United Healthcare 2004 Annual Report Download - page 37

UNITEDHEALTH GROUP 35
MEDICAL COSTS
Each reporting period, we estimate our obligations for medical care services that have been rendered
on behalf of insured consumers but for which claims have either not yet been received or processed, and
for liabilities for physician, hospital and other medical cost disputes. We develop estimates for medical
care services incurred but not reported using an actuarial process that is consistently applied, centrally
controlled and automated. The actuarial models consider factors such as time from date of service to
claim receipt, claim backlogs, seasonal variances in medical care consumption, provider contract rate
changes, medical care utilization 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 date of service. Substantially all claims related to medical care services are
known and settled within nine to 12 months from the date of service. We estimate liabilities for physician,
hospital and other medical cost disputes based upon an analysis of potential outcomes, assuming a
combination of litigation and settlement strategies.
Each period, we re-examine previously established medical costs payable estimates based on actual
claim submissions and other changes in facts and circumstances. As the liability estimates recorded in
prior periods become more exact, we increase or decrease the amount of the estimates, and include the
changes in estimates in medical costs in the period in which the change is identified. In every reporting
period, our operating results include the effects of more completely developed medical costs payable
estimates associated with previously reported periods. If the revised estimate of prior period medical costs
is less than the previous estimate, we will decrease reported medical costs in the current period (favorable
development). If the revised estimate of prior period medical costs is more than the previous estimate, we
will increase reported medical costs in the current period (unfavorable development). Historically, the net
impact of estimate developments has represented less than one-half of 1% of annual medical costs, less
than 4% of annual earnings from operations and less than 3% of medical costs payable.
In order to evaluate the impact of changes in medical cost estimates for any particular discrete period,
one should consider both the amount of development recorded in the current period pertaining to prior
periods and the amount of development recorded in subsequent periods pertaining to the current period.
The accompanying table provides a summary of the net impact of favorable development on medical costs
and earnings from operations (in millions).
Favorable Net Impact on Medical Costs Earnings from Operations
Development Medical Costs (a) As Reported As Adjusted (b) As Reported As Adjusted (b)
2001 $30 $(40) $17,644 $17,604 $1,566 $1,606
2002 $70 $(80) $18,192 $18,112 $2,186 $2,266
2003 $150 $(60) $20,714 $20,654 $2,935 $2,995
2004 $210 (c) $27,000 (c) $4,101 (c)
a) The amount of favorable development recorded in the current year pertaining to the prior year less the amount of favorable
development recorded in the subsequent year pertaining to the current year.
b) Represents reported amounts adjusted to reflect the net impact of medical cost development.
c) Not yet determinable as the amount of prior period development recorded in 2005 will change as our December 31, 2004
medical costs payable estimate develops throughout 2005.
Our estimate of medical costs payable represents management’s best estimate of the company’s liability
for unpaid medical costs as of December 31, 2004, 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, 2004; however, actual claim payments may
differ from established estimates. Assuming a hypothetical 1% difference between our December 31, 2004
estimates of medical costs payable and actual costs payable, excluding the AARP business, 2004 earnings
from operations would increase or decrease by $46 million and diluted net earnings per common share
would increase or decrease by approximately $0.05 per share.