United Healthcare 2012 Annual Report Download - page 60

the amount of medical costs payable is reasonable and adequate to cover our liability for unpaid claims as of
December 31, 2012; however, actual claim payments may differ from established estimates as discussed above.
Assuming a hypothetical 1% difference between our December 31, 2012 estimates of medical costs payable and
actual medical costs payable, excluding AARP Medicare Supplement Insurance and any potential offsetting
impact from premium rebates, 2012 net earnings would have increased or decreased by $62 million.
Revenues
Revenues are principally derived from health care insurance premiums. We recognize premium revenues in the
period eligible individuals are entitled to receive health care services. Customers are typically billed monthly at a
contracted rate per eligible person multiplied by the total number of people eligible to receive services, as
recorded in our records.
Effective in 2011, U.S. commercial health plans with medical loss ratios on fully insured products, as calculated
under the definitions in the Health Reform Legislation, that fall below certain targets are required to rebate
ratable portions of their premiums to their customers annually. Premium revenues are recognized based on the
estimated premiums earned net of projected rebates because we are able to reasonably estimate the ultimate
premiums of these contracts. Each period, we estimate premium rebates based on the expected financial
performance of the applicable contracts within each defined aggregation set (e.g., by state, group size and
licensed subsidiary). The most significant factors in estimating the financial performance are current and future
premiums and medical claim experience, effective tax rates and expected changes in business mix. The estimated
ultimate premium is revised each period to reflect current and projected experience.
Our Medicare Advantage and Part D premium revenues are subject to periodic adjustment under CMS’ risk
adjustment payment methodology. The CMS risk adjustment model provides higher per member payments for
enrollees diagnosed with certain conditions and lower payments for enrollees who are healthier. We and health
care providers collect, capture, and submit available diagnosis data to CMS within prescribed deadlines. CMS
uses submitted diagnosis codes, demographic information, and special statuses to determine the risk score for
most Medicare Advantage beneficiaries. CMS also retroactively adjusts risk scores during the year based on
additional data. We estimate risk adjustment revenues based upon the data submitted and expected to be
submitted to CMS. As a result of the variability of factors that determine such estimations, the actual amount of
CMS’ retroactive payments could be materially more or less than our estimates. This may result in favorable or
unfavorable adjustments to our Medicare premium revenue and, accordingly, our profitability. Risk adjustment
data for certain of our plans is subject to review by the government, including audit by regulators. See Note 12 of
Notes to the Consolidated Financial Statements included in Item 8, “Financial Statements” for additional
information regarding these audits.
Goodwill and Intangible Assets
Goodwill. Goodwill represents the amount of the purchase price in excess of the fair values assigned to the
underlying identifiable net assets of acquired businesses. Goodwill is not amortized, but is subject to an annual
impairment test. Tests are performed more frequently if events occur or circumstances change that would more
likely than not reduce the fair value of the reporting unit below its carrying amount.
To determine whether goodwill is impaired, we perform a multi-step impairment test. First, we can elect to
perform a qualitative assessment of each reporting unit to determine whether facts and circumstances support a
determination that their fair values are greater than their carrying values. If the qualitative analysis is not
conclusive, or if we elect to proceed directly with quantitative testing, we will then measure the fair values of the
reporting units and compare them to their aggregate carrying values, including goodwill. If the fair value is less
than the carrying value of the reporting unit, then the implied value of goodwill would be calculated and
compared to the carrying amount of goodwill to determine whether goodwill is impaired.
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