United Healthcare 2005 Annual Report Download - page 49

and for liabilities for physician, hospital and other medical cost disputes. We develop estimates for medical costs
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, care provider contract rate changes, medical care consumption and other medical cost trends. 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 adjust 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.
Cash, Cash Equivalents and Investments
Cash and cash equivalents are highly liquid investments that generally have an original maturity of three months
or less. The fair value of cash and cash equivalents approximates their carrying value because of the short
maturity of the instruments. Investments with maturities of less than one year are classified as short-term. We
may sell investments classified as long-term before their maturities to fund working capital or for other purposes.
Because of regulatory requirements, certain investments are included in long-term investments regardless of their
maturity date. We classify these investments as held to maturity and report them at amortized cost. All other
investments are classified as available for sale and reported at fair value based on quoted market prices.
We exclude unrealized gains and losses on investments available for sale from earnings and report it, net of
income tax effects, as a separate component of shareholders’ equity. We continually monitor the difference
between the cost and estimated fair value of our investments. If any of our investments experiences a decline in
value that is determined to be other than temporary, based on analysis of relevant factors, we record a realized
loss in Investment and Other Income in our Consolidated Statements of Operations. To calculate realized gains
and losses on the sale of investments, we use the specific cost or amortized cost of each investment sold.
Assets Under Management
We administer certain aspects of AARP’s insurance program (see Note 11). Pursuant to 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.
We do not guarantee any rates of return on these investments and, upon transfer of the AARP contract to another
entity, we would transfer cash equal in amount to the fair value of these investments at the date of transfer to that
entity. Because the purpose of these assets is to fund the medical costs payable, the rate stabilization fund (RSF)
liabilities and other related liabilities associated with the AARP contract, assets under management are classified
as current assets, consistent with the classification of these liabilities. Interest earnings and realized investment
gains and losses on these assets accrue to the overall benefit of the AARP policyholders through the RSF. As
such, they are not included in our earnings.
Property, Equipment and Capitalized Software
Property, equipment and capitalized software is stated at cost, net of accumulated depreciation and amortization.
Capitalized software consists of certain costs incurred in the development of internal-use software, including
external direct costs of materials and services and payroll costs of employees devoted to specific software
development.
We calculate depreciation and amortization using the straight-line method over the estimated useful lives of the
assets. The useful lives for property, equipment and capitalized software are: from three to seven years for
furniture, fixtures and equipment; from 35 to 40 years for buildings; the shorter of the useful life or remaining
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