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UnitedHealth Group 2003 annual report
Making
health care
work better
vision

Table of contents

  • Page 1
    UnitedHealth Group 2003 annual report vision Making health care work better

  • Page 2
    ... challenge faced by the American health care system involves not a scarcity of resources but the failure to optimize their use, UnitedHealth Group marshals people, skills and technology to make health care services more accessible for all Americans, to improve the health care experience, to enhance...

  • Page 3
    ...access to health and well-being resources. Developing and applying technology to simplify health care delivery, improve the service experience and lower costs. 3 capabilities Gathering and sharing information to promote better decision-making and improve health care outcomes. UnitedHealth Group...

  • Page 4
    ...needs, Specialized Care Services provides individuals with vital resources ranging from Centers of Excellence for critical diseases and needs, to ancillary care services, to unique patient support interventions. Providing crucial data that physicians, care providers, hospitals, health plans, payers...

  • Page 5
    ... hospitals and health care resources, UnitedHealthcare combines important health services with flexible, consumer-oriented benefit designs and the buying power of nearly 20 million individuals. businesses The largest business in the United States solely dedicated to the health and well-being needs...

  • Page 6

  • Page 7
    ...the vast health and well-being marketplace, which represents more than $1.7 trillion of our domestic spending and is growing faster than any other sector of our economy, no participant is better positioned for growth and performance than UnitedHealth Group. Our companies offer critical services that...

  • Page 8
    ... cost. The activities and associated results have benefited those we serve and those with whom we work. Our shareholders, in turn, have realized meaningful and continuing advances in the value of UnitedHealth Group as an investment. In that regard, our 2003 financial results and long-term growth...

  • Page 9
    ...-based medicine as the standard for care decisions and action. Clinical care based on evidence must become a pervasive standard for the care that is delivered and that which is sought. It should underscore consumer decisions, physician action, resource organization and health care benefit coverage...

  • Page 10
    ... efficiency, better information exchanges, error reduction, facilitation of optimum medical interventions, and better education tools, services and experiences for all involved. These advancements will individually and cumulatively help us to expand access, improve quality and moderate costs...

  • Page 11
    ...years of successful innovations and interventions to expand access, share information and make services more affordable, UnitedHealth Group again enters a new year in a very strong position. Our commitment to these efforts is unwavering, and we will continue to strive to make health care work better...

  • Page 12
    ...through physician data-sharing. An essential component of quality health care delivery is the continuous refinement of clinical practice based on critical analysis of performance and outcomes for individual physicians and medical practices. UnitedHealth Group has created database analytic tools that...

  • Page 13
    ...related expenses directly from their health savings accounts, flexible spending accounts and personal benefit accounts. Open architecture Internet portals for individuals, employers, physicians and brokers offer real-time access to self-service capabilities, such as online enrollment, billing, claim...

  • Page 14
    Business overview 12 UnitedHealth Group

  • Page 15
    ... market segments. > We continually invest in the future, spending more than $2.2 billion on research, development and capital expenditures, largely for technology and clinical performance advancement services, over the past six years. How we're making health care work better We enhance access...

  • Page 16
    ... services Dental Benefit Providers dental networks and services HealthAllies consumer-driven health care access and purchasing programs ® National Benefit Resources cost management services and consulting for insurers, third-party administrators and employers Optum® care facilitation, disease...

  • Page 17
    ...complete consumer-directed health plan option, combines high-deductible medical coverage linked to an employer-funded Personal Benefit Account and includes information tools, personal care assistance services, preventive health benefits and financial incentives that help individuals use health care...

  • Page 18
    ... and health benefit products and services, from simple individual health coverage to services for the largest, most complex groups. Personal benefit accounts and health savings accounts are available within all of our benefit offerings. > Innovative pharmaceutical management programs provide access...

  • Page 19
    ... nation's largest Medicare supplement business, serving nearly 4 million seniors enrolled in AARP Health Care Options. > We provide network-based health benefit products to 230,000 people eligible for Medicare, including Medicare+Choice products and new Medicare preferred provider plans as part of...

  • Page 20
    ... education programs, interactive communications tools and publications services to inform and educate the medical community about new clinical treatments, therapies and practices. Financial performance (in millions) 2003 2002 2001 Revenues Earnings From Operations Operating Margin Return...

  • Page 21
    ...in Shareholders' Equity 43 Consolidated Statements of Cash Flows 44 Notes to Consolidated Financial Statements 63 Report of Management 64 Independent Auditors' Report 66 Corporate and Business Leaders/Board of Directors 67 Financial Performance At A Glance 68 Investor Information UnitedHealth Group...

  • Page 22
    ... Year Ended December 31, (in millions, except per share data) CONSOLIDATED OPERATING RESULTS 2003 2002 2001 2000 1999 Revenues Earnings From Operations Net Earnings Return on Shareholders' Equity Basic Net Earnings per Common Share Diluted Net Earnings per Common Share Common Stock Dividends...

  • Page 23
    ... services and related administrative costs. Service revenues consist primarily of fees derived from services performed for customers that self-insure the medical costs of their employees and their dependents. For both premium risk-based and fee-based customer arrangements, we provide coordination...

  • Page 24
    ...programs since the acquisition date. The remaining premium revenue growth in 2003 was primarily driven by growth in the number of individuals served by Ovations' Medicare supplement products provided to AARP members and its Evercare business, along with growth in several of Specialized Care Services...

  • Page 25
    .... Business Segments The following summarizes the operating results of our business segments for the years ended December 31 (in millions): REVENUES 2003 2002 Percent Change Health Care Services Uniprise Specialized Care Services Ingenix Corporate and Eliminations Consolidated Revenues EARNINGS FROM...

  • Page 26
    ... was driven by the favorable development of prior period medical cost estimates, with the balance of the decrease resulting from net premium rate increases that exceeded overall medical benefit cost increases and changes in business and customer mix. Health Care Services' 2003 operating margin was...

  • Page 27
    ... resources. Specialized Care Services revenues during 2003 of $1.9 billion increased by $369 million, or 24%, over 2002. This increase was principally driven by an increase in the number of individuals served by United Behavioral Health, its mental health benefits business; Dental Benefit Providers...

  • Page 28
    ...acquisition of AmeriChoice on September 30, 2002. The balance of premium revenue growth in 2002 included 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...

  • Page 29
    ... of new technology releases, as well as increased business self-insurance costs during 2002. On an absolute dollar basis, operating costs increased by $408 million, or 10%, over 2001. This increase was driven by a 7% increase in the total number of individuals served by Health Care Services and...

  • Page 30
    ... million as a result of planned withdrawals and benefit design changes in certain markets in response to insufficient Medicare program reimbursement rates. The balance of Health Care Services' revenue growth in 2002 includes a $240 million increase in Ovations revenues driven by an increase in the...

  • Page 31
    ... and benefit design changes. These actions were taken in response to insufficient Medicare program reimbursement rates in specific counties and were intended to preserve profit margins and better position the Medicare program for long-term success. Year-over-year Medicaid enrollment increased...

  • Page 32
    ... of 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...

  • Page 33
    ... our operating and financial flexibility. We generally use these cash flows to reinvest in our businesses in the form of capital expenditures, to expand the depth and breadth of our services through business acquisitions, and to repurchase shares of our common stock, depending on market conditions...

  • Page 34
    ...cash generated by working capital changes, driven primarily by an increase in medical costs payable. As premium revenues and related medical costs increase, we generate incremental operating cash flows because we collect premium revenues in advance of the claim payments for related medical costs. We...

  • Page 35
    ... stock dividend. The stock dividend was issued on June 18, 2003, to shareholders of record as of June 2, 2003. All share and per share amounts have been restated to reflect the stock split. On November 13, 2003, our Health Care Services business segment acquired Golden Rule Financial Corporation...

  • Page 36
    ... goods and services. 3 Estimated payments required under life insurance and annuity contracts. 4 Includes obligations associated with certain employee benefit programs and minority interest purchase commitments. Currently, we do not have any other material contractual obligations, off-balance sheet...

  • Page 37
    ... and other medical cost trends, membership volume and demographics, benefit plan changes, and business mix changes related to products, customers and geography. Depending on the health care provider and type of service, the typical billing lag for services can range from two to 90 days from the...

  • Page 38
    ... estimate of the company's liability for unpaid medical costs as of December 31, 2003, 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, 2003...

  • Page 39
    ... actions related to the design, management and offerings of our services. We record liabilities for our estimates 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; contract...

  • Page 40
    ... fair value of our commercial paper and debt. At December 31, 2003, we had $181 million of equity investments, primarily held by our UnitedHealth Capital business in various public and non-public companies concentrated in the areas of health care delivery and related information technologies. Market...

  • Page 41
    ... loss of existing customers, difficulties in attracting new customers, difficulties in determining medical costs estimates and establishing appropriate pricing, customer and physician and health care provider disputes, regulatory violations, increases in operating costs or other adverse consequences...

  • Page 42
    ... For the Year Ended December 31, 2002 (in millions, except per share data) REVENUES 2003 2001 Premiums Services Investment and Other Income Total Revenues MEDICAL AND OPERATING COSTS $ 25,448 3,118 257 28,823 $ 21,906 2,894 220 25,020 $ 20,683 2,490 281 23,454 Medical Costs Operating Costs...

  • Page 43
    ...-Term Debt Unearned Premiums Total Current Liabilities Long-Term Debt, less current maturities Future Policy Benefits for Life and Annuity Contracts Deferred Income Taxes and Other Liabilities Commitments and Contingencies (Note 12) Shareholders' Equity Common Stock, $0.01 par value - 1,500 shares...

  • Page 44
    ...) 913 $ 913 Issuances of Common Stock, and related tax benefits Common Stock Repurchases Comprehensive Income Net Earnings Other Comprehensive Income Adjustments Change in Net Unrealized Gains on Investments, net of tax effects Comprehensive Income Common Stock Dividend BALANCE AT DECEMBER 31, 2001...

  • Page 45
    ... 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 FLOWS FROM...

  • Page 46
    ... Financial Statements 1 DESCRIPTION OF BUSINESS UnitedHealth Group Incorporated (also referred to as "UnitedHealth Group," "the company," "we," "us," and "our") is a national leader in forming and operating orderly, efficient markets for the exchange of high quality health and well-being services...

  • Page 47
    ...our agreement, AARP assets are managed separately from our general investment portfolio and are used to pay costs associated with the AARP program. These assets are invested at our discretion, within investment guidelines approved by AARP. At December 31, 2003, the assets were invested in marketable...

  • Page 48
    ... contracts represents account balances that accrue to the benefit of the policyholders, excluding surrender charges, for universal life and investment annuity products. Policy Acquisition Costs For our health insurance contracts, costs related to the acquisition and renewal of customer contracts...

  • Page 49
    ...had we applied the fair value expense recognition provisions of Statement of Financial Accounting Standards (FAS) No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation. (in millions, except per share data) NET EARNINGS 2003 For the Year Ended December 31, 2002 2001...

  • Page 50
    ...of the United States. This merger significantly strengthens UnitedHealthcare's market position in the mid-Atlantic region and provides substantial distribution opportunities for other UnitedHealth Group businesses. Under the terms of the purchase agreement, MAMSI shareholders received 0.82 shares of...

  • Page 51
    ... 13, 2003, our Health Care Services business segment acquired Golden Rule Financial Corporation and subsidiaries (Golden Rule). Golden Rule offers a broad range of health and life insurance and annuity products to the individual consumer market, and this acquisition provides UnitedHealth Group with...

  • Page 52
    ... of New York, New Jersey and Pennsylvania. We integrated our existing Medicaid business with AmeriChoice within the Health Care Services reporting segment, creating efficiencies from the consolidation of physician and health care provider networks, technology platforms and operations. We issued...

  • Page 53
    ...) 2003 2002 Accounts Receivable Assets Under Management Medical Costs Payable Other Policy Liabilities Other Current Liabilities $ $ $ $ $ 352 1,959 874 1,275 162 $ $ $ $ $ 294 2,045 893 1,299 147 The effects of changes in balance sheet amounts associated with the AARP program accrue to AARP...

  • Page 54
    ... of more than 10 years. During 2001, we contributed UnitedHealth Capital investments valued at approximately $22 million to the United Health Foundation, a non-consolidated, not-for-profit organization. The realized gain of approximately $18 million was offset by related contribution expense of $22...

  • Page 55
    ... Diluted Net Earnings per Share Changes in the carrying amount of goodwill, by operating segment, during the year ended December 31, 2003, were as follows: (in millions) Health Care Services Uniprise Specialized Care Services Ingenix Consolidated Total Balance at January 1, 2002 Acquisitions and...

  • Page 56
    ...for the years ended December 31: (in millions) MEDICAL COSTS PAYABLE, BEGINNING OF PERIOD ACQUISITIONS REPORTED MEDICAL COSTS 2003 2002 2001 $ 3,741 165 20,864 (150) 20,714 $ 3,460 180 18,262 (70) 18,192 $ 3,266 17 17,674 (30) 17,644 Current Year Prior Years Total Reported Medical Costs CLAIM...

  • Page 57
    ... the proceeds from these borrowings to repay commercial paper and term debt maturing in 2003, and for general corporate purposes including working capital, business acquisitions and share repurchases. We have interest rate swap agreements that qualify as fair value hedges to convert a portion of our...

  • Page 58
    ... Stock Split In May 2003, our board of directors declared a two-for-one split of the company's common stock in the form of a 100% common stock dividend. The stock dividend was issued on June 18, 2003, to shareholders of record as of June 2, 2003. The accompanying consolidated financial statements...

  • Page 59
    ... fair value expense recognition provisions of FAS No. 123 is included in Note 2. We also maintain a 401(k) plan and an employee stock purchase plan. Activity related to these plans was not significant in relation to our consolidated financial results in 2003, 2002 and 2001. UnitedHealth Group 57

  • Page 60
    ... and Allowances Unearned Premiums Medical Costs Payable and Other Policy Liabilities Long-Term Liabilities Net Operating Loss Carryforwards Other Subtotal Less: Valuation Allowances Total Deferred Income Tax Assets Deferred Income Tax Liabilities Capitalized Software Development Net Unrealized Gains...

  • Page 61
    ...design, management and offerings of our services. We record liabilities for our estimates 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, contract disputes and claims related...

  • Page 62
    ... Services customers by Specialized Care Services, and sales of medical benefits cost, quality and utilization data and predictive modeling to Health Care Services and Uniprise by Ingenix. These transactions are recorded at management's best estimate of fair value, as if the services were purchased...

  • Page 63
    ... presents segment financial information as of and for the years ended December 31, 2003, 2002 and 2001 (in millions): 2003 Health Care Services Uniprise Specialized Care Services Ingenix Corporate and Eliminations Consolidated Revenues - External Customers Revenues - Intersegment Investment and...

  • Page 64
    ... Ended June 30 September 30 (in millions, except per share data) March 31 December 31 2003 Revenues Medical and Operating Expenses Earnings From Operations Net Earnings Basic Net Earnings per Common Share Diluted Net Earnings per Common Share 2002 Revenues Medical and Operating Expenses Earnings...

  • Page 65
    ... in this annual report. The consolidated financial statements and related information were prepared according to accounting principles generally accepted in the United States of America and include some amounts that are based on management's best estimates and judgments. To meet its responsibility...

  • Page 66
    ... consolidated balance sheets of UnitedHealth Group Incorporated and Subsidiaries (the "Company") as of December 31, 2003 and 2002 and the related statements of operations, changes in shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are...

  • Page 67
    ... 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 68
    ... LLC A New York City-based investment counseling and management firm Director since 1991. Gail R. Wilensky, PhD Executive Vice President Reed V. Tuckson, MD Senior Vice President Consumer Health and Medical Care Advancement L. Robert Dapper President and Chief Operating Officer UnitedHealth Group...

  • Page 69
    ... - CONSOLIDATED (in millions, except per share data) 2003 2002 2001 Revenues Earnings From Operations Operating Margin Return on Net Assets Net Earnings Net Margin Diluted Net Earnings per Common Share GROWTH & PROFITS - BY SEGMENT (in millions) HEALTH CARE SERVICES $ 28,823 $ 2,935 10.2% 43...

  • Page 70
    ... for the company's stock as reported on the New York Stock Exchange for the calendar periods shown through February 27, 2004. These prices do not include commissions or fees associated with purchasing or selling this security. High Low 2004 You can contact UnitedHealth Group Investor Relations to...

  • Page 71

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    UnitedHealth Group UnitedHealth Group Center 9900 Bren Road East Minnetonka, Minnesota 55343 www.unitedhealthgroup.com 100-5266