United Healthcare 2006 Annual Report Download

Download and view the complete annual report

Please find the complete 2006 United Healthcare annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 130

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ÈANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
OR
‘TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-10864
UNITEDHEALTH GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1321939
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
UNITEDHEALTH GROUP CENTER
9900 BREN ROAD EAST
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (952) 936-1300
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ‘No È
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ‘No È
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ÈNo ‘
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer ÈAccelerated filer ‘Non-accelerated filer ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ‘No È
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2006, was
approximately $55,976,249,541 (based on the last reported sale price of $44.78 per share on June 30, 2006, on the
New York Stock Exchange).*
As of February 15, 2007, there were 1,354,320,209 shares of the registrant’s Common Stock, $.01 par value per
share, issued and outstanding.
Note that in Part III of this report on Form 10-K, we “incorporate by reference” certain information from our
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 29, 2007. This document will
be filed with the Securities and Exchange Commission (SEC) within the time period permitted by the SEC. The
SEC allows us to disclose important information by referring to it in that manner. Please refer to such information.
* Only shares of voting stock held beneficially by directors, executive officers and subsidiaries of the Company
have been excluded in determining this number.

Table of contents

  • Page 1
    ... company (as defined in Rule 12b-2 of the Exchange Act). Yes ' No È The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2006, was approximately $55,976,249,541 (based on the last reported sale price of $44.78 per share on June 30, 2006, on the New York...

  • Page 2
    ...Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ... Item 9A. Controls and Procedures ...Item 9B. Other Information ...PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance...

  • Page 3
    ... on November 8, 2006, the Company filed with the SEC a Current Report on Form 8-K reporting management's conclusion, which the Audit Committee of the Board had approved, that - due solely to the Company's historic stock option practices - the Company's financial statements for the fiscal years ended...

  • Page 4
    ... the number of shares an individual employee was entitled to receive and the option or purchase price, if any, were known. The restatement in this Form 10-K principally reflects additional stock-based compensation expense and related tax effects under both FAS 123R, the Company's current accounting...

  • Page 5
    ...-Based Grants - Between 1,500 and 4,000 middle and senior management employees periodically and customarily received options. As described in the WilmerHale Report, our former chief executive officer, acting pursuant to authority delegated to him by the Compensation Committee, chose the grant dates...

  • Page 6
    ... the fourth quarter of 1999, following a decline in its stock price, the Company granted "supplemental" stock options to acquire 2.2 million shares of Company common stock (17.6 million shares on a split-adjusted basis) to a broad group of employees, including our former chief executive officer and...

  • Page 7
    ... at the date of the modification based upon the incremental fair value provided to the employee. 1999 Cancellation and Reissuance of Options. In the fourth quarter of 1999, the Company issued stock options to acquire an aggregate of 400,000 shares of Company common stock (3.2 million shares on...

  • Page 8
    ...controls and procedures were not effective as of that date. Item 9A of this Form 10-K further describes the conclusion of the Company's Chief Executive Officer and Chief Financial Officer, based upon management's evaluation of the effectiveness of the design and operation of the Company's disclosure...

  • Page 9
    ... and broadening the scope of our product offerings for a host of specialized services. On January 1, 2006, we began serving as a plan sponsor offering Medicare Part D prescription drug insurance coverage under a contract with the Centers for Medicare & Medicaid Services (CMS). As of December 31...

  • Page 10
    ... report our results of operations in our earnings releases and SEC filings (including this Form 10-K) using the four business segments described in " - Overview" above. Executive Compensation and Corporate Governance In addition to the senior leadership and business organization changes, our Board...

  • Page 11
    ...consumer and care provider services; and access to contracted networks of physicians, hospitals and other health care professionals for a fixed service fee per individual served. As of December 31, 2006, USS served approximately 405 employers, including approximately 180 of the Fortune 500 companies...

  • Page 12
    ...) or health savings accounts (HSAs), and are offered on a self-funded and fully insured basis. Definity Health is a national leader in consumer-driven health benefit programs and as of December 31, 2006, its products were provided to more than 18,000 group health plans across the UnitedHealth Group...

  • Page 13
    ... of the large employer group and public sector markets, and cross-selling of specialty products to existing customers. Ovations Ovations provides health and well-being services for individuals age 50 and older, addressing their unique needs for preventive and acute health care services as well as...

  • Page 14
    ... offers Medicare Advantage HMO, preferred provider organization (PPO), Special Needs Plans and Private-Fee-for-Service plans. Under the Medicare Advantage programs, Ovations provides health insurance coverage to eligible Medicare beneficiaries in exchange for a fixed monthly premium per member from...

  • Page 15
    ... Medicaid, Children's Health Insurance Programs (CHIP), and other government-sponsored health care programs. AmeriChoice provides health insurance coverage to eligible Medicaid beneficiaries in exchange for a fixed monthly premium per member from the applicable state. AmeriChoice provides services...

  • Page 16
    ... on behavioral health and substance abuse, dental, vision, disease management, complex and chronic illness and care facilitation. The SCS companies also offer solutions in the areas of complementary and alternative care, employee assistance, short-term disability, life insurance, work/life balance...

  • Page 17
    ... provides integrated short-term disability, critical illness and group life insurance products to employer's benefit programs. National Benefit Resources (NBR) distributes and administers medical stop-loss insurance covering self-funded employer benefit plans. Through a network of third-party...

  • Page 18
    ..., 250,000 physicians, 1,500 payers and intermediaries, more than 200 Fortune 500 companies, and more than 150 life sciences companies, as well as other UnitedHealth Group businesses. Ingenix is engaged in the simplification of health care administration with information and technology that helps...

  • Page 19
    ... contain network, contracting, product and rate, financial and reporting requirements. There are laws and regulations that set specific standards for delivery of services, payment of claims, fraud prevention, protection of consumer health information and covered benefits and services. Our pharmacy...

  • Page 20
    ... our business units may do business with employers who sponsor employee benefit health plans, particularly those that maintain self-funded plans. Regulations established by the U.S. Department of Labor provide additional rules for claims payment and member appeals under health care plans governed by...

  • Page 21
    ... of Public and Senior Markets Group Senior Vice President and Chief Accounting Officer Executive Vice President of UnitedHealth Group and President of Individual and Employer Markets Group 1997 2006 2005 2006 1998 2006 2004 Our Board of Directors elects executive officers annually. Our executive...

  • Page 22
    ...Group and President of the Public and Senior Markets Group and has served in that capacity since December 2006. From 2002 to December 2006, Ms. Quam served as Chief Executive Officer of Ovations. Ms. Quam joined UnitedHealth Group in 1989. Mr. Rangen is the Senior Vice President and Chief Accounting...

  • Page 23
    ... Purchases of Equity Securities (1) Fourth Quarter 2006 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that may yet be purchased under the Plans or Programs For the Month Ended Total Number of Shares Purchased Average Price Paid per Share...

  • Page 24
    ... (which is reflected in this Form 10-K) and become current in our periodic SEC filings. As a result, we did not repurchase any shares through this publicly announced program for the quarter ended December 31, 2006. (2) Represents shares of common stock withheld by the Company, as permitted by the...

  • Page 25
    ... UnitedHealth Group ...S & P 500 ...Fortune 50 Group ... 100.00 100.00 100.00 118.03 77.90 73.79 164.54 100.24 89.64 249.08 111.15 99.03 351.75 116.61 98.09 304.31 135.03 111.23 The stock price performance included in this graph is not necessarily indicative of future stock price performance...

  • Page 26
    ... companies included in our peer group are Aetna Inc, Cigna Corp., Coventry Health Care Inc., Humana Inc. and WellPoint Inc. We believe that this peer group accurately reflects our peers in the health care industry. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among UnitedHealth Group, The S & P 500...

  • Page 27
    ... included in UnitedHealth Group's Consolidated Financial Statements since the respective acquisition dates. (3) On January 1, 2006, the Company began serving as a plan sponsor offering Medicare Part D drug insurance coverage under a contract with CMS. Total revenues generated under this program were...

  • Page 28
    ... Condition and Results of Operations" and Note 3 of the Notes to Consolidated Financial Statements. Pre-tax adjustments related to 2003 and 2002 include non-cash stock-based compensation expense totaling $54 million and $62 million, respectively under FAS 123R, our current accounting method. The...

  • Page 29
    ...28.1% Financial Highlights and Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with the accompanying Consolidated Financial Statements and Notes. (1) UnitedHealth Group's historical accounting policy for stock-based compensation followed...

  • Page 30
    ...per share data) For the Year Ended December 31, 2003 APB 25 - Historical Accounting Method FAS 123R - Current Accounting Method As Reported Adjustments (1) As Restated Adoption (2) Adjustments (3) As Restated Revenues Premiums ...Services ...Products ...Investment and Other Income ...Total Revenues...

  • Page 31
    ... FAS 123R - Current Accounting Method As Reported Adjustments (1) As Restated Adoption (2) Adjustments (3) As Restated (in millions, except per share data) Revenues Premiums ...Services ...Products ...Investment and Other Income ...Total Revenues ...Operating Costs Medical Costs ...Operating Costs...

  • Page 32
    ..., cost-effective health care services and resources. We provide employers and consumers with superb value, service and support, and we deliver value to our shareholders by executing a business strategy founded upon a commitment to balanced growth, profitability and capital discipline. Financial...

  • Page 33
    ... Earnings Per Common Share: As Reported - APB 25 ...As Restated - APB 25 ...As Restated - FAS 123 Pro Forma . . 2006 Financial Performance Highlights UnitedHealth Group had very strong results in 2006. The Company achieved diversified growth across its business segments and generated net earnings of...

  • Page 34
    ... medical services; transaction processing; customer, consumer and care provider services; and access to contracted networks of physicians, hospitals and other health care professionals. Through our Prescription Solutions pharmacy benefit management (PBM) business, revenues are derived from products...

  • Page 35
    ... fee-based arrangements during 2006, as well as annual rate increases. In addition, Ingenix service revenues increased by approximately 23% due to new business growth in the health information and contract research businesses and from businesses acquired since the beginning of 2005. Product Revenues...

  • Page 36
    ... income tax rate was 36.3% in 2006 and in 2005. Business Segments The following summarizes the operating results of our business segments for the years ended December 31 (in millions): Revenues 2006 2005 (As Restated) Percent Change (As Restated) Health Care Services ...Uniprise ...Specialized Care...

  • Page 37
    ... of supplemental health insurance coverage on behalf of AARP and the delivery of the new Medicare Part D prescription drug benefit to beneficiaries throughout the United States. AmeriChoice provides network-based health and well-being services to state Medicaid, Children's Health Insurance Programs...

  • Page 38
    ...Total Health Care Services ... 10,040 4,735 14,775 1,410 4,500 1,425 22,110 10,105 3,990 14,095 1,150 - 1,250 16,495 (1) Excludes individuals served by Ovations' Medicare supplement products provided to AARP members as well as Medicare institutional and Medicaid long-term care members. The number...

  • Page 39
    ... over 2004, driven primarily by an increase in the number of individuals served by Medicare Advantage products and by Medicare supplement products provided to AARP members, as well as rate increases on these products. Premium revenues from AmeriChoice's Medicaid programs in 2005 totaled $3.3 billion...

  • Page 40
    ... was primarily due to pharmacy revenues at our PBM business, which was acquired in December 2005 with the purchase of PacifiCare, and increased revenues associated with the interim government-sponsored drug card program. Investment and Other Income Investment and other income totaled $505 million...

  • Page 41
    ...products provided to AARP members and by its Medicare Advantage products as well as rate increases on these products. The remaining increase in Health Care Services revenues is attributable to an 8% increase in AmeriChoice's revenues, excluding the impact of acquisitions, driven primarily by premium...

  • Page 42
    ... from 8.2% in 2004. This increase was driven mainly by the lower commercial medical care ratio as well as changes in business and customer mix. The following table summarizes the number of individuals served by Health Care Services, by major market segment and funding arrangement, as of December 31...

  • Page 43
    ... include our Board of Directors' approved investment policy, regulatory limitations, return objectives, tax implications, risk tolerance and maturity dates. Our longterm investments are also available for sale to meet short-term liquidity and other needs. Cash in excess of the capital needs of our...

  • Page 44
    ... monthly payments received in 2005, positively impacting the change in reported operating cash flows by $275 million, along with growth in medical payables during 2006 compared to 2005 primarily driven by overall growth of the insured business. Additionally, there was an increase in accrued taxes...

  • Page 45
    ... On December 1, 2006, our Health Care Services business segment acquired the Student Insurance Division (Student Resources) of The MEGA Life and Health Insurance Company through an asset purchase agreement. Under the terms of the asset purchase agreement, we issued a 10-year, 5.4% promissory note...

  • Page 46
    ... on Form 10-Q for the quarter ended June 30, 2006. Our indenture requires us to provide to the trustee copies of the reports we are required to file with the SEC, such as our quarterly reports, within 15 days of filing such reports with the SEC. On October 25, 2006, we filed an action in the United...

  • Page 47
    ... shares because we believe it is a prudent use of capital. The Company suspended purchases under its stock repurchase program in the third quarter of 2006 pending completion of our restatement (which is reflected in this Form 10-K) and becoming current in our periodic SEC filings. The Company...

  • Page 48
    ... internal development of new products, programs and technology applications, and may include acquisitions. Medicare Part D Pharmacy Benefits Contract Beginning January 1, 2006, the Company began serving as a plan sponsor offering Medicare Part D prescription drug insurance coverage under a contract...

  • Page 49
    ... the AARP Medicare Supplement Insurance business are directly recorded as an increase or decrease to a rate stabilization fund (RSF). The primary components of the underwriting results are premium revenue, medical costs, investment income, administrative expenses, member services expenses, marketing...

  • Page 50
    ... as time from date of service to claim receipt, claim backlogs, care provider contract rate changes, medical care consumption and other medical cost trends. 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...

  • Page 51
    ... incurred in prior months for which more complete claim data is available and by reviewing a broad set of health care utilization indicators including, but not limited to, pharmacy utilization trends, inpatient hospital census data and incidence data from the National Centers for Disease Control. We...

  • Page 52
    ... and actual medical costs payable, excluding the AARP business, 2006 earnings from operations would increase or decrease by $71 million and diluted net earnings per common share would increase or decrease by $0.03 per share. Historic Stock Option Measurement Dates The selection by the Company of the...

  • Page 53
    ...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...

  • Page 54
    ... 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. 52

  • Page 55
    ...Revenue Service seeking documents relating to stock option grants and other compensation for the persons who from 2003 to the present were the named executive officers in our annual proxy statements. On May 17, 2006, we received a subpoena from the U.S. Attorney for the Southern District of New York...

  • Page 56
    ... matters include, but are not limited to, claims relating to health care benefits coverage, medical malpractice actions, contract disputes and claims related to disclosure of certain business practices. Beginning in 1999, a series of class action lawsuits were filed against both UnitedHealthcare and...

  • Page 57
    ...of equity investments, a portion of which were 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 conditions that affect the value of health care or technology stocks will...

  • Page 58
    ...and WilmerHale had completed their review of the Company's stock option practices and reported the findings to the non-management directors of the Company. As a result of our historic stock option practices, we restated, in this Form 10-K, our previously filed financial statements, we are subject to...

  • Page 59
    ... Revenue Service seeking documents relating to stock option grants and other compensation for the persons who from 2003 to the present were named executive officers in the Company's annual proxy statements. We also received a subpoena from the U.S. Attorney for the Southern District of New York...

  • Page 60
    ... SEC's Office of the Chief Accountant on certain interpretive accounting issues, recorded additional cash and noncash stock-based compensation expenses, and related tax effects, with regard to certain past stock option grants, and restated previously filed financial statements included in this Form...

  • Page 61
    ... the federal government, including Medicare Part D prescription drug coverage, Medicare Advantage Regional PPOs, Private Fee for Service Plans and Special Needs Plans for chronically ill Medicare beneficiaries. We have invested considerable resources in creating new Medicare product offerings for...

  • Page 62
    ...levels may affect certain aspects of our business, including contracting with physicians, hospitals and other health care professionals; physician reimbursement methods and payment rates; coverage determinations; mandated benefits and minimum medical expenditures; claim payments and processing; drug...

  • Page 63
    ...of our service offerings. These matters include, among others, claims related to health care benefits coverage, medical malpractice actions, contract disputes and claims related to disclosure of certain business practices. We are also party to certain class action lawsuits brought by provider groups...

  • Page 64
    ... products and services, to provide effective and efficient service to our customers, and to accurately report our financial results depends on the integrity of the data in our information systems. As a result of technology initiatives, changes in our system platforms and integration of new business...

  • Page 65
    ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by this Item is incorporated herein by reference to Item 7 of this report under the heading "Quantitative and Qualitative Disclosures about Market Risk." 63

  • Page 66
    ... 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA UnitedHealth Group Consolidated Statements of Operations (in millions, except per share data) For the Year Ended December 31, 2006 2005 2004 (As Restated) (As Restated) Revenues Premiums ...Services ...Products ...Investment and Other Income ...Total...

  • Page 67
    ... Group Consolidated Balance Sheets (in millions, except per share data) As of December 31, 2006 2005 (As Restated) Assets Current Assets Cash and Cash Equivalents ...Short-Term Investments ...Accounts Receivable, net of allowances of $120 and $108 ...Assets Under Management ...Deferred Income Taxes...

  • Page 68
    ... ...5 Stock-Based Compensation, and related tax benefits ...- 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, 2006 ...1,345...

  • Page 69
    ... ...670 Deferred Income Taxes and Other ...(267) Stock-Based Compensation ...404 Net Change in Other Operating Items, net of effects from acquisitions, and changes in AARP balances: Accounts Receivable and Other Current Assets ...(411) Medical Costs Payable ...597 Accounts Payable and Other Accrued...

  • Page 70
    ... medical services; transaction processing; customer, consumer and care provider services; and access to contracted networks of physicians, hospitals and other health care professionals. Through our Prescription Solutions pharmacy benefits management (PBM) business, revenues are derived from products...

  • Page 71
    ... the member's applicable co-payment. Product revenues are recognized upon sale or shipment. Service revenues are recognized when the prescription claim is adjudicated. The Company has entered into retail service contracts that separately obligate us to pay our network pharmacy providers for benefits...

  • Page 72
    ... under the Medicare Part D program (See Note 4), customer balances related to experience-rated insurance products and the current portion of future policy benefits for life insurance and annuity contracts. Customer balances represent excess customer payments and deposit accounts under experience...

  • Page 73
    ...year term and may be cancelled upon 30 days notice by either the Company or the customer. Costs related to the acquisition and renewal of customer contracts are charged to expense as incurred. Stock-Based Compensation In December 2004, the Financial Accounting Standards Board (FASB) issued Statement...

  • Page 74
    ... carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, premium and other receivables, unearned premiums, accounts payable and accrued expenses, income taxes payable, and certain other current liabilities approximate fair value because of their short-term nature...

  • Page 75
    ...Financial Statements. 3. Restatement of Consolidated Financial Statements In March 2006, media reports questioned whether a number of companies, including UnitedHealth Group, had engaged in backdating stock option grants. Shortly thereafter, the Company was notified that the Securities and Exchange...

  • Page 76
    ... both the number of shares that an individual employee was entitled to receive and the option or purchase price, if any, were known. The restatement principally reflects additional stock-based compensation expense and related tax effects under both FAS 123R, the Company's current accounting method...

  • Page 77
    ...-Based Grants - Between 1,500 and 4,000 middle and senior management employees periodically and customarily received options. As described in the WilmerHale Report, our former chief executive officer, acting pursuant to authority delegated to him by the Compensation Committee, chose the grant dates...

  • Page 78
    ... the fourth quarter of 1999, following a decline in its stock price, the Company granted "supplemental" stock options to acquire 2.2 million shares of Company common stock (17.6 million shares on a split-adjusted basis) to a broad group of employees, including our former chief executive officer and...

  • Page 79
    ... at the date of the modification based upon the incremental fair value provided to the employee. 1999 Cancellation and Reissuance of Options. In the fourth quarter of 1999, the Company issued stock options to acquire an aggregate of 400,000 shares of Company common stock (3.2 million shares on...

  • Page 80
    ... Income Taxes Net Earnings Section 16 New Hire 1999 Grant Reactivation Other Stock- Total StockTotal Stockand and of of Cliff Based Based Other Based Other Broad-Based Promotion Supplemental Suspended Vesting Option Compensation Compensation Errors Compensation Errors Grants Grants Options Options...

  • Page 81
    ...Increase) to Decrease (Increase) to Earnings Before Income Taxes Net Earnings Section 16 New Hire 1999 Grant Reactivation Cliff Other Stock- Total Stock Total Stockand Broadand of of Vesting Based Based Other Based Other Based Promotion Supplemental Suspended Options Option Compensation Compensation...

  • Page 82
    ... based on the estimated grant date fair value accounting method as defined by FAS 123 for 2005 and 2004. (in millions, except per share data) 2005 2004 Net Earnings APB 25 As Reported-APB 25 Restatement Adjustments-APB 25: ...Compensation Expense, net of tax effects ...Other Adjustments, net of tax...

  • Page 83
    ... FAS 123R - Current Accounting Method As Reported Adjustments (1) As Restated Adoption (2) Adjustments (3) As Restated (in millions, except per share data) Revenues Premiums ...Services ...Products ...Investment and Other Income ...Total Revenues ...Operating Costs Medical Costs ...Operating Costs...

  • Page 84
    ... FAS 123R - Current Accounting Method As Reported Adjustments (1) As Restated Adoption (2) Adjustments (3) As Restated (in millions, except per share data) Revenues Premiums ...Services ...Products ...Investment and Other Income ...Total Revenues ...Operating Costs Medical Costs ...Operating Costs...

  • Page 85
    ... share data) As Reported Adjustments (1) As Restated FAS 123R - Current Accounting Method Adoption (2) Adjustments (3) As Restated Assets Current Assets Cash and Cash Equivalents Short-Term Investments ...Accounts Receivable, net ...Assets Under Management ...Deferred Income Taxes ...Other Current...

  • Page 86
    ... ...Deferred Income Taxes and Other ...Stock-Based Compensation ...Net Change in Other Operating Items, net of effects from acquisitions, and changes in AARP balances Accounts Receivable and Other Assets ...Medical Costs Payable ...Accounts Payable and Other Accrued Liabilities ...Unearned Premiums...

  • Page 87
    ... ...Deferred Income Taxes and Other ...Stock-Based Compensation ...Net Change in Other Operating Items, net of effects from acquisitions, and changes in AARP balances Accounts Receivable and Other Assets ...Medical Costs Payable ...Accounts Payable and Other Accrued Liabilities ...Unearned Premiums...

  • Page 88
    ...as a plan sponsor offering Medicare Part D prescription drug insurance coverage under a contract with the Centers for Medicare & Medicaid Services (CMS). Under the Medicare Part D program, there are six separate elements of payment received by the Company during the plan year. These payment elements...

  • Page 89
    ...contract year-end. The projected net risk-share payable to be paid to CMS as of December 31, 2006 was $350 million. 5. Acquisitions and Divestitures On December 1, 2006, our Health Care Services business segment acquired the Student Insurance Division (Student Resources) of The MEGA Life and Health...

  • Page 90
    ...): Fair Value Weighted-Average Useful Life Customer Contracts and Membership Lists ...Trademarks ...Physician and Hospital Networks ...Total Acquired Finite-Lived Intangible Assets ... $ 744 157 53 954 12 years 17 years 15 years 13 years $ The acquired goodwill is not deductible for income tax...

  • Page 91
    ... Health Care Services business segment acquired Neighborhood Health Partnership (NHP). NHP serves local employers primarily in South Florida. This acquisition strengthened our market position in this region and provided expanded distribution opportunities for our other UnitedHealth Group businesses...

  • Page 92
    ... investments are aggregated by investment type and length of time that individual securities have been in a continuous unrealized loss position (in millions)1: As of December 31, 2006 Less Than 12 Months Gross Fair Unrealized Value Losses 12 Months or Greater Gross Fair Unrealized Value Losses Total...

  • Page 93
    ... equity securities consists of investments held by our UnitedHealth Capital business in various public and nonpublic companies concentrated in the areas of health care delivery and related information technologies. Market conditions that affect the value of health care and related technology stocks...

  • Page 94
    ... 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...

  • Page 95
    ...adjusted based upon the applicable interest rate swap fair values in accordance with the fair value hedge short-cut method of accounting described below. (2) Estimated based on third-party quoted market prices for the same or similar issues. As of December 31, 2006, our outstanding commercial paper...

  • Page 96
    ... for working capital purposes as well as to pay or repay any outstanding borrowings of the Company. We have entered into amendments to our $7.5 billion credit facility to provide us with additional time to deliver to the lenders our quarterly reports on Form 10-Q for the quarters ended June 30, 2006...

  • Page 97
    ... 136.7 million shares of our common stock. The Company suspended purchases under this stock repurchase program in the third quarter of 2006 pending completion of the restatement (which is reflected in this Form 10-K) and becoming current in its periodic SEC filings. The Company intends to resume...

  • Page 98
    ... FAS 123R as of January 1, 2006. FAS 123R requires companies to measure compensation expense for all share-based payments (including employee stock options, stock appreciation rights and restricted stock) at fair value and recognize the expense over the related service period. We adopted FAS 123R...

  • Page 99
    ... service period (generally the vesting period) of the award, or to an employee's eligible retirement date under the award agreement, if earlier. For 2006, 2005 and 2004, we recognized compensation expense related to our stock-based compensation plans of $404 million ($259 million net of tax effects...

  • Page 100
    ... CEO and current CEO. The SERPs are non-contributory, unfunded and provide benefits based on years of service and compensation during employment. Pension expense is determined using various actuarial methods to estimate the total benefits ultimately payable to executives, and is allocated to service...

  • Page 101
    ... the AARP Medicare Supplement insurance business are directly recorded as an increase or decrease to a rate stabilization fund (RSF). The primary components of the underwriting results are premium revenue, medical costs, investment income, administrative expenses, member service expenses, marketing...

  • Page 102
    ... contract. The following AARP program-related assets and liabilities are included in our Consolidated Balance Sheets: Balance as of December 31, 2006 2005 (in millions) Accounts Receivable ...Assets Under Management ...Medical Costs Payable ...Other Policy Liabilities ...Other Current Liabilities...

  • Page 103
    ... benefit of California health care consumers, which has been accrued on our Consolidated Balance Sheets. Additionally, we agreed to invest $200 million in California's health care infrastructure to further health care services to the underserved populations of the California marketplace. The timing...

  • Page 104
    ...consolidating the actions into a single action. The action is captioned In re UnitedHealth Group Incorporated PSLRA Litigation. The action was brought by lead plaintiff California Public Employees Retirement System against the Company and certain of our current and former officers and directors. The...

  • Page 105
    ... matters include, but are not limited to, claims relating to health care benefits coverage, medical malpractice actions, contract disputes and claims related to disclosure of certain business practices. Beginning in 1999, a series of class action lawsuits were filed against both UnitedHealthcare and...

  • Page 106
    ... in government programs. We also are subject to a formal investigation of our historic stock option practices by the SEC, Internal Revenue Service, U.S. Attorney for the Southern District of New York, Minnesota Attorney General, and a related review by the Special Litigation Committee of the Company...

  • Page 107
    ...reportable business segments include the nature of operating activities, existence of separate senior management teams, and the type of information presented to the Company's chief operating decision-maker to evaluate our results of operations. Our accounting policies for business segment operations...

  • Page 108
    ...): Health Care Services Uniprise Specialized Care Services Ingenix Intersegment Eliminations Consolidated 2006 Revenues - External Customers ...Revenues - Intersegment ...Investment and Other Income ...Total Revenues ...Earnings From Operations ...Total Assets (1) ...Net Assets (1) ...Purchases of...

  • Page 109
    ...January 1, 2006. FAS 123R - Current Accounting Method For the Quarter Ended March 31 June 30 September 30 December 31 (in millions, except per share data) 2006 Revenues ...Operating Costs ...Earnings From Operations ...Net Earnings ...Basic Net Earnings per Common Share ...Diluted Net Earnings per...

  • Page 110
    ... FAS 123R - Current Accounting Method As Reported Adjustments (1) As Restated Adoption (2) Adjustments (3) As Restated (in millions, except per share data) Revenues Premiums ...Services ...Products ...Investment and Other Income ...Total Revenues ...Operating Costs Medical Costs ...Operating Costs...

  • Page 111
    ...of Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment in 2006. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as...

  • Page 112
    ... fiscal year ended December 31, 2005. As reported in a Current Report on Form 8-K filed with the SEC on November 8, 2006, management concluded that the Company had a material weakness in internal control over financial reporting solely relating to stock option plan administration and accounting for...

  • Page 113
    ... controls around the preparation and review of stock-based compensation information in the Company's financial reports. Established an Equity Award Working and Oversight Group, comprised of senior tax, legal, human capital and accounting/finance personnel, to review all recommended equity awards to...

  • Page 114
    ... and equity exercise administration processes and report the results of its review to the Compensation Committee on a quarterly basis. • The Company made the following personnel changes during the fourth quarter of 2006 The Company's Chief Executive Officer, General Counsel and head...

  • Page 115
    ... L. Mikan III Executive Vice President and Chief Financial Officer /S/ ERIC S. RANGEN Eric S. Rangen Senior Vice President and Chief Accounting Officer March 6, 2007 New York Stock Exchange Certification Pursuant to Section 303A.12(a) of the NYSE listed company manual, the Company submitted an...

  • Page 116
    ... opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other...

  • Page 117
    ... of the UnitedHealth Group Incorporated 2002 Stock Incentive Plan, as amended, and the 1993 Qualified Employee Stock Purchase Plan, as amended. Includes 26,779,128 options to acquire shares of common stock that were originally issued under the United HealthCare Corporation 1998 Broad-Based 115

  • Page 118
    ... and Transactions" and "Corporate Governance" in our definitive proxy statement for the Annual Meeting of Shareholders to be held May 29, 2007, and such required information is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by Item 9(e) of...

  • Page 119
    ... Bylaws of UnitedHealth Group Incorporated (incorporated by reference to Exhibit 3(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 2002) Senior Indenture, dated as of November 15, 1998, between United HealthCare Corporation and The Bank of New York (incorporated by...

  • Page 120
    ...of the Company's Annual Report on Form 10-K for the year ended December 31, 2003) First Amendment to UnitedHealth Group Executive Savings Plans (2004 Statement) (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K dated October 31, 2006) UnitedHealth Group Directors...

  • Page 121
    ... UnitedHealth Group Incorporated and William W. McGuire, M.D. *10(hh) Employment Agreement, dated as of October 16, 1998, between United HealthCare Services, Inc. and David J. Lubben, as amended (incorporated by reference to Exhibit 10(p) to the Company's Annual Report on Form 10-K for the year...

  • Page 122
    ... UnitedHealth Group Incorporated PSLRA Litigation" (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated November 29, 2006) 12 21 23 24 31 32 99 * ** Denotes management contracts and compensation plans in which certain directors and named executive officers...

  • Page 123
    ... duly authorized. Dated: March 6, 2007 UNITEDHEALTH GROUP INCORPORATED By /S/ STEPHEN J. HEMSLEY Stephen J. Hemsley President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf...

  • Page 124
    ...Bylaws of UnitedHealth Group Incorporated (incorporated by reference to Exhibit 3(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 2002) 4(a) Senior Indenture, dated as of November 15, 1998, between United HealthCare Corporation and The Bank of New York (incorporated by...

  • Page 125
    ...of the Company's Annual Report on Form 10-K for the year ended December 31, 2003) First Amendment to UnitedHealth Group Executive Savings Plans (2004 Statement) (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K dated October 31, 2006) UnitedHealth Group Directors...

  • Page 126
    ... to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000) Letter, dated as of November 9, 2006, from Lois E. Quam to UnitedHealth Group Incorporated Employment Agreement, dated as of December 15, 2006, by and between United HealthCare Services, Inc. and Eric...

  • Page 127
    ... "In re UnitedHealth Group Incorporated PSLRA Litigation" (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated November 29, 2006) Denotes management contracts and compensation plans in which certain directors and named executive officers participate and which...

  • Page 128
    ...Officer I, Stephen J. Hemsley, Chief Executive Officer and President of UnitedHealth Group Incorporated, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of UnitedHealth Group Incorporated (the "registrant"); Based on my knowledge, this report does not contain any untrue statement...

  • Page 129
    ... III, Executive Vice President and Chief Financial Officer of UnitedHealth Group Incorporated, certify that: 1. 2. I have reviewed this report on Form 10-K of UnitedHealth Group Incorporated (the "registrant"); Based on my knowledge, this report does not contain any untrue statement of a material...

  • Page 130
    ... with the Annual Report of UnitedHealth Group Incorporated (the "Company") on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, George L. Mikan III, Executive Vice President and Chief Financial Officer of the...