United Healthcare 2006 Annual Report Download - page 89

the last half of the contract year, when comparatively more members will be incurring claims above the $2,250
initial coverage limit. The uneven timing of Medicare Part D pharmacy benefit claims results in losses in the first
half of 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 Statement 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 reverse in the second half of the year and final risk-share
amounts due to or from CMS, if any, are settled approximately six months after the contract year-end. The
projected net risk-share payable to be paid to CMS as of December 31, 2006 was $350 million.
5. Acquisitions and Divestitures
On December 1, 2006, our Health Care Services business segment acquired the Student Insurance Division
(Student Resources) of The MEGA Life and Health Insurance Company through an asset purchase agreement.
Student Resources primarily serves college and university students. This acquisition strengthened our position in
this market and provided expanded distribution opportunities for our other UnitedHealth Group businesses. In
exchange and under the terms of the asset purchase agreement, we issued a 10-year, $95 million promissory note
bearing a 5.4% fixed interest rate and paid approximately $1 million in cash. The results of operations and
financial condition of Student Resources have been included in our Consolidated Financial Statements since the
acquisition date. The pro forma effects of the Student Resources acquisition on our Consolidated Financial
Statements were not material.
On February 24, 2006, the Company acquired John Deere Health Care, Inc. (JDHC). JDHC serves employers
primarily in Iowa, central and western Illinois, eastern Tennessee and southwestern Virginia. This acquisition
strengthened our resources and capabilities in these areas. The operations of JDHC reside primarily within our
Health Care Services and Uniprise segments. We paid approximately $515 million in cash, including transaction
costs, in exchange for all of the outstanding equity of JDHC. The purchase price and costs associated with the
acquisition exceeded the estimated preliminary fair value of the net tangible assets acquired by approximately
$376 million. Based on management’s consideration of fair value, which included completion of a valuation
analysis, we have allocated the excess purchase price over the fair value of the net tangible assets acquired to
finite-lived intangible assets of $60 million and goodwill of $316 million. The finite-lived intangible assets
consist primarily of member lists and physician and hospital networks, with an estimated weighted-average
useful life of approximately 15 years. The acquired goodwill is deductible for income tax purposes. The results
of operations and financial condition of JDHC have been included in our consolidated financial statements since
the acquisition date. The pro forma effects of the JDHC acquisition on our consolidated financial statements were
not material. Acquired net tangible assets and liabilities are categorized as follows: cash and cash equivalents of
$46 million; investments of $197 million; accounts receivable and other current assets of $60 million; property,
equipment and capitalized software and other assets of $29 million; medical costs payable of $131 million and
other liabilities of $62 million. JDHC has been renamed UnitedHealthcare Services Company of the River
Valley, Inc.
On December 20, 2005, the Company acquired PacifiCare Health Systems, Inc. (PacifiCare). PacifiCare provides
health care and benefit services to individuals and employers, principally in markets in the western United States.
This merger significantly strengthened our resources by enhancing our capabilities on the Pacific Coast and in
other western states and broadening the scope of our product offerings for a host of specialized services. The
operations of PacifiCare reside primarily within our Health Care Services and Specialized Care Services
segments. Under the terms of the agreement, PacifiCare shareholders received 1.1 shares of UnitedHealth Group
common stock and $21.50 in cash for each share of PacifiCare common stock they owned. Total consideration
issued for the transaction was approximately $8.8 billion, composed of approximately 99.2 million shares of
UnitedHealth Group common stock (valued at approximately $5.3 billion based upon the average of
UnitedHealth Group’s share closing price for two days before, the day of and two days after the acquisition
announcement date of July 6, 2005), approximately $2.1 billion in cash, $960 million cash paid to retire
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