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UnitedHealth Group
2002 ANNUAL REPORT
We imagine health care as it could be.

Table of contents

  • Page 1
    UnitedHealth Group 2 0 0 2 A N N U A L R E P O R T We imagine health care as it could be.

  • Page 2
    ... F or UnitedHealth Group, 2002 was another year of change and positive performance. The disciplined application of our business principles combined with the competencies that form the foundation of our businesses continue to manifest themselves in exceptional operating and financial results...

  • Page 3
    .... Critical choices are inevitably confronted when these limits are approached, whether by individuals, employers, charitable enterprises or governments. It is time to address this concern. We have many reasons to be proud of the American health care system and the medical science associated with it...

  • Page 4
    Pathways to essential health and well-being ser vices for all Americans.

  • Page 5
    Improved quality of health care for ever y individual.

  • Page 6
    ... public, private and community partnerships to implement solutions? > Will we as individuals prepare ourselves to exercise personal restraint regarding utilization of limited and expensive health care resources, and demand the same of health care professionals, in order to realize enhanced and cost...

  • Page 7
    ...health costs are borne through employer- or government-sponsored benefits. At the other end of the spectrum are those without any form of health care sponsorship. They are fully exposed to dramatic cost escalation and often lack the financial capacity to access even the most essential levels of care...

  • Page 8
    Decisions grounded in scientific data.

  • Page 9
    Individual involvement in health care decisions.

  • Page 10
    ...: > Delivering sustained education programs for school, workplace and clinical settings that focus on appropriate health care use and resource conservation. > Encouraging development of information sources for consumers that are void of commercial bias. > Developing media channels that will...

  • Page 11
    By investing in technology, information tools, facilitation of care and basic operating disciplines, UnitedHealth Group is taking meaningful steps toward achieving a better health care system. We are addressing a vast, critically important and dynamic marketplace, and the outlook for our company is ...

  • Page 12
    UnitedHealth Group Business Over view { 11 }

  • Page 13
    ... state-of-the-art Web-based and voice-based services to support a simple access and service experience for consumers, employers, brokers, physicians and other health care providers, who use our Web-based applications for more than 60 million transactions annually. FINANCIAL PERFORMANCE (in millions...

  • Page 14
    ...-directed benefit plans, Web-based services, information resources and easy-to-use applications and tools to help consumers become better informed and make better choices. FINANCIAL PERFORMANCE (in millions) 2002 2001 2000 Revenues Earnings From Operations Operating Margin Return on Net Assets...

  • Page 15
    ... health education and information resources, personal care facilitation and advocacy services, intensive case management, pharmacy and diagnostic testing services, targeted disease management programs, and care coordination and outreach programs. This array represents the most comprehensive set...

  • Page 16
    .... OVATIONS HEALTH AND WELL-BEING SERVICES Ovations offers the nation's largest retail pharmacy discount card program, pharmacy mail order services, and merchandise offerings of healthy living products targeted to individuals age 50 and older. EVERCARE Evercare provides individualized health care...

  • Page 17
    ...support services to more than 23 million individuals through multiple communication and media channels. CONSUMER CARE SERVICES Specialized Care Services businesses address the need to access services and products in unique areas associated with personal care. > Dental Benefit Providers and Spectera...

  • Page 18
    ..., and 100 life science customers. Ingenix products focus on four key areas: DATABASE SERVICES CONSULTING SERVICES AND ANALYTICS INFORMATION SOFTWARE PUBLICATIONS AND ONLINE SERVICES > Comprehensive > Actuarial services > Clinical cost trend > Physician data sharing > Coding and longitudinal...

  • Page 19
    UnitedHealth Group Financial Review { 18 }

  • Page 20
    ...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...

  • Page 21
    ...Strong growth across our business segments was partially offset by the impact of targeted withdrawals from unprofitable risk-based arrangements with customers using multiple health benefit carriers, and withdrawals and benefit design changes in our Medicare+Choice product offering in certain markets...

  • Page 22
    ... a $240 million increase in Health Care Services' premium revenues driven by an increase in the number of individuals served by both Ovations' Medicare supplement products provided to AARP members and by its Evercare business. In addition, Specialized Care Services realized a $140 million increase...

  • Page 23
    ... number of people receiving benefits under our Medicare and commercial risk-based products. The balance of the decrease in medical costs was driven primarily by changes in benefit designs in certain Medicare markets. Operating Costs The operating cost ratio (operating costs as a percentage of total...

  • Page 24
    ... 36.0% during 2001. BUSINESS SEGMENTS The following summarizes the operating results of our business segments for the years ended December 31 (in millions): REVENUES 2002 2001 Percent Change Health Care Services Uniprise Specialized Care Services Ingenix Corporate and Eliminations Consolidated...

  • Page 25
    ... higher operating costs than larger customers. The balance of the decrease in the commercial medical care ratio was primarily driven by changes in product mix, care management activities and net premium rate increases that exceeded overall medical benefit cost increases. { 24 } UnitedHealth Group

  • Page 26
    ...and UnitedHealthcare's targeted withdrawal of risk-based product offerings from unprofitable arrangements with customers using multiple health benefit carriers. UnitedHealthcare's year-over-year Medicare enrollment decreased 35% because of market withdrawals and benefit design changes. These actions...

  • Page 27
    ...revenue growth from Spectera, its vision care benefits business acquired in October 2001, and an increase in the number of individuals served by United Behavioral Health, its mental health benefits business, and Dental Benefit Providers, its dental services business. Earnings from operations reached...

  • Page 28
    ...business segments was partially offset by the impact of planned exits in 2000 from UnitedHealthcare's commercial businesses in the Pacific Coast region, the withdrawal of its Medicare+Choice product offering from targeted counties and the closure of Uniprise's Medicare fiscal intermediary operations...

  • Page 29
    ... Change Health Care Services Uniprise Specialized Care Services Ingenix Total Operating Segments Corporate Consolidated Earnings From Operations nm - not meaningful 944 374 214 48 1,580 (14) $ 1,566 $ 739 289 174 32 1,234 (34) $ 1,200 $ 28% 29% 23% 50% 28% nm 31% { 28 } UnitedHealth Group

  • Page 30
    ... withdrawal of its risk-based product offerings from unprofitable arrangements with customers using multiple health benefit carriers. UnitedHealthcare's year-over-year Medicare enrollment decreased by 15% in 2001 because of targeted market withdrawals and benefit design changes in response to...

  • Page 31
    ... dates. Our long-term investments are also available for sale to meet short-term liquidity and other needs. Monies in excess of the capital needs of our regulated entities are paid to their non-regulated parent companies, typically in the form of dividends, for general corporate use, when and...

  • Page 32
    ... remaining $150 million consists primarily of public and non-public equity securities held by UnitedHealth Capital, our investment capital business. FINANCING AND INVESTING ACTIVITIES We use commercial paper and debt to maintain adequate operating and financial flexibility. As of December 31, 2002...

  • Page 33
    ...equipment, capitalized software and information technology hardware. These investments were made to support business growth, operational and cost efficiencies, service improvements and technology enhancements. Effective September 30, 2002, we acquired AmeriChoice Corporation (AmeriChoice), a leading...

  • Page 34
    ...resources; however, we continually evaluate opportunities to expand our operations. This includes internal development of new products, programs and technology applications and may include acquisitions. AARP In January 1998, we initiated a 10-year contract to provide insurance products and services...

  • Page 35
    ... eligible person multiplied by the total number of people eligible to receive services, as recorded in our records. Employer groups generally provide us with changes to their eligible population one month in arrears. Each billing includes an adjustment for prior month changes in eligibility status...

  • Page 36
    ... but have not yet processed. We develop medical costs payable estimates using consistently applied actuarial methods based on historical claim submission and payment data, cost trends, utilization of health care services, contracted service rates, customer and product mix, and other relevant factors...

  • Page 37
    ...charges at that time. We manage our investment portfolio to limit our exposure to any one issuer or industry, and largely limit our investments to U.S. Government and Agency securities, state and municipal securities, and corporate debt obligations that are investment grade. LONG-LIVED ASSETS As of...

  • Page 38
    ... care providers and consumers, major epidemics, and applicable regulations may affect our ability to control the impact of health care cost inflation. Because of the narrow operating margins of our risk-based products, changes in medical cost trends that were not anticipated in establishing premium...

  • Page 39
    ... UnitedHealth Group to concentrations of credit risk. Our investments in marketable securities are managed under an investment policy authorized by our board of directors. This policy limits the amounts that may be invested in any one issuer and generally limits our investments to U.S. Government...

  • Page 40
    ...part to service AARP customers in an effective manner and any adverse events that directly affect AARP or its business partners; (f) medical cost increases or benefit changes associated with our remaining Medicare+Choice operations; (g) significant deterioration in customer retention; (h) violations...

  • Page 41
    ... except per share data) REVENUES 2002 For the Year Ended December 31, 2001 2000 Premiums Services Investment and Other Income Total Revenues MEDICAL AND OPERATING COSTS $ 21,906 2,894 220 25,020 $ 20,683 2,490 281 23,454 $ 18,926 1,964 232 21,122 Medical Costs Operating Costs Depreciation and...

  • Page 42
    ... Common Stock, $0.01 par value - 1,500,000,000 shares authorized; 299,458,000 and 308,626,000 shares outstanding Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income: Net Unrealized Gains on Investments, net of tax effects TOTAL SHAREHOLDERS' EQUITY TOTAL LIABILITIES...

  • Page 43
    ... Paid-In Capital Retained Earnings Net Unrealized Total Gains on Shareholders' Comprehensive Investments Equity Income 335 13 (31) - $ 3 - - - $ 250 349 (599) - $ 3,445 - (581) 736 $ 165 - - - $ 3,863 349 (1,180) 736 $ 736 Issuances of Common Stock, and related tax benefits Common Stock...

  • Page 44
    ...Income Taxes and Other Net Change in Other Operating Items, net of effects from acquisitions, sales of subsidiaries and changes in AARP balances Accounts Receivable and Other Current Assets Medical Costs Payable Accounts Payable and Accrued Liabilities Other Policy Liabilities Unearned Premiums CASH...

  • Page 45
    .... We develop our estimates of medical costs payable using actuarial methods based upon historical claim submission and payment data, cost trends, utilization of health care services, contracted service rates, customer and product mix, and other relevant factors. The estimates may change as actuarial...

  • Page 46
    ... we identify the changes in estimates. Each period, our operating results reflect revisions in estimates related to all prior periods, based on actual claims processed and paid. Management believes the amount of medical costs payable is reasonable and adequate to cover the company's liability for...

  • Page 47
    ...fund associated with the AARP program (see Note 4) and customer balances related to experience-rated insurance products. Customer balances represent excess customer payments and deposit accounts under experience-rated contracts. At the customer's option, these balances may be refunded or used to pay...

  • Page 48
    ...which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. Its adoption did not have a material impact on our consolidated financial position or results of operations. { 47 } UnitedHealth Group

  • Page 49
    ... our existing Medicaid business with AmeriChoice within the Health Care Services reporting segment, creating efficiencies from the consolidation of health care provider networks, technology platforms and operations. We issued 5.3 million shares of our common stock with a fair value of approximately...

  • Page 50
    ... Care Services business segment acquired Spectera, Inc. (Spectera), a leading vision care benefits company in the United States, to expand the breadth of service offerings we extend to our customers. We paid $37 million in cash, and issued 1.5 million shares of common stock with a fair value...

  • Page 51
    ... with maturities of more than five years. During 2001 and 2000, respectively, we contributed UnitedHealth Capital investments valued at approximately $22 million and $52 million to the United Health Foundation, a non-consolidated, not-for-profit organization. The realized gains of approximately...

  • Page 52
    ...net of tax effects Adjusted Diluted Net Earnings per Share Changes in the carrying amount of goodwill, by operating segment, during the year ended December 31, 2002, were as follows: (in millions) Health Care Services Uniprise Specialized Care Services Ingenix Consolidated Total Balance at January...

  • Page 53
    ... Years Total Claim Payments MEDICAL COSTS PAYABLE, END OF PERIOD (12,435) (2,280) (14,715) $ 2,848 (11,933) (2,239) (14,172) $ 2,593 (10,711) (1,983) (12,694) $ 2,411 1 Represents the medical costs payable balance as of the applicable acquisition date. Subsequent changes in estimates related...

  • Page 54
    ... We used proceeds from this borrowing to repay commercial paper and for general corporate purposes including working capital, capital expenditures, business acquisitions and share repurchases. When we issued these notes, we entered into interest rate swap agreements that qualify as fair value hedges...

  • Page 55
    ... paid-in capital. We currently have no outstanding purchase agreements with respect to our common stock. PREFERRED STOCK At December 31, 2002, we had 10 million shares of $0.001 par value preferred stock authorized for issuance, and no preferred shares issued and outstanding. { 54 } UnitedHealth...

  • Page 56
    ... August 1, 2002, our employee stock ownership plan was merged into our existing 401(k) plan. We also maintain an employee stock purchase plan. Activity related to these plans was not significant in relation to our consolidated financial results in 2002, 2001 and 2000. { 55 } UnitedHealth Group

  • Page 57
    ... Income Tax Assets Accrued Expenses and Allowances Unearned Premiums Medical Costs Payable and Other Policy Liabilities Net Operating Loss Carryforwards Other Subtotal Less: Valuation Allowances Total Deferred Income Tax Assets Deferred Income Tax Liabilities Capitalized Software Development Net...

  • Page 58
    ... of legal actions related to the design, management and offerings of our services. We record liabilities for our estimate of probable costs resulting from these matters. These matters include, but are not limited to: claims relating to health care benefits coverage; medical malpractice actions...

  • Page 59
    ... between business segments principally consist of customer service and transaction processing services that Uniprise provides to UnitedHealthcare and Ovations, certain product offerings sold to Uniprise and UnitedHealthcare customers by Specialized Care Services, and sales of medical benefits cost...

  • Page 60
    ... present segment financial information as of and for the years ended December 31, 2002, 2001 and 2000 (in millions): 2002 Health Care Services Uniprise Specialized Care Services Ingenix Corporate and Eliminations Consolidated Revenues - External Customers Revenues - Intersegment Investment and...

  • Page 61
    ...68 $ 5,941 $ 5,545 $ 396 $ 231 $ 0.75 $ 0.71 $ 6,020 $ 5,599 $ 421 $ 247 $ 0.79 $ 0.76 1 Includes an estimated $40 million ($26 million after tax effect), or $0.08 diluted net earnings per common share, of favorable medical costs estimate development from prior periods. { 60 } UnitedHealth Group

  • Page 62
    ... of directors who are not employees of the company, meets periodically and privately with the company's independent auditors and management to review accounting, auditing, internal control, financial reporting and other matters. William W. McGuire, MD Chairman and Chief Executive Officer Stephen...

  • Page 63
    ... agreeing the previously reported medical costs to the previously issued consolidated financial statements (iii) agreeing paid claims payments and prior years medical costs change in medical costs payable to supporting documentation of claims payment detail and (iv) testing the mathematical accuracy...

  • Page 64
    ... consolidated balance sheets of UnitedHealth Group Incorporated (a Minnesota Corporation) and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December...

  • Page 65
    ... and Chief Financial Officer Medtronic, Inc. Medical technology company Director since 1996. Donna E. Shalala, PhD President University of Miami Director since 2001. William G. Spears Managing Partner Spears Grisanti & Brown LLC New York City-based investment counseling and management firm Director...

  • Page 66
    ... CONSOLIDATED 1 (in millions, except per share data) 2002 2001 2000 Revenues Earnings From Operations Operating Margin Return on Net Assets Net Earnings Net Margin Diluted Net Earnings per Share GROWTH & PROFITS - BY SEGMENT (in millions) HEALTH CARE SERVICES $ 25,020 $ 2,186 8.7% 37.5% $ 1,352...

  • Page 67
    ... Group Center, 9900 Bren Road East, Minnetonka, Minnesota. Dividend Policy UnitedHealth Group's board of directors established the company's dividend policy in August 1990. The policy requires the board to review the company's audited financial statements following the end of each fiscal year...