United Healthcare 2005 Annual Report Download - page 35

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. If the
revised estimate of prior period medical costs is less than the previous estimate, we will decrease reported
medical costs in the current period (favorable development). If the revised estimate of prior period medical costs
is more than the previous estimate, we will increase reported medical costs in the current period (unfavorable
development). Historically, the net impact of estimate developments has represented less than 1% of annual
medical costs, less than 5% of annual earnings from operations and less than 4% of medical costs payable.
In order to evaluate the impact of changes in medical cost estimates for any particular discrete period, one should
consider both the amount of development recorded in the current period pertaining to prior periods and the
amount of development recorded in subsequent periods pertaining to the current period. The accompanying table
provides a summary of the net impact of favorable development on medical costs and earnings from operations
(in millions).
Favorable
Development
Net Impact
on Medical
Costs(a)
Medical Costs Earnings from Operations
As Reported As Adjusted(b) As Reported As Adjusted(b)
2002 .................... $ 70 ($ 80) $18,192 $18,112 $2,186 $2,266
2003 .................... $150 ($ 60) $20,714 $20,654 $2,935 $2,995
2004 .................... $210 ($190) $27,000 $26,810 $4,101 $4,291
2005 .................... $400 (c) $32,725 (c) $5,373 (c)
(a) The amount of favorable development recorded in the current year pertaining to the prior year less the amount of
favorable development recorded in the subsequent year pertaining to the current year.
(b) Represents reported amounts adjusted to reflect the net impact of medical cost development.
(c) Not yet determinable as the amount of prior period development recorded in 2006 will change as our December 31, 2005
medical costs payable estimate develops throughout 2006.
Our estimate of medical costs payable represents management’s best estimate of the company’s liability for
unpaid medical costs as of December 31, 2005, developed using consistently applied actuarial methods.
Management believes the amount of medical costs payable is reasonable and adequate to cover the company’s
liability for unpaid claims as of December 31, 2005; however, actual claim payments may differ from established
estimates. The increase in favorable medical cost development in 2005 was driven primarily by lower than
anticipated medical costs as well as growth in the size of the medical cost base and related medical payables due
to organic growth and businesses acquired since the beginning of 2004. Assuming a hypothetical 1% difference
between our December 31, 2005 estimates of medical costs payable and actual costs payable, excluding the
AARP business, 2005 earnings from operations would increase or decrease by $63 million and diluted net
earnings per common share would increase or decrease by $0.03 per share.
Contingent Liabilities
Because of the nature of our businesses, we are routinely involved in various disputes, legal proceedings and
governmental audits and investigations. We record liabilities for our estimates of the probable costs resulting
from these matters. Our estimates are developed in consultation with outside legal counsel and are based upon an
analysis of potential results, assuming a combination of litigation and settlement strategies and considering our
insurance coverages, if any, for such matters. We do not believe any matters currently threatened or pending will
have a material adverse effect on our consolidated financial position or results of operations. It is possible,
however, that future results of operations for any particular quarterly or annual period could be materially
affected by changes in our estimates or assumptions.
Goodwill, Intangible Assets and Other Long-Lived Assets
As of December 31, 2005, we had long-lived assets, including goodwill, other intangible assets, property,
equipment and capitalized software, of $19.9 billion. We review our goodwill for impairment annually at the
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