United Healthcare 2006 Annual Report Download - page 51

In developing our medical costs payable estimates, we apply different estimation methods depending on the
month for which incurred claims are being estimated. For example, we actuarially calculate completion factors
using an analysis of claim adjudication patterns over the most recent 36-month period. A completion factor is an
actuarial estimate, based upon historical experience, of the percentage of incurred claims during a given period
that have been adjudicated by the Company as of the date of estimation. For months prior to the most recent three
months, we apply the completion factors to actual claims adjudicated-to-date in order to estimate the expected
amount of ultimate incurred claims for those months. We do not believe that completion factors are a reliable
basis for estimating claims incurred for the most recent three months as there is typically insufficient claim data
available for those months to calculate credible completion factors. Accordingly, for the most recent three
months, we estimate claim costs incurred primarily by applying observed medical cost trend factors to the
average per member per month (PMPM) medical costs incurred in prior months for which more complete claim
data is available, supplemented by a review of near-term completion factors. Medical cost trend factors are
developed through a comprehensive analysis of claims 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 also consider completion factors in developing medical cost estimates for the most recent
months. This approach is consistently applied from period to period.
Completion factors are the most significant factors we use in developing our medical costs payable estimates for
older periods, generally periods prior to the most recent three months. The following table illustrates the
sensitivity of these factors and the estimated potential impact on our medical costs payable estimates for those
periods as of December 31, 2006:
Completion Factor
Increase (Decrease) in Factor
Increase (Decrease) in
Medical Costs Payable (1)
(in millions)
(0.75)% ............................................... $126
(0.50)% ............................................... $ 84
(0.25)% ............................................... $ 42
0.25% ................................................. $ (42)
0.50% ................................................. $ (84)
0.75% ................................................. $(126)
Medical cost PMPM trend factors are the most significant factors we use in estimating our medical costs payable
for the most recent three months. The following table illustrates the sensitivity of these factors and the estimated
potential impact on our medical costs payable estimates for the most recent three months as of December 31,
2006:
Medical Cost PMPM Trend
Increase (Decrease) in Factor
Increase (Decrease) in
Medical Costs Payable (2)
(in millions)
3% ................................................... $247
2% ................................................... $165
1% ................................................... $ 82
(1)% .................................................. $ (82)
(2)% .................................................. $(165)
(3)% .................................................. $(247)
(1) Reflects estimated potential changes in medical costs and medical costs payable caused by changes in
completion factors used in developing medical cost payable estimates for older periods, generally periods
prior to the most recent three months.
(2) Reflects estimated potential changes in medical costs and medical costs payable caused by changes in
medical costs PMPM trend data used in developing medical cost payable estimates for the most recent three
months.
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