United Healthcare 2013 Annual Report Download - page 72

capture, and submit the necessary and available diagnosis data to CMS within prescribed deadlines. The
Company estimates risk adjustment revenues based upon the diagnosis data submitted and expected to be
submitted to CMS. Risk adjustment data for certain of the Company’s plans is subject to review by the
government, including audit by regulators. See Note 12 for additional information regarding these audits.
Service revenues consist primarily of fees derived from services performed for customers that self-insure the
health care costs of their employees and employees’ dependants. Under service fee contracts, the Company
recognizes revenue in the period the related services are performed. The customers retain the risk of financing
health care costs for their employees and employees’ dependants, and the Company administers the payment of
customer funds to physicians and other health care professionals from customer-funded bank accounts. As the
Company has neither the obligation for funding the health care costs, nor the primary responsibility for providing
the medical care, the Company does not recognize premium revenue and medical costs for these contracts in its
Consolidated Financial Statements.
For both risk-based and fee-based customer arrangements, the Company provides coordination and facilitation of
medical services; transaction processing; customer, consumer and care professional services; and access to
contracted networks of physicians, hospitals and other health care professionals. These services are performed
throughout the contract period.
For the Company’s OptumRx pharmacy benefits management (PBM) business, revenues are derived from products
sold through a contracted network of retail pharmacies or mail services, and from administrative services, including
claims processing and formulary design and management. Product revenues include ingredient costs (net of
rebates), a negotiated dispensing fee and customer co-payments for drugs dispensed through the Company’s mail-
service pharmacy. In retail pharmacy transactions, revenues recognized exclude the member’s applicable co-
payment. Product revenues are recognized when the prescriptions are dispensed through the retail network or
received by consumers through the Company’s mail-service pharmacy. Service revenues are recognized when the
prescription claim is adjudicated. The Company has entered into retail service contracts in which it is primarily
obligated to pay its network pharmacy providers for benefits provided to their customers regardless if the Company
is paid. The Company is also involved in establishing the prices charged by retail pharmacies, determining which
drugs will be included in formulary listings and selecting which retail pharmacies will be included in the network
offered to plan sponsors’ members. As a result, revenues are reported on a gross basis.
Medical Costs and Medical Costs Payable
Medical costs and medical costs payable include estimates of the Company’s obligations for medical care
services that have been rendered on behalf of insured consumers, but for which claims have either not yet been
received or processed, and for liabilities for physician, hospital and other medical cost disputes. The Company
develops 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 processing backlogs, care provider contract rate changes, medical care utilization
and other medical cost trends. The Company estimates 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, the Company re-examines previously established medical costs payable estimates based
on actual claim submissions and other changes in facts and circumstances. As the medical costs payable
estimates recorded in prior periods develop, the Company adjusts the amount of the estimates and includes the
changes in estimates in medical costs in the period in which the change is identified. Medical costs also include
the direct cost of patient care rendered through OptumHealth.
Cash, Cash Equivalents and Investments
Cash and cash equivalents are highly liquid investments that 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.
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