United Healthcare 2007 Annual Report Download - page 29

Service Revenues.Service revenues in 2006 totaled $4.3 billion, an increase of $602 million, or 16%, over 2005.
Excluding the impact of acquisitions since the beginning of 2005, service revenues increased by approximately
12% over 2005. The increase in service revenues was primarily driven by aggregate growth of 8% in the number
of individuals served by commercial fee-based arrangements during 2006, as well as annual rate increases. In
addition, Ingenix service revenues increased by approximately 22% 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 increased pharmacy sales at Prescription Solutions, 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 and $10 million in 2005.
Medical Costs
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.
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.
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. The medical cost trend was due to both medical inflation and increases in
health care consumption.
Operating Costs
The operating cost ratio 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 share-based compensation expense.
Operating costs in 2006 totaled $10.0 billion, an increase of $2.8 billion, or 40%, over 2005. Excluding the
impact of businesses acquired since the beginning of 2005, operating costs increased by approximately 13% over
2005. The increase was primarily due to the new Medicare Part D program as well as a 4% increase in the total
number of individuals served by Health Care Services during 2006 (excluding the impact of acquisitions since
the beginning of 2005), growth in OptumHealth and Ingenix, general operating cost inflation, and the specific
items discussed above, partially offset by productivity gains from technology deployment, cost savings
associated with acquisition integrations and other cost management initiatives.
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