United Healthcare 2002 Annual Report Download - page 36

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UnitedHealth Group
MEDICAL COSTS
A substantial portion of our medical costs payable is based on estimates, which include estimates for the
costs of health care services eligible individuals have received under risk-based arrangements but for
which claims have not yet been submitted, and estimates for the costs of claims we have received 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.
Over time, as actual claim costs and more current information become available, our estimated liability
for medical costs payable develops either favorably, with revised payable estimates less than originally
reported medical costs payable, or unfavorably, with revised payable estimates more than originally reported
medical costs payable. We include the impacts of changes in estimates in the operating results of the period
in which we identify the changes.
Each period, our operating results include the effects of revisions in estimates related to all prior
periods, based on actual claims processed and paid. Changes in estimates may relate to the prior fiscal
year or to prior quarterly reporting periods within the same fiscal year. Changes in estimates for prior
quarterly reporting periods within the same fiscal year have no impact on total medical costs reported for
that fiscal year. In contrast, changes in medical costs payable estimates for prior fiscal years that are
identified in the current year affect total medical costs reported for the current fiscal year.
Our medical costs payable estimates as of December 31, 2001, 2000 and 1999 each developed favorably
in the subsequent fiscal year by approximately $70 million, $30 million and $15 million, respectively,
representing earnings from operations of 3.2% in 2002, 1.9% in 2001 and 1.3% in 2000. Favorable
development of prior year medical costs payable estimates represented 0.5%, 0.2%, and 0.1% of medical
costs in 2002, 2001 and 2000, respectively, and 2.7%, 1.2%, and 0.7% of medical costs payable as of
December 31, 2001, 2000, and 1999, respectively. Management does not believe the changes in medical
costs payable estimates described above were significant in relation to earnings from operations,
medical costs or medical costs payable. Amounts related to the AARP business were excluded from these
calculations since the underwriting gains and losses associated with this business are recorded as an
increase or decrease to a rate stabilization fund. For additional information regarding the components
of the change in medical costs payable for the years ended December 31, 2002, 2001 and 2000, see
Note 7 of the consolidated financial statements.
Our estimate of medical costs payable represents management’s best estimate of the company’s liability
for unpaid medical costs as of December 31, 2002, developed using consistently applied actuarial methods.
Management believes the amount of medical costs payable is reasonable and adequate to cover the
company’s liability for unpaid claims as of December 31, 2002; however, actual claim payments may differ
from established estimates. Assuming a hypothetical 1% difference between our December 31, 2002
estimates of medical costs payable and actual costs payable, excluding the AARP business, 2002 earnings
from operations would increase or decrease by approximately $28 million and basic and diluted net
earnings per common share would increase or decrease by approximately $0.06 per share.