United Healthcare 2007 Annual Report Download - page 38

California’s health care infrastructure to further health care services to the underserved populations of the
California marketplace, of which $8 million was invested at December 31, 2007. The timing and amount of
individual contributions and investments are at our discretion subject to the advice and oversight of the local
regulatory authorities; however, our goal is to have the investment commitment fully funded by the end of 2010.
The investment commitment remains in place for 20 years after funding. The unfunded charitable commitment
and investment commitment have been included in the above table.
At December 31, 2007, we had pending cash acquisitions. See Note 4 of Notes of the Consolidated Financial
Statements for further detail.
We do not have any other material contractual obligations, off-balance sheet arrangements or commitments that
require cash resources; however, we continually evaluate opportunities to expand our operations. This includes
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 contracts with CMS. The Company contracts with CMS on an annual basis.
Under Medicare Part D, members have access to a standard drug benefit that features a monthly premium,
typically with an initial annual deductible, coinsurance of 25% for the member and 75% for the Company up to
an initial coverage limit of $2,400 of annual drug costs, no insurance coverage between $2,400 and $5,451
(except the member gets the benefit of the Company’s significant drug discounts), and catastrophic coverage for
annual drug costs in excess of $5,451 covered approximately 80% by CMS, 15% by the Company and 5% by the
member up to an annual out-of-pocket maximum of $3,850.
The Company’s contract with CMS includes risk-sharing provisions, wherein CMS retains approximately 75% to
80% of the losses or profits outside a pre-defined risk corridor. The risk-sharing provisions take effect if actual
pharmacy benefit costs are more than 2.5% above or below expected cost levels as submitted by the Company in
its initial contract application. Contracts are generally non-cancelable by enrollees; however, enrollees may
change plans during an annual enrollment period each year.
As a result of the Medicare Part D product benefit design, the Company incurs a disproportionate amount of
pharmacy benefit costs early in the contract year. While the Company is responsible for approximately 67% of a
Medicare Part D beneficiary’s drug costs up to $2,400, the beneficiary is responsible for 100% of their drug costs
from $2,400 up to $5,451 (at the Company’s discounted purchase price). Consequently, the Company incurs a
disproportionate amount of pharmacy benefit costs in the first half of the contract year as compared with the last
half of the contract year, when comparatively more members will be incurring claims above the $2,400 initial
coverage limit. The uneven timing of Medicare Part D pharmacy benefit claims results in losses in the first half
of the year that entitle the Company to risk-share adjustment payments from CMS. Accordingly, during the
interim periods within the contract year we record a net risk-share receivable from CMS in Other Current Assets
in the Consolidated Balance Sheets and a corresponding retrospective premium adjustment in Premium Revenues
in the Consolidated Statements of Operations. This represents the estimated amount payable by CMS to the
Company under the risk-share contract provisions if the program were terminated based on estimated costs
incurred through that interim period. Those losses are typically expected to reverse in the second half of the year.
Total premium revenues from CMS related to the Medicare Part D program and all other Medicare-related
programs were approximately 25% of our total consolidated revenues for the twelve months ended December 31,
2007.
As of January 1, 2008, certain changes were made to the Medicare Part D coverage by CMS, including:
• The initial coverage limit increased to $2,510.
• The catastrophic coverage begins at $5,726.
36