------------------------
1988
First Quarter $66.8125 $46.5625
Second Quarter $73.9375 $ 61.25
Third Quarter $ 66.50 $29.5625
Fourth Quarter $ 50.625 $ 33.375
- ------------------------------------------------------------------------------
1997
First Quarter $ 55.25 $ 42.625
Second Quarter $ 56.75 $ 43.75
Third Quarter $ 60.125 $ 47.875
Fourth Quarter $ 54.75 $42.4375
- ------------------------------------------------------------------------------
AS OF FEBRUARY 26, 1999, THE COMPANY HAD 13,111 SHAREHOLDERS OF RECORD.
DIVIDEND POLICY
The Company's dividend policy, established by its board of directors in
August 1990, 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 3, 1997, received an annual dividend for 1997
of $0.03 per share, and shareholders of record on April 1, 1998, received an
annual dividend for 1998 of $0.03 per share. On February 16, 1999, the
Company's board of directors approved an annual dividend for 1999 of $0.03
per share to holders of the Company's common stock. The dividend will be paid
on April 15, 1999, to shareholders of record at the close of business on
April 1, 1999.
II-1
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS UNITEDHEALTH GROUP
For the Year Ended December 31,
(in millions, except per share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
Revenues $17,355 $11,794 $10,074 $5,671 $3,769
Earnings (Loss) From Operations $ (42)(1) $ 742 $ 581(2) $ 461(3) $ 506
- ------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) Before
Extraordinary Gain $ (166) $ 460 $ 356 $ 286 $ 288(4)
Extraordinary Gain on Sale of
Subsidiary, net of income tax effects -- -- -- -- 1,377(5)
- ------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) $ (166)(1) $ 460 $ 356(2) $ 286(3) $1,665
Convertible Preferred Stock Dividends (28) (29) (29) (7) --
Preferred Stock Redemption Premium (20) -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) Applicable to
Common Shareholders $ (214)(1) $ 431 $ 327 $ 279 $1,665
- ------------------------------------------------------------------------------------------------------------
Basic Net Earnings (Loss) per
Common Share
Basic Net Earnings (Loss) per Common
Share Before Extraordinary Gain $ (1.12) $ 2.30 $ 1.80 $ 1.61 $ 1.69
Extraordinary Gain -- -- -- -- 8.06
- ------------------------------------------------------------------------------------------------------------
Basic Net Earnings (Loss) per
Common Share $ (1.12) $ 2.30 $ 1.80 $ 1.61 $ 9.75
- ------------------------------------------------------------------------------------------------------------
Diluted Net Earnings (Loss) per
Common Share
Diluted Net Earnings (Loss) per Common
Share Before Extraordinary Gain $ (1.12)(1) $ 2.26 $ 1.76(2) $ 1.57(3) $ 1.64(4)
Extraordinary Gain -- -- -- -- 7.86(5)
- ------------------------------------------------------------------------------------------------------------
Diluted Net Earnings (Loss) per
Common Share $ (1.12)(1) $ 2.26 $ 1.76(2) $ 1.57(3) $ 9.50
- ------------------------------------------------------------------------------------------------------------
Basic Weighted-Average Number of
Common Shares Outstanding 191 187 182 174 171
Weighted-Average Number of Common
Shares Outstanding, Assuming Dilution 191 191 186 177 175
- ------------------------------------------------------------------------------------------------------------
Dividends Per Share
Common Stock $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.03
Convertible Preferred Stock $ 56.03 $ 57.50 $ 57.50 $14.38 $ --
- ------------------------------------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL CONDITION
(As of December 31)
Cash and Investments $ 4,424 $ 4,041 $ 3,453 $3,078 $2,769
Total Assets $ 9,701 $ 7,623 $ 6,997 $6,161 $3,489
Debt $ 708(6) $ -- $ -- $ -- $ --
Convertible Preferred Stock $ -- $ 500 $ 500 $ 500 $ --
Shareholders' Equity $ 4,038 $ 4,534 $ 3,823 $3,188 $2,795
- ------------------------------------------------------------------------------------------------------------
Financial Highlights should be read together with the accompanying Financial
Review and 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 28
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) Excluding the nonoperating merger costs associated with the acquisitions of
Complete Health Services, Inc. and Ramsay-HMO, Inc., of $36 million ($22
million after tax, or $0.13 diluted net earnings per common share), 1994
earnings before extraordinary gain would have been $310 million or $1.77
diluted net earnings per common share.
(5) In May 1994, the Company sold Diversified Pharmaceutical Services, Inc. for
$2.3 billion in cash and recognized an extraordinary gain after transaction
costs and income tax effects of $1.4 billion, or $7.86 diluted net earnings per
common share.
(6) During 1998, we issued notes and commercial paper aggregating $708 million,
which remained outstanding at December 31, 1998.
II-2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATIONS
1998 FINANCIAL PERFORMANCE HIGHLIGHTS
1998 was an important year of both challenges and successes for UnitedHealth
Group.
- - Excluding the effects of the unusual or nonrecurring events and transactions
described below, we achieved record profits. Underlying earnings from
operations, net earnings applicable to common shareholders, and diluted net
earnings per common share were $858 million, $509 million and $2.62 per share,
respectively, representing increases over 1997 of 16%, 18%, and 16%,
respectively.
- - We achieved record revenues of $17.4 billion, a 47% increase over 1997. This
growth was driven primarily by same-store enrollment growth in our
UnitedHealthcare business and from successful implementation of our $3.5
billion Medicare supplement insurance program with the AARP.
- - Record cash flows of more than $1.0 billion were generated from operating
activities, a 57% increase over 1997.
- - We completed several financing initiatives to achieve a more efficient
capital structure, including the redemption of our $500 million convertible
preferred stock and the repurchase of 11.3 million shares of our common stock.
- - We embarked on a major realignment of our operations into independent but
strategically linked businesses, each focused on performance, growth and
shareholder value. As a result of our evaluation of each business's strategic
fit and contributions, analysis of our profitability in certain markets, and
the adequacy of our medical costs payable estimates, we took actions that
resulted in special operating charges of $900 million.
1998 OPERATING RESULTS OVERVIEW
The following table summarizes our results for each of the last three years
ended December 31 (in millions, except per share amounts).
1998(1) 1997 1996(2)
- -----------------------------------------------------------------------
Earnings (Loss) From Operations $ (42) $ 742 $ 581
Net Earnings (Loss) Applicable to
Common Shareholders $ (214) $ 431 $ 327
Diluted Net Earnings (Loss) per
Common Share $(1.12) $2.26 $1.76
Medical Costs to Premium Revenues 87.2%(3) 84.3% 84.6%
SG&A Expenses to Total Revenues 17.1% 20.0% 21.5%
- -----------------------------------------------------------------------
(1) Excluding the effects of $725 million of operational realignment and other
charges, $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, earnings from operations, net earnings applicable to common
shareholders, and diluted net earnings per common share would have been $858
million, $509 million, and $2.62 per share, respectively.
(2) Excluding the effects of a $45 million provision for future losses on two
large multi-year contracts and $15 million of merger costs associated with the
acquisition of HealthWise of America, Inc., earnings from operations, net
earnings applicable to common shareholders, and diluted net earnings per common
share would have been $641 million, $392 million, and $1.96 per share,
respectively.
(3)Includes $175 million of contract losses associated with certain Medicare
markets and other increases to commercial and Medicare medical costs payable
estimates. The company's ratio of medical costs to premium revenues for the
year ended December 31, 1998, would have been 86.0% without these charges.
In 1998, we reported a net loss applicable to common shareholders of $214
million, or $1.12 diluted net loss per common share. However, these results
include certain large or unusual events and transactions as described below:
- - In conjunction with our realignment and other initiatives, we recorded $725
million of charges to operations during the second quarter of 1998. The charges
included $451 million of asset impairments and $274 million of estimated future
costs associated with our initiatives, such as employee terminations; disposing
of or discontinuing business units, product lines and contracts; and
consolidating certain processing operations and associated real estate
obligations. Although our realignment initiatives and the associated
nonrecurring charges caused us to report a net loss for 1998, these actions
position us to make long-term fundamental process and performance improvements.
- - Our second quarter 1998 medical costs include $120 million related to
contract losses and other increases to medical costs payable estimates in
UnitedHealthcare's Medicare markets and $55 million related to increases to
medical costs payable estimates associated with increased commercial medical
costs in certain health plans.
- - In conjunction with the redemption of our $500 million convertible preferred
stock, we paid a $20 million redemption premium. This premium is added to
1998's net loss to arrive at net loss applicable to common shareholders.
Excluding the effects of the events and transactions described above,
1998 underlying earnings from operations and diluted net earnings per common
share were $858 million and $2.62 per share, respectively, representing
increases of 16% over earnings from operations of $742 million and diluted net
earnings per common share of $2.26 in 1997. These increases were primarily
driven by improved margins in the commercial product offerings of our
UnitedHealthcare business and successful integration and management of our
services provided to the AARP, which began on January 1, 1998.
The discussion that follows provides a more detailed analysis of our
1998, 1997 and 1996 operating results.
II-3
1998 RESULTS COMPARED TO 1997 RESULTS
REVENUES AND ENROLLMENT
1998 was a record year for UnitedHealth Group, with consolidated revenues of
$17.4 billion, an increase of $5.6 billion, or 47%, over 1997. Our revenue
growth was primarily derived from successful implementation of our $3.5
billion Medicare supplement insurance program with the AARP and same-store
enrollment growth in our UnitedHealthcare business. On a year-over-year
same-store basis, UnitedHealthcare's total revenues increased by $1.7
billion, or 16%, over 1997.
The following table summarizes enrollment in all of our product
offerings as of December 31:
ENROLLMENT SUMMARY(1)
1998 1997 1996
----------------------------- ----------------------------- -------
Amount Increase (Decrease) Amount Increase (Decrease) Amount
- ----------------------------------------------------------------------------------------------------------------
Enrollment, excluding Ovations
(as of December 31, in thousands)
UnitedHealthcare
Risk-Based:
Health Plans 5,231 17% 4,475 13% 3,945
Other Network-Based and Indemnity 530 (14%) 613 (29%) 858
- ----------------------------------------------------------------------------------------------------------------
Total Commercial 5,761 13% 5,088 6% 4,803
Medicare 483 40% 345 54% 224
Medicaid 638 21% 526 0% 525
- ----------------------------------------------------------------------------------------------------------------
Total Risk-Based 6,882 15% 5,959 7% 5,552
Fee-Based:
Commercial 1,725 7% 1,609 (29%) 2,279
- ----------------------------------------------------------------------------------------------------------------
Total UnitedHealthcare 8,607 14% 7,568 (3%) 7,831
- ----------------------------------------------------------------------------------------------------------------
Uniprise
Risk-Based 261 (1%) 263 (9%) 288
Fee-Based 5,139 (2%) 5,226 (8%) 5,653
- ----------------------------------------------------------------------------------------------------------------
Total Uniprise 5,400 (2%) 5,489 (8%) 5,941
- ----------------------------------------------------------------------------------------------------------------
Total Enrollment, excluding
Ovations 14,007 7% 13,057 (5%) 13,772
- ----------------------------------------------------------------------------------------------------------------
(1) Enrollment information includes growth resulting from our 1998
acquisition of HealthPartners of Arizona, Inc. (509,000 members).
Additionally, the fee-based lives served by United HealthCare Administrators,
Inc. are included in 1996 (666,000 members). We sold United HealthCare
Administrators, Inc. on June 30, 1997.
Our revenues are comprised of: 1) premium revenues associated with our
risk-based products (those where we assume financial responsibility for
health care costs); 2) management services and fees associated with
administrative services only customers, managed health plans, and our
Specialized Care Services and Ingenix businesses; and 3) investment and other
income.
The discussion that follows provides an analysis of our 1998 revenue
trends for each of our three revenue components.
PREMIUM REVENUES
The following table summarizes premium revenues by business unit for the
years ended December 31 (in millions):
Percent
Increase
1998 1997 (Decrease)
- -----------------------------------------------------------------------------
UnitedHealthcare $11,397 $ 9,507 20%
Ovations 3,584 87 NM
Uniprise 447 418 7%
Specialized Care Services 337 291 16%
Elimination of Inter-Unit
Transactions (249) (168) NM
- -----------------------------------------------------------------------------
$15,516 $10,135 53%
- -----------------------------------------------------------------------------
NM - Not Meaningful
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 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
$12.0 billion, an increase of 19% over 1997. This increase is primarily the
result of growth in our UnitedHealthcare business. On a year-over-year
same-store basis, UnitedHealthcare's premium revenues increased $1.7 billion,
or 18%, during 1998. The increase reflects 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 times to four times higher than average commercial premium rates
because Medicare members typically use proportionately more medical care
services. On a year-over-year same-
II-4
store basis, UnitedHealthcare's commercial health plan and Medicare products
accounted for $1.8 billion of premium revenue growth during 1998.
The increase in UnitedHealthcare's commercial health plan and Medicare
product premium revenues was partially offset by a $240 million decrease from
other network-based and indemnity products. We expect enrollment in
UnitedHealthcare's other network-based and indemnity products will continue
to decline through 1999. To the extent possible, we will convert these
enrollees to UnitedHealthcare's commercial health plan products.
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 is primarily the result of acquisitions by Ingenix during 1997 and
1998. Additionally, our Specialized Care Services business -- most notably
United Behavioral Health and Optum,-Registered Trademark- our telephone- and
Internet-based health information and services business -- continues to
increase 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 is primarily attributable to an increase in
average cash and investments from $3.6 billion in 1997 to $4.1 billion in 1998.
Net capital gains were $26 million in both 1998 and 1997.
MEDICAL COSTS
The combination of our pricing strategy and medical management efforts is
reflected in the medical care ratio (medical costs as a percentage of premium
revenues). The following table summarizes our medical care ratio by product line
for the years ended December 31:
1998 1997
- ----------------------------------------------------------------------------
UnitedHealthcare:
Commercial(1) 85.3% 85.7%
Medicare 92.0% 83.3%
Medicaid 85.2% 82.8%
- ----------------------------------------------------------------------------
Total UnitedHealthcare 86.7% 85.1%
- ----------------------------------------------------------------------------
Consolidated UnitedHealth Group 87.2% 84.3%
- ----------------------------------------------------------------------------
Consolidated (excluding AARP) 85.8% 84.3%
- ----------------------------------------------------------------------------
(1) Includes commercial health plan, other network-based and indemnity products.
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 is primarily attributable to
average Medicare premium rate increases of 2.5% that 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 are generally newer markets where we have been unable to achieve the
scale of operations necessary to achieve profitability. In numerous counties
in the other seven markets, we experienced high medical costs which exceeded
the fixed Medicare premiums that increased only 2.5% on average.
We are addressing our Medicare medical care ratio by altering benefit
designs, recontracting with providers, and aggressively increasing both
contemporaneous and retrospective claim management activities. We also are
continuing to evaluate the markets we serve and products we offer. In
addition, we will curtail activities or exit markets where we believe near
term prospects are unacceptable.
To that end, in October 1998, we announced our decision to withdraw
Medicare product offerings from 86 of the 206 counties we then served. The
decision, effective January 1, 1999, affected approximately 60,000, or 13%,
of our Medicare members. We will continue to offer Medicare products in
strong and economically viable markets. Annual revenues for 1998 from
Medicare counties we exited were approximately $225 million.
Despite increasing commercial medical cost trends in certain health plan
markets, UnitedHealthcare's overall commercial medical care ratio improved
slightly to 85.3% in 1998 from 85.7% in 1997.
Commercial health plan premium rates are established based on
anticipated health care costs. During 1998, commercial premium yield
increases averaging 5% to 6% minimally exceeded medical cost trends of 4% to
5%. Looking to 1999, we expect average medical cost increases to remain
stable in the 4% to 5% range, and we also expect that our medical care ratio
will improve as a result of premium yield increases on new and renewal
commercial business averaging 7% to 8%.
OPERATING EXPENSES
Selling, general and administrative expenses as a percent of total revenues
(the SG&A ratio) decreased from 20.0% in 1997 to 17.1% in 1998. The
improvement in the year-over-year SG&A ratio principally reflects the
operating leverage we gained with the addition of the AARP business and
planned cost reductions we have achieved to date from our realignment
initiatives. On an absolute dollar basis, selling, general and administrative
costs increased by $600 million, or 25%, over 1997. This increase primarily
reflects the additional infrastructure needed to support the $5.4 billion, or
53%, increase in premium-based business.
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.
The $451 million of asset impairments recorded in the second quarter of
1998 will reduce depreciation and amortization by approximately $15 million
annually. This decrease will be more than offset in 1999 by increased
depreciation and amortization related to capital expenditures and intangible
assets acquired in acquisitions during 1998.
II-5
OPERATIONAL REALIGNMENT AND OTHER CHARGES
In conjunction with our operational realignment, 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, which reflect the estimated costs we will incur 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 processing operations and
associated real estate obligations. These activities will result in a net
reduction of more than 4,000 positions, affecting 6,000 people in various
locations. Through December 31, 1998, we have eliminated approximately 2,000
positions pursuant to the Plan.
Businesses we intend to dispose of include our managed workers'
compensation business, and medical and behavioral health provider clinics.
Markets where we plan to curtail or make changes to our operating presence
include our small group health insurance business and three health plan markets
that are in non-strategic locations.
Our original provision for operational realignment and other charges
was developed based on management's best judgment and estimates at that time.
As we began to execute the Plan, we adjusted certain estimates based on more
current information related to the amounts to be paid for severance and lease
cancellation fees. In addition, based on continuing negotiations related to
business dispositions, our original estimates for asset impairments and
business disposition costs were revised. In total, our Operational
Realignment and Other Charges did not change.
The table below summarizes realignment activities for the year ended
December 31, 1998 (in millions):
Additional Charges Incurred
Recorded Charges ----------------- Accrual at
Provision (Credits) Cash Noncash Year-End
- -----------------------------------------------------------------------------------------------------------------
Provision for operational realignment and other charges:
Asset Impairments $ 430 21 $ -- $(451) $ --
Severance and outplacement costs 142 (20) (19) -- 103
Noncancelable lease obligations 82 (9) (6) -- 67
Dispositions of business and other costs 71 8 (13) -- 66
- -----------------------------------------------------------------------------------------------------------------
Total provision $ 725 - $(38) $(451) $236
- -----------------------------------------------------------------------------------------------------------------
We have included in asset impairments the write off of $68 million
of purchased in-process research and development associated with the
acquisition of Medicode, Inc. The in-process projects were focused on the
continued development and evolution of next generation medical databases and
software solutions including clinical editing software, benchmarking databases
and technologies. These technologies upon completion will enable both
healthcare payers and providers to use the same data generated in the
treatment documentation process to then be used in the financial transaction
process, which involves provider compensation, care utilization review, trend
analysis and management reporting. As of the date of acquisition, Medicode
had invested $8.5 million in the in-process projects identified above. We
estimate that it will be necessary to dedicate approximately $2.2 million
over the next sixteen months in order to successfully complete these projects.
Details of the asset impairments are as follows (in millions):
Triggering Event Expected Disposal Disposal Date
- -------------------------------------------------------------------------------------------------------------------------------
UnitedHealthcare intangible and operating A decision to exit or Operating assets will be The carrying value
assets of certain health plan and small reconfigure these abandoned or disposed of the assets will
group insurance markets $291 businesses, markets of upon exit or be depreciated
and products. reconfiguration of the over the estimated
Specialized Care Services intangible market, business, or remaining life,
and operating assets $ 39 products. with physical
disposal during
either the fourth
quarter of 1998
or the first six
months of 1999.
- -------------------------------------------------------------------------------------------------------------------------------
Ingenix purchased in-process research The acquisition of Not applicable. Written down
and development $ 68 Medicode, Inc. occurred during second
in December 1997. quarter of 1998.
The final allocation of
purchase price and
valuation of acquired
intangibles was completed
in June 1998.
- ------------------------------------------------------------------------------------------------------------------------------
Corporate operating assets $ 53 Realignment initiatives Operating assets have The carrying
resulted in operating been or will be written value of the
assets to be abandoned or off, abandoned or assets will be
disposed. disposed of upon exit of depreciated over
certain businesses or as a the estimated
result of other remaining life
realignment initiatives. with physical
disposal during
either the fourth
quarter of 1998
or the first six
months of 1999.
- ------------------------------------------------------------------------------------------------------------------------------
Total $451
- ------------------------------------------------------------------------------------------------------------------------------
We believe the aggregate reduction in our overall cost structure from
our realignment and other cost reduction activities will approximate $300
million annually by the end of the year 2000. We expect to realize approximately
$75 million of these reductions in 1999.
The operational realignment 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 will be
charged to expense as incurred or capitalized, as appropriate.
1997 RESULTS COMPARED TO 1996 RESULTS
PREMIUM REVENUES
During 1997, consolidated premium revenues totaled $10.1 billion, representing
an increase of $1.6 billion, or 19%, compared to 1996. Excluding the effects of
acquisitions, premium revenues in 1997 increased by 17% over 1996.
The increase in premium revenues in 1997 was primarily due to growth in
year-over-year same-store commercial health plan revenues of $1.5 billion, or
25%. The increase reflected same-store commercial health plan enrollment growth
of 13% and
II-6
average year-over-year premium rate increases on renewing commercial groups
of approximately 5%. Growth in our Medicare programs also contributed to the
increase in premium revenues, with a year-over-year same-store increase of
53% in Medicare enrollment.
The 1997 year-over-year increase in premium revenues from commercial
and Medicare products was partially offset by a $220 million decrease from
non-network-based indemnity products. Nearly $60 million of this decrease
resulted because we discontinued our relationship with a broker who sold and
administered small group indemnity business on our behalf, which led to the loss
of 30,000 indemnity members effective July 1, 1997. The remaining decrease was
from declining enrollment in these products, which is attributed to average rate
increases of 10% to 20% that started in 1996 and continued into 1997, as well as
other business factors.
MANAGEMENT SERVICES AND FEE REVENUES
Management services and fee revenues in 1997 totaled $1.4 billion, representing