Medical Costs for UnitedHealth

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UNH » Topics » Medical Costs

These excerpts taken from the UNH 10-K filed Feb 11, 2009.

Medical Costs

Medical costs for 2008 increased primarily due to medical cost inflation, acquisitions completed in 2008 and growth in Ovations Medicare Advantage and Medicare Supplement products, partially offset by a decrease in the number of individuals served through both UnitedHealthcare risk-based products and Medicare Part D prescription drug plans.

The medical care ratio, calculated as medical costs as a percentage of premium revenues, reflects the combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation efforts. Our consolidated medical care ratio increase was primarily driven by premium rates advancing more slowly than medical costs in 2008 for certain risk-based products in the commercial, senior and behavioral care markets.

Medical Costs

The consolidated medical care ratio decreased primarily due to a decrease in the medical care ratio relating to Ovations which was partially offset by an increase in the commercial medical care ratio resulting from our

internal pricing decisions in a competitive commercial risk-based pricing environment, as well as a shift from favorable medical cost development for UnitedHealthcare during 2006 to unfavorable medical cost development during 2007.

Medical costs for 2007 included approximately $420 million of favorable medical cost development related to prior fiscal years. Medical costs for 2006 included approximately $430 million of favorable medical cost development related to prior fiscal years.

Medical costs for 2007 increased primarily due to an annual medical cost trend of 7% to 8% on commercial risk-based business due to medical cost inflation and increased utilization, as well as growth in Ovations Medicare programs, partially offset by a decrease in the number of individuals served by commercial risk-based products.

This excerpt taken from the UNH 10-Q filed Nov 7, 2008.

Medical Costs

Medical costs for the three and nine months ended September 30, 2008 were $14.9 billion and $45.3 billion, respectively, an increase of $1.4 billion, or 11%, and $3.5 billion, or 8%, over the comparable 2007 periods, primarily due to medical cost inflation, acquisitions completed in 2008 and growth in Ovations products, partially offset by a decrease in the number of individuals served through both UnitedHealthcare risk-based products and Medicare Part D prescription drug plans.

The combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation efforts is reflected in the medical care ratio, calculated as medical costs as a percentage of premium revenues. Our consolidated medical care ratios for the three and nine months ended September 30, 2008 of 81.7% and 82.4%, respectively, increased 220 basis points and 160 basis points from 79.5% and 80.8% in the comparable 2007 periods, primarily driven by SecureHorizons Medicare Advantage products, where risk-adjusted revenue yields have been lower than anticipated, gross margin pressures in Special Needs Plans and reduced gross margin performance in Medicare Part D prescription drug plans, particularly in the lower income, government-subsidized population. Also contributing to the increase in consolidated medical care ratios were UnitedHealthcare’s premium yield increases that did not fully match medical cost trend and an increased mix effect from low margin national account pharmaceutical benefit business.

ended September 30, 2007 included approximately $70 million in net favorable medical cost development related to prior fiscal years and approximately $70 million of net favorable medical cost development related to the first and second quarters of 2007. For the nine months ended September 30, 2008 and 2007, medical costs included approximately $210 million and $350 million, respectively, of net favorable medical cost development related to prior fiscal years.

This excerpt taken from the UNH 10-Q filed Aug 7, 2008.

Medical Costs

Medical costs for the three and six months ended June 30, 2008 were $15.3 billion and $30.4 billion, respectively, an increase of $1.3 billion, or 9%, and $2.0 billion, or 7%, over the comparable 2007 periods primarily due to medical cost inflation, the acquisition of Sierra and growth in Ovations products, partially offset by a decrease in the number of individuals served through both UnitedHealthcare risk-based products and Medicare Part D prescription drug plans.

The combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation efforts is reflected in the medical care ratio, calculated as medical costs as a percentage of premium revenues. Our consolidated medical care ratios for the three and six months ended June 30, 2008 of 83.2% and 82.8%, respectively, increased 290 basis points and 130 basis points from 80.3% and 81.5% in the comparable 2007 periods, primarily driven by SecureHorizons Medicare Advantage products, where risk-adjusted revenue yields have been lower than anticipated, gross margin pressures in Special Needs Plans and reduced gross margin performance in Medicare Part D prescription drug plans, particularly in the lower income, government-subsidized population. Also contributing to the increase in consolidated medical care ratios were UnitedHealthcare’s premium yield increases that did not fully match medical cost trend and an increased mix of national account pharmaceutical benefit business. Partially offsetting these increases were decreases in medical care ratios at AmeriChoice.

This excerpt taken from the UNH 10-Q filed May 2, 2008.

Medical Costs

Medical costs for the quarter ended March 31, 2008 were $15.1 billion, an increase of $704 million, or 5%, over the comparable 2007 period primarily due to medical cost inflation, unusually high influenza costs, the acquisition of Sierra and growth in the Ovations products, partially offset by a decrease in the number of individuals served through Commercial Markets risk-based products.

The combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation efforts is reflected in the medical care ratio, calculated as medical costs as a percentage of premium revenues. Our consolidated medical care ratio for the three months ended March 31, 2008 of 82.4% decreased 30 basis points from 82.7% in the comparable 2007 period, driven by improved ratios in Medicaid and Medicare Advantage products, offset by increases in medical care ratios in Commercial Markets, Evercare, and Part D prescription drug plans. We experienced costs associated with an unusually high incidence of influenza during the 2008 flu season. The impact of higher flu costs moderated the improved ratios in Medicaid and Medicare Advantage products. Our estimate of commercial medical cost trend for 2008 is an increase of approximately 7.5% plus or minus 50 basis points over 2007. We estimate that premium yield increases will not fully match medical cost trend on a full year basis in 2008.

This excerpt taken from the UNH 10-K filed Feb 21, 2008.

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.

This excerpt taken from the UNH 10-Q filed Nov 1, 2007.

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 for the three and nine months ended September 30, 2007 of 79.5% and 80.8%, respectively, decreased from 81.1% and 81.6% in the comparable 2006 periods. These medical care ratios decreased primarily as a result of a decrease in the medical care ratio relating to Ovations. This was partially offset by an increase in UnitedHealthcare’s commercial medical care ratio, which was partially the result of a shift from favorable medical cost development during 2006 to unfavorable medical cost development during 2007.

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 periods, resulting from more complete claim information identified in the current period, are included in total medical costs reported for the current period. Medical costs for the three months ended September 30, 2007 included approximately $70 million of favorable medical cost development related to prior fiscal years and approximately $70 million of favorable medical cost development related to the first and second quarters of 2007. Medical costs for the three months ended September 30, 2006 included approximately $10 million in favorable medical cost development related to prior fiscal years and approximately $70 million of favorable medical cost development related to the first and second quarters of 2006. For the nine months ended September 30, 2007 and 2006, medical costs included approximately $350 million and $380 million, respectively, of favorable medical cost development related to prior fiscal years.

Medical costs for the three months ended September 30, 2007 of $13.5 billion increased $131 million, or 1%, over the comparable 2006 period due primarily to an annual medical cost trend of 7% to 8% on commercial risk-based business due to medical cost inflation and increased utilization, partially offset by a decrease in the number of individuals served by UnitedHealthcare’s commercial risk-based products. Medical costs for the nine months

ended September 30, 2007 of $41.9 billion increased $1.8 billion, or 5%, over the comparable 2006 period due primarily to the 7% to 8% annual medical cost trend on commercial risk-based business discussed above and growth in Ovations Medicare programs, partially offset by a decrease in the number of individuals served by UnitedHealthcare’s commercial risk-based products.

This excerpt taken from the UNH 10-Q filed Aug 6, 2007.

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 for the three and six months ended June 30, 2007 of 80.3% and 81.5%, respectively, decreased from 81.6% and 81.8% in the comparable 2006 periods. These medical care ratios decreased primarily as a result of a decrease in the medical care ratio relating to Ovations Medicare programs. This was partially offset by an increase in UnitedHealthcare’s commercial medical care ratio, which was primarily the result of a shift from favorable medical cost development in 2006 to unfavorable medical cost development in 2007.

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 periods, resulting from more complete claim information identified in the current period, are included in total medical costs reported for the current period. Medical costs for the three months ended June 30, 2007 included approximately $100 million of favorable medical cost development related to prior fiscal years and approximately $10 million of favorable medical cost development related to the first quarter of 2007. Medical costs for the three months ended June 30, 2006 included approximately $150 million in favorable medical cost development, all of which related to prior fiscal years. For the six months ended June 30, 2007 and 2006, medical costs included approximately $280 million and $370 million, respectively, of favorable medical cost development. Favorable medical cost development in all periods includes updated estimates for extension of benefit obligations based upon analysis of historical claim submissions. The decreases in favorable medical cost development year-over-year were primarily the result of UnitedHealthcare experiencing favorable development during the six months ended June 30, 2006 and unfavorable development during the six months ended June 30, 2007. This unfavorable development was partially driven by costs from higher benefit utilization in December 2006 relating primarily to our high-deductible risk-based products.

Medical costs for the three and six months ended June 30, 2007 of $13.9 billion and $28.4 billion, respectively, increased $534 million, or 4%, and $1.7 billion, or 6%, over the comparable 2006 periods due primarily to an annual medical cost trend of 7% to 8% on commercial risk-based business due to medical cost inflation, and growth in the Medicare Part D program.

This excerpt taken from the UNH 10-Q filed May 9, 2007.

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 82.1% in the first quarter of 2006 to 82.7% in the first quarter of 2007. The medical care ratio increase resulted primarily from an increase in UnitedHealthcare’s commercial medical care ratio due largely to a shift from favorable medical cost development in the first quarter of 2006 to unfavorable medical cost development in the first quarter of 2007 within this business unit and growth in the Medicare Part D program, which carries a higher medical care ratio than the historic UnitedHealth Group businesses, partially offset by a decrease in the medical care ratio related to Ovations Medicare programs.

Medical costs for first quarter 2007 increased $1.2 billion, or 9%, to $14.4 billion, due primarily to an annual medical cost trend of 7% to 8% on commercial risk-based business due to both medical cost inflation and increases in health care consumption as well as growth in the Medicare Part D program.

This excerpt taken from the UNH 10-K filed Mar 6, 2007.

Medical Costs

The combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation efforts is reflected in the medical care ratio. The consolidated medical care ratio decreased from 80.9% in 2004 to 80.0% in 2005. This medical care ratio decrease resulted primarily from changes in product, business and customer mix and an increase in favorable medical cost development related to prior periods.

On an absolute dollar basis, 2005 medical costs totaled $33.7 billion, an increase of $5.8 billion, or 21%, over 2004. Excluding the impact of acquisitions, medical costs increased by approximately 9% driven primarily by a medical cost trend of 7% to 8% due to both inflation and an increase in health care consumption as well as organic growth.

This excerpt taken from the UNH 10-Q filed Mar 6, 2007.

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 for the three and nine months ended September 30, 2006 of 81.1% and 81.6%, respectively, increased from 79.7% and 80.0% in the comparable 2005 periods. The medical care ratio increase resulted primarily from the impact of the acquisition of PacifiCare and 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 periods, resulting from more complete claim information and other changes in facts and circumstances, identified in the current period are included in total medical costs reported for the current period. Medical costs for the three months ended September 30, 2006 include approximately $10 million of favorable medical cost development related to prior years and approximately $70 million of favorable medical cost development related to the first and second quarters of 2006. Medical costs for the three months ended September 30, 2005 include approximately $60 million of favorable medical cost development related to prior years and approximately $70 million of favorable medical cost development related to the first and second quarters of 2005. Medical costs for the nine months ended September 30, 2006 and 2005 include approximately $380 million and $370 million, respectively, of favorable medical cost development related to prior years.

Medical costs for the three months and nine months ended September 30, 2006 increased $5.0 billion, or 60%, and $15.3 billion, or 62%, to $13.4 billion and $40.1 billion, respectively, 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 the three months and nine months ended September 30, 2006 were $1.2 billion and $4.1 billion, respectively. Medical trend was due to both medical inflation and increases in health care consumption.

This excerpt taken from the UNH 10-Q filed Mar 6, 2007.

Medical Costs

Medical costs for first quarter 2006 increased $5.2 billion, or 64%, to $13.3 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 first quarter 2006 were $1.5 billion. Medical trend was due to both medical inflation and increases in health care consumption.

This excerpt taken from the UNH 10-Q filed Mar 6, 2007.

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 for the three and six months ended June 30, 2006 of 81.6% and 81.8%, respectively, increased from 80.3% and 80.2% in the comparable 2005 periods. The medical care ratio increase resulted primarily from the impact of the acquisition of PacifiCare and the Medicare Part D program, both of which carry a higher medical care ratio than the historic UnitedHealth Group businesses.

to the first quarter of 2005. Medical costs for the six months ended June 30, 2006 and 2005 include approximately $370 million and $310 million, respectively, of favorable medical cost development related to prior years. The increase in net favorable medical cost development was partially due to a reduction in estimates for extension of benefit obligations based upon analysis of historical claim submissions.

Medical costs for the three months and six months ended June 30, 2006 increased $5.1 billion, or 62%, and $10.3 billion, or 63%, to $13.4 billion and $26.7 billion, respectively, 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 the three months and six months ended June 30, 2006 were $1.4 billion and $2.9 billion, respectively. Medical trend was due to both medical inflation and increases in health care consumption.

This excerpt taken from the UNH 10-Q filed May 11, 2006.

Medical Costs

physician, hospital and other medical cost disputes. We develop estimates for medical care services incurred but not reported using an actuarial process that is consistently applied, centrally controlled and automated. The actuarial models consider factors such as time from date of service to claim receipt, claim backlogs, seasonal variances in medical care consumption, provider contract rate changes, medical care utilization and other medical cost trends, membership volume and demographics, benefit plan changes, and business mix changes related to products, customers and geography. Depending on the health care provider and type of service, the typical billing lag for services can range from two to 90 days from the date of service. Substantially all claims related to medical care services are known and settled within nine to 12 months from the date of service. We estimate liabilities for physician, hospital and other medical cost disputes based upon an analysis of potential outcomes, assuming a combination of litigation and settlement strategies.

Each period, we re-examine previously established medical costs payable estimates based on actual claim submissions and other changes in facts and circumstances. As more complete claim information becomes available, we adjust the amount of the estimates, and include the changes in estimates in medical costs in the 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
	Favorable Development		Net Impact on Medical Costs(a)			As Reported(b)		As Adjusted(c)		As Reported(d)		As Adjusted(c)
2003	$	150	$	(60	)	$	21,562	$	21,502	$	2,745	$	2,805
2004	$	210	$	(190	)	$	27,926	$	27,736	$	3,898	$	4,088
2005	$	400	$	210	(e)	$	33,741	$	33,951	$	5,123	$	4,913	(e)

(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)	Prior period amounts have been reclassified to conform to the 2006 presentation. The reclassification has no effect on our net earnings, earnings from operations or shareholder’s equity as previously reported.

(c)	Represents reported amounts adjusted to reflect the net impact of medical cost development.

(d)	Restated to include the impact of FAS 123R, which we adopted effective January 1, 2006.

(e)	For the first quarter of 2006, the company recorded net favorable development of $190 million pertaining to 2005. The amount of prior period development in 2006 pertaining to 2005 will change as our December 31, 2005 medical costs payable estimate continues to develop throughout 2006.

Our estimate of medical costs payable represents management’s best estimate of the company’s liability for unpaid medical costs as of March 31, 2006, 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 March 31, 2006; 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 March 31, 2006 estimates of medical costs payable and actual costs payable, excluding the AARP business, first quarter 2006 earnings from operations would increase or decrease by $72 million and diluted net earnings per common share would increase or decrease by $0.03 per share.

This excerpt taken from the UNH 10-K filed Feb 24, 2006.

Medical Costs

Each reporting period, we estimate our obligations for medical care services that have been rendered on behalf of insured consumers but for which claims have either not yet been received or processed, and for liabilities for physician, hospital and other medical cost disputes. We develop estimates for medical care services incurred but not reported using an actuarial process that is consistently applied, centrally controlled and automated. The actuarial models consider factors such as time from date of service to claim receipt, claim backlogs, seasonal variances in medical care consumption, provider contract rate changes, medical care utilization and other medical cost trends, membership volume and demographics, benefit plan changes, and business mix changes related to products, customers and geography. Depending on the health care provider and type of service, the typical billing lag for services can range from two to 90 days from the date of service. Substantially all claims related to medical care services are known and settled within nine to 12 months from the date of service. We estimate liabilities for physician, hospital and other medical cost disputes based upon an analysis of potential outcomes, assuming a combination of litigation and settlement strategies.

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.


	Favorable Development		Net Impact on Medical Costs(a)			Medical Costs					Earnings from Operations
	Favorable Development		Net Impact on Medical Costs(a)			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.

This excerpt taken from the UNH 10-Q filed Nov 4, 2005.

Medical Costs

Each reporting period, we estimate our obligations for medical care services that have been rendered on behalf of insured consumers but for which claims have either not yet been received or processed, and for liabilities for physician, hospital and other medical cost disputes. We develop estimates for medical care services incurred but not reported using an actuarial process that is consistently applied, centrally controlled and automated. The actuarial models consider factors such as time from date of service to claim receipt, claim backlogs, seasonal variances in medical care consumption, care provider contract rate changes, medical care utilization and other medical cost trends, membership volume and demographics, benefit plan changes, and business mix changes related to products, customers and geography. Depending on the health care provider and type of service, the typical claim submission lag for medical care services provided can range from two to 90 days from the date of service. Substantially all claims related to medical care services are known and settled within nine to 12 months from the date of service. We estimate liabilities for physician, hospital and other medical cost disputes based upon an analysis of potential outcomes, assuming a combination of litigation and settlement strategies.

become more exact, we increase or decrease the amount of the estimates, and include the changes in estimates in medical costs in the 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 4% of annual earnings from operations and less than 3% of medical costs payable.


	Net Favorable Development		Net Impact on Medical Costs(a)			Medical Costs					Earnings from Operations
	Net Favorable Development		Net Impact on Medical Costs(a)			As Reported		As Adjusted(b)			As Reported		As Adjusted(b)
2001	$	30	$	(40	)	$	17,644	$	17,604		$	1,566	$	1,606
2002	$	70	$	(80	)	$	18,192	$	18,112		$	2,186	$	2,266
2003	$	150	$	(60	)	$	20,714	$	20,654		$	2,935	$	2,995
2004	$	210	$	(160	)(c)	$	27,000	$	26,840	(c)	$	4,101	$	4,261	(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)	For the nine months ended September 30, 2005, the company recorded net favorable development of $370 million pertaining to 2004. The amount of prior period development in 2005 pertaining to 2004 may change if our December 31, 2004 medical costs payable estimate continues to develop in 2005.

Our estimate of medical costs payable represents management’s best estimate of the company’s liability for unpaid medical costs as of September 30, 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 September 30, 2005; however, actual claim payments may differ from established estimates. Assuming a hypothetical 1% difference between our September 30, 2005 estimates of medical costs payable and actual costs payable, excluding the AARP business, third quarter 2005 earnings from operations would increase or decrease by approximately $49 million and diluted net earnings per common share would increase or decrease by approximately $0.02 per share.

This excerpt taken from the UNH 10-Q filed Aug 8, 2005.

Medical Costs

Each reporting period, we estimate our obligations for medical care services that have been rendered on behalf of insured consumers but for which claims have either not yet been received or processed, and for liabilities for physician, hospital and other medical cost disputes. We develop estimates for medical care services incurred but not reported using an actuarial process that is consistently applied, centrally controlled and automated. The actuarial models consider factors such as time from date of service to claim receipt, claim backlogs, seasonal variances in medical care consumption, care provider contract rate changes, medical care utilization and other medical cost trends, membership volume and demographics, benefit plan changes, and business mix changes related to products, customers and geography. Depending on the health care provider and type of service, the typical billing lag for services can range from two to 90 days from the date of service. Substantially all claims related to medical care services are known and settled within nine to 12 months from the date of service. We estimate liabilities for physician, hospital and other medical cost disputes based upon an analysis of potential outcomes, assuming a combination of litigation and settlement strategies.

Each period, we re-examine previously established medical costs payable estimates based on actual claim submissions and other changes in facts and circumstances. As the liability estimates recorded in prior periods become more exact, we increase or decrease the amount of the estimates, and include the changes in estimates in medical costs in the 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 one-half of 1% of annual medical costs, less than 4% of annual earnings from operations and less than 3% of medical costs payable.

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).


	Net Favorable Development		Net Impact on Medical Costs(a)			Medical Costs					Earnings from Operations
	Net Favorable Development		Net Impact on Medical Costs(a)			As Reported		As Adjusted(b)			As Reported		As Adjusted(b)
2001	$	30	$	(40	)	$	17,644	$	17,604		$	1,566	$	1,606
2002	$	70	$	(80	)	$	18,192	$	18,112		$	2,186	$	2,266
2003	$	150	$	(60	)	$	20,714	$	20,654		$	2,935	$	2,995
2004	$	210	$	(100	)(c)	$	27,000	$	26,900	(c)	$	4,101	$	4,201	(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)

For the six months ended June 30, 2005, the company recorded net favorable development of $310 million pertaining to 2004. The amount of prior period development in 2005 pertaining to 2004 will likely change as our December 31, 2004 medical costs payable estimate continues to develop throughout 2005.

Our estimate of medical costs payable represents management’s best estimate of the company’s liability for unpaid medical costs as of June 30, 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 June 30, 2005; however, actual claim payments may differ from established estimates. Assuming a hypothetical 1% difference between our June 30, 2005 estimates of medical costs payable and actual costs payable, excluding the AARP business, second quarter 2005 earnings from operations would increase or decrease by approximately $49 million and diluted net earnings per common share would increase or decrease by approximately $0.02 per share.

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UnitedHealth Group (UNH)

UNH » Topics » Medical Costs

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