United Healthcare 2006 Annual Report Download - page 35

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Service Revenues Service revenues in 2006 totaled $4.3 billion, an increase of $602 million, or 16%, over 2005.
Excluding the impact of acquisitions, service revenues increased by approximately 12% over 2005. The increase
in service revenues was driven primarily by aggregate growth of 8% in the number of individuals served by
Uniprise and UnitedHealthcare under 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 Product revenues in 2006 totaled $737 million, an increase of $579 million over 2005. This
was primarily due to pharmacy revenues at our PBM business, which was acquired in December 2005 with the
purchase of PacifiCare.
Investment and Other Income Investment and other income during 2006 totaled $871 million, representing an
increase of $366 million over 2005. Interest income increased by $372 million in 2006, principally due to the
impact of increased levels of cash and fixed-income investments during the year, due in part to the acquisition of
PacifiCare, as well as higher yields on fixed-income investments. Net capital gains on sales of investments were
$4 million in 2006, compared with net capital gains of $10 million in 2005.
Medical Costs
The combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation
efforts is reflected in the medical care ratio (medical costs as a percentage of premium revenues). The
consolidated medical care ratio increased from 80.0% in 2005 to 81.2% in 2006. This medical care ratio increase
resulted primarily from the impact of the acquisition of PacifiCare and launch of the Medicare Part D program,
both of which carry a higher medical care ratio than the historic UnitedHealth Group businesses.
For each period, our operating results include the effects of revisions in medical cost estimates related to all prior
periods. Changes in medical cost estimates related to prior fiscal years, resulting from more complete claim
information and other facts and circumstances, that are identified in the current year are included in total medical
costs reported for the current fiscal year. Medical costs for 2006 include approximately $430 million of favorable
medical cost development related to prior fiscal years. Medical costs for 2005 include approximately
$400 million of favorable medical cost development related to prior fiscal years. The increase in favorable
medical cost development in 2006 was driven by an increase in medical payables due to organic growth and
businesses acquired since the beginning of 2005.
Medical costs for 2006 increased $19.6 billion, or 58%, to $53.3 billion, due to the impact of businesses acquired
since the beginning of 2005, medical costs associated with the new Medicare Part D program and a medical cost
trend of 7% to 8% on commercial risk-based business. Medical costs associated with the new Medicare Part D
program for 2006 were $4.9 billion. Medical trend was due to both medical inflation and increases in health care
consumption.
Operating Costs
The operating cost ratio (operating costs as a percentage of total revenues) for 2006 of 14.0%, improved from
15.4% in 2005. This decrease was primarily driven by revenue mix changes, with premium revenues growing at
a faster rate than service revenues primarily due to the new Medicare Part D program and the PacifiCare
acquisition. Operating costs as a percentage of premium revenues are generally considerably lower than
operating costs as a percentage of fee-based revenues. The decrease in the operating cost ratio reflected
productivity gains from technology deployment and other cost management initiatives, including cost savings
associated with the PacifiCare acquisition integration, and an insurance recovery of $43 million. These items
were partially offset by a $22 million charitable contribution to the United Health Foundation and approximately
$44 million of additional cash expenses related to the stock option review, exclusive of the FAS 123R
compensation expense.
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