United Healthcare 2005 Annual Report Download - page 36

reporting unit level, and we review our remaining long-lived assets for impairment when events and changes in
circumstances indicate we might not recover their carrying value. To determine the fair value of our long-lived
assets and assess their recoverability, we must make assumptions about a wide variety of internal and external
factors including estimated future utility and estimated future cash flows, which in turn are based on estimates of
future revenues, expenses and operating margins. If these estimates or their related assumptions change in the
future, we may be required to record impairment charges for these assets that could materially affect our results
of operations and shareholders’ equity in the period in which the impairment occurs.
Revenues
Revenues are principally derived from health care insurance premiums. We recognize premium revenues in the
period eligible individuals are entitled to receive health care services. Customers are typically billed monthly at a
contracted rate per 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 that were not
reflected in our previous billing. We estimate and adjust the current period’s revenues and accounts receivable
accordingly. Our estimates are based on historical trends, premiums billed, the level of contract renewal activity
and other relevant information. We revise estimates of revenue adjustments each period, and record changes in
the period they become known.
Investments
As of December 31, 2005, we had approximately $9.6 billion of investments, primarily held in marketable debt
securities. Our investments are principally classified as available for sale and are recorded at fair value. We
exclude unrealized gains and losses on investments available for sale from earnings and report them together, net
of income tax effects, as a separate component in shareholders’ equity. We continually monitor the difference
between the cost and fair value of our investments. As of December 31, 2005, our investments had gross
unrealized gains of $105 million and gross unrealized losses of $53 million. If any of our investments experience
a decline in fair value that is determined to be other than temporary, based on analysis of relevant factors, we
record a realized loss in our Consolidated Statements of Operations. Management judgment is involved in
evaluating whether a decline in an investment’s fair value is other than temporary. New information and the
passage of time can change these judgments. We revise impairment judgments when new information becomes
known and record any resulting impairment 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.
Inflation
The current national health care cost inflation rate significantly exceeds the general inflation rate. We use various
strategies to lessen the effects of health care cost inflation. These include setting commercial premiums based on
anticipated health care costs and coordinating care with physicians and other health care providers. Through
contracts with physicians and other health care providers, we emphasize preventive health care, appropriate use
of health care services consistent with clinical performance standards, education and closing gaps in care.
We believe our strategies to mitigate the impact of health care cost inflation on our operating results have been
and will continue to be successful. However, other factors including competitive pressures, new health care and
pharmaceutical product introductions, demands from physicians and other health 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 rates can create significant changes in our financial results.
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