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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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Commission file number: 0-13253
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UNITED HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1321939
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
300 OPUS CENTER
9900 BREN ROAD EAST
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 936-1300
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Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
(Title of each class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO __
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 1, 1997, was approximately $7,957,874,400* (based on the
last reported sale price of $50 per share on March 1, 1997, on the New York
Stock Exchange).
As of March 17, 1997, 185,600,404 shares of the registrant's Common Stock,
$.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders of Registrant for the fiscal year ended
December 31, 1996. Certain information therein is incorporated by reference into
Part II hereof.
Proxy Statement for the Annual Meeting of Shareholders of Registrant to be
held on May 14, 1997. Certain information therein is incorporated by reference
into Part III hereof.
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*Only shares of common stock held beneficially by directors and executive
officers of the Company and persons or entities filing Schedules 13G and
received by the Company have been excluded in determining this number.
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PART I
ITEM 1. BUSINESS
United HealthCare Corporation-SM- is a national leader in offering health
care coverage and related services through a broad continuum of products and
services in all 50 states and Puerto Rico. United HealthCare's products and
services reflect a number of core capabilities, including medical information
management, health benefit administration, risk assessment and pricing, health
benefit design and provider contracting and risk sharing. With these
capabilities, United is able to provide comprehensive managed health care
services, such as health maintenance organizations ("HMOs"), insurance and self-
funded health care coverage products.The Company also offers unbundled health
care management and cost containment products such as behavioral health
services, utilization review services, specialized provider networks and
employee assistance programs.
United HealthCare Corporation is a Minnesota corporation, incorporated in
January 1977. Unless the context otherwise requires, the terms "United," "United
HealthCare" or the "Company" refer to United HealthCare Corporation and its
subsidiaries. United's executive offices are located at 300 Opus Center, 9900
Bren Road East, Minnetonka, Minnesota 55343; telephone (612) 936-1300.
HEALTH PLANS, INSURANCE AND RELATED OPERATIONS
HEALTH PLANS. As of December 31, 1996, United held a majority ownership
interest in health plans operating in 28 states and Puerto Rico. With respect to
these owned health plan operations, United assumes the risk for health care and
administrative costs in return for the premium revenue it receives. United's
owned health plans are usually licensed as HMOs or insurers and provide
comprehensive health care coverage for a fixed fee or premium that usually does
not vary with the extent of medical services received by the member. In
addition, these health plans enter into contractual arrangements with
independent providers of health care services to help manage medical and
hospital use, quality and costs. A few of United's owned health plans employ
health care providers and directly deliver health care services to members.
These plans strive to achieve cost-effective delivery of health care services by
emphasizing appropriate use of health care services, promoting preventive health
services, and encouraging the reduction of unnecessary hospitalization and other
medical services. United also provides administrative and other management
services to a few health plans in which United has no ownership interest. With
respect to these managed health plan operations, United receives an
administrative fee for providing its services and generally assumes no
responsibility for health care costs.
HEALTH PLAN POINT-OF-SERVICE PRODUCTS. United HealthCare's point-of-service
products are growing rapidly, and are one of the Company's most popular health
plan coverage options. Unlike traditional closed-panel HMO products, which cover
non-emergency services only when rendered by contracted providers, the
point-of-service products also provide coverage, usually at a lower level, for
services received from non-contracted providers. This out-of-network coverage is
sometimes offered directly by the health plan, but more often is provided by an
insurance policy "wrapped around" the health plan benefit contract. The
insurance policy is usually sold by one of United's insurance subsidiaries.
HEALTH PLAN SELF-FUNDED PRODUCTS. United has developed self-funded products
for employers who desire the cost containment aspects of an HMO product and want
to self-insure the health care cost risk. United uses the provider networks it
has developed in connection with its HMO or insurance products for these
products, many of which include a point-of-service feature. The provider
contracts for these products are with individual physicians or groups of
physicians as well as health care facilities and are generally on a standardized
fee-for-service basis. These self-funded products offer employers and other
sponsoring groups access to a provider network and the administrative and care
coordination services associated with an HMO product, but the risks of health
care use generally are borne by the sponsoring company or group.
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HEALTH PLAN MEDICARE PRODUCTS. Several of United's owned health plans
contract with the federal Health Care Financing Administration ("HCFA") to
provide coverage for Medicare-eligible individuals. In addition, several more
health plans that do not currently have such a contract are in the process of
seeking one. Under these contracts the plans receive a fixed payment each month
from HCFA for each enrolled individual, and must provide at least the benefits
which would be covered under traditional Medicare. Typically, the plans provide
a significantly higher level of coverage and may, but often do not, charge an
additional premium to the members for the additional benefits. The health plans
generally use a subset of their commercial product provider network as the
provider network for the Medicare products. Any Medicare-eligible person in a
plan's service area may enroll in the Medicare product without underwriting or
health screening.
Some of United's health plans also may offer these Medicare products to or
through employer groups as a method of providing retiree health care coverage.
In addition, certain health plans may market Medicare Select, a modifiction of a
Medicare supplement program which allows individuals to seek care through HMOs
or preferred provider organizations ("PPOs") and receive additional benefits at
a lower cost while still retaining their traditional Medigap-type coverage.
HEALTH PLAN MEDICAID PRODUCTS. Several of United's health plans offer
coverage to Medicaid-eligible individuals. These plans typically contract with a
state agency to provide such coverage and are paid a fixed monthly payment for
each enrolled individual. The level of benefits is generally set by contract and
few additional benefits are offered. Enrollment must usually be offered to all
eligible individuals, without underwriting or health screening. Generally, the
provider network for commercial products is used, but some providers may refuse
to participate in the Medicaid product and the network may otherwise have a
different number or set of providers.
PPO, INDEMNITY INSURANCE AND SELF-FUNDED PRODUCTS. United's insurance
subsidiaries are licensed to sell their respective products in all 50 states,
the District of Columbia, Puerto Rico and the Virgin Islands. Through these
insurance subsidiaries and the Company's third-party administrator subsidiaries,
United offers a variety of health insurance and self-funded plan products and
services. Many of the insurance and self-funded products are marketed as
point-of-service products or include a PPO feature, under which a higher level
of coverage is available if certain providers are used.
For smaller customers (less than 50 employees) these products are typically
sold on an insured basis for a fixed premium, with no experience adjustments
made to that premium. This type of business has often been subject to sudden and
unpredictable changes in health care costs and generally has high administrative
and marketing expenses. In addition, these products are subject to extensive
state regulations. For larger customers, these products are sold on both an
insured and self-funded basis. The insured products are often sold on an
experience-rated basis and the self-funded products are usually sold on an
administrative fee basis. In some cases United's agreement with the customer may
provide for penalties or rewards related to administrative service standards
and/or health care costs.
United's insurance subsidiaries have historically also offered several
health insurance products in conjunction with health plan products. These
products help employers replace multiple health care policies and vendors with a
single health care plan. These subsidiaries also offer reinsurance and other
insured products on a selective basis to most of United's health plans and to
employers and other sponsoring groups offering self-funded health care benefit
plans. In connection with the acquisition of The MetraHealth Companies, Inc. in
October 1995, United entered into an agreement with Metropolitan Life Insurance
Company ("MetLife") under which United offers MetLife's life, dental, accidental
death and dismemberment and short-term disability products to United customers
and MetLife offers United's health care coverage products to MetLife customers.
This agreement with MetLife also contains certain mutual exclusivity and
non-competition provisions.
The following tables provide information with respect to the enrollment in
the Company's various health plan and insurance products. The enrollment numbers
are provided as of December 31, 1996 and
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January 31, 1997 since a number of the contracts for the Company's health care
coverage products commence, expire or renew, as the case may be, as of January 1
of each year.
ENROLLMENT BY PRODUCT TYPE
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DECEMBER 31, JANUARY 31,
PRODUCT 1996 1997
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HEALTH PLAN PRODUCTS(1)
Commercial......................................................................... 4,100,000 4,224,000
Medicare........................................................................... 230,000 243,000
Medicaid........................................................................... 525,000 513,000
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Total Health Plan Products........................................................... 4,855,000 4,980,000
OTHER NETWORK BASED PRODUCTS(2)
Commercial......................................................................... 5,764,000 5,577,000
INDEMNITY
Commercial......................................................................... 3,249,000 3,096,000
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TOTAL................................................................................ 13,778,000 13,653,000
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(1) Includes various HMO and HMO point-of-service products as well as
self-funded programs that use a health plan network of providers.
(2) Includes insurance-based and self-funded PPO and point-of-service products.
ENROLLMENT BY FUNDING MECHANISM AND PRODUCT TYPE
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DECEMBER 1996 JANUARY 1997
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PRODUCT FUNDED SELF-FUNDED FUNDED SELF-FUNDED
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Health Plan Products.................................... 4,542,000 313,000 4,657,000 323,000
Other Network Based Products............................ 719,000 4,955,000 749,000 4,828,000
Indemnity............................................... 585,000 2,664,000 577,000 2,519,000
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TOTAL................................................... 5,846,000 7,932,000 5,983,000 7,670,000
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SPECIALTY SERVICES
Through United HealthCare's specialty services business units, United
develops and sells specialized products to facilitate the efficient delivery of
health care services. United makes these products available to or in connection
with the products of its health plans and insurance operations where feasible.
In addition, these products often are sold independently of United's health
plans and insurance operations.
With respect to its specialty services, United generally receives fees for
the services provided, which are primarily administrative in nature, and assumes
no responsibility for health care costs except in the case of certain of its
behavioral health products. United assumes some responsibility for health care
costs related to providing mental health/substance abuse services and thus
recognizes premium-like revenue and medical services expense.
United's specialty products were available to a total of approximately 48.8
million participant lives at December 31, 1996, many of whom were not enrolled
in one of United's owned health plans. One person may be covered by more than
one specialty service and therefore may account for more than one of these
participant lives. United offers the following specialty services to HMOs, PPOs,
insurers, providers, Blue Cross/Blue Shield plans, third-party administrators,
employers, labor unions and/or government agencies.
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CARE MANAGEMENT AND BENEFIT ADMINISTRATION SERVICES. United's care
management programs offer customers unbundled cost and utilization review and
care management services. These services include prior, concurrent and
retrospective review of hospital admissions and certain ambulatory services,
second opinion programs, care management, specialist referrals and discharge
planning. These services emphasize patient and provider education as a means of
helping clients manage their health care costs.
United's care management programs offer customers who may not have
geographic access to United's health plans an alternative to bundled managed
care services. These services include utilization management, medical
information and education, claims payment, provider networks, mental
health/substance abuse services and other related services. Use of these
services can provide clients who have members outside health plan service areas
with results similar to health plans.
TRANSPLANT NETWORK. United's transplant network services programs offer
clients access to a network of health care facilities for transplant-related
services and transplant care management services. United negotiates fixed,
competitive rates for high-cost, low-frequency health care services such as
organ and tissue transplants.
WORKERS COMPENSATION AND DISABILITY MANAGEMENT SERVICES. United's workers
compensation and disability management services tailor United's broad resources
into products and services intended to apply managed care concepts, such as
utilization review and use of specialized preferred provider networks, to
workers compensation and casualty insurance cases. These products and services
include hospitalization and outpatient surgery pre-certification and care
management, access to provider networks, specialized programs such as carpal
tunnel and back injury case management, and review of imaging (CAT scans and
MRI) services.
DEMAND MANAGEMENT PROGRAMS. United's demand management programs help
consumers make informed choices about their health and well-being by focusing on
preventive care, self-care, smart lifestyle options, and consumer education.
United's Optum-Registered Trademark- NurseLine and employee assistance programs
provide customers the opportunity to improve the quality and reduce the cost of
medical care by helping them identify medical and human risks that could affect
their health and well-being and developing problem-specific solutions to change
behavior and reduce those risks. In addition, these programs issue various
publications to members as supplementary tools for managing demand for services,
with content that emphasizes health and wellness and explains how to use health
care services most effectively.
GERIATRIC CARE MANAGEMENT SERVICES. United also develops and provides
products and services that help manage health care for the elderly. United's
EverCare-Registered Trademark- program coordinates the provision of a broad
spectrum of health care services to elderly nursing home residents through
contracts with a physician-nurse practitioner team. EverCare is participating in
a demonstration project with HCFA to offer health care services to the elderly
nursing home residents in nine separate locations throughout the country.
Through its Government Operations division, United provides administrative
services for certain government health care programs. Most of this business is
Medicare Part B claims processing. One of United's insurance subsidiaries is the
sole carrier for the states of Minnesota, Virginia, Mississippi and Connecticut.
That subsidiary also serves as the fiscal intermediary for Medicare Part A in
Connecticut, Michigan and New York, and handles all Medicare durable medical
equipment claims for the 10 states in HCFA's northeast region.
BEHAVIORAL HEALTH SERVICES. The specialty operations in United's behavioral
health services business unit include mental health and substance abuse-related
services. United's behavioral health subsidiaries provide specialized provider
networks and behavioral health care case management services to some of United's
health plans and to other customers. These services are provided by Company
employed behavioral health care professionals and by a network of contracted
providers. United assumes the responsibility for health care costs related to
certain of these services.
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THIRD PARTY ADMINISTRATION SERVICES. United provides third party
administrator ("TPA") services to employers who choose to use self-funding to
control health care costs and also desire customized health care plans and
administration. United's TPA services are available to employers of all sizes in
both single and multiple locations and include a fully integrated portfolio of
products.
APPLIED HEALTHCARE INFORMATICS, INC. Applied HealthCare Informatics, Inc.
("AHI") was formed in 1996 to combine certain of the Company's existing
information-related businesses and capabilities. AHI provides products and
services for United's health plans and other businesses and to external
customers in the following areas: data collection and warehousing; data analysis
and reporting; outcomes and effectiveness research; health services delivery
evaluation and improvement; appropriateness of care programs; and the creation
of information management tools. AHI includes the Center for Health Care
Evaluation, United's longstanding health care information and research unit. AHI
will continue to expand the Center's research programs.
INTERNATIONAL BUSINESS. United has begun exploring opportunities to sell
its products and services in foreign countries and anticipates using various
arrangements such as joint ventures, and direct contracting. United currently is
engaged in a joint venture that operates a health plan in the Republic of South
Africa and provides certain managed care consulting services in Germany.
EXPANSION AND DIVESTITURE OF OPERATIONS
United continually evaluates opportunities to expand its business and
considers whether to divest or cease offering the products of certain of its
businesses. These opportunities may include acquisitions or dispositions of a
specialty services program or of insurance and health plan operations. United
also devotes significant attention to developing new products and techniques for
containing health care costs, measuring the outcomes and efficiency of health
care delivered, and managing health care delivery systems.
During 1996, the Company sold or terminated certain immaterial lines of
business or ceased offering certain products as part of its ongoing emphasis on
its strategic focus. In addition, United has engaged in an extensive acquisition
program over the last few years that may affect United's ability to integrate
and manage its overall business effectively. Integration activities relating to
acquisitions may increase costs, affect membership, revenue and earnings growth
and adversely affect United's financial results.
The Company has recently finalized an agreement with the American
Association of Retired Persons ("AARP") relating to the delivery of Medicare
supplement health insurance products effective January 1, 1998. Throughout the
remainder of 1997, the Company will be engaged in an extensive transition
process relative to implementation of this contract, including multi-state
product filings, information systems assessments, and coordination of the
transfer of the operations from AARP's existing vendor. In addition, late in
1996, AARP accepted the Company's proposal to make its managed health plan
services available to AARP members in five geographic markets.
GOVERNMENT REGULATION
United's primary business, offering health care coverage and health care
management services, is heavily regulated at both the federal and state level.
United believes that it is in compliance in all material respects with the
various federal and state regulations applicable to its current operations. To
maintain such compliance, it may be necessary for United or a subsidiary to make
changes from time to time in its services, products, organizational or capital
structure or marketing methods.
Government regulation of health care coverage products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Changes in
applicable laws and regulations are continually being considered and the
interpretation of existing laws and rules also may change from time to time.
Regulatory agencies generally have broad discretion in promulgating regulations
and in interpreting and enforcing laws and rules. While United is unable to
predict what regulatory changes may occur or the impact on
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United of any particular change, United's operations and financial results could
be negatively affected by regulatory revisions. Certain proposed changes in
Medicare and Medicaid programs may increase the opportunities for United to
enroll persons under products developed for the Medicare- and Medicaid-eligible
populations. Other proposed changes may limit the reimbursement available to
United and increase competition in those programs, which could adversely affect
United's financial results. The continued consideration and enactment of
"anti-managed care" laws and regulations, such as "any willing provider" laws
and limits on utilization management, by federal and state bodies may make it
more difficult for United to control medical costs and may adversely affect
financial results.
A number of jurisdictions have enacted small group insurance and rating
reforms, which generally limit the ability of insurer and health plans to use
risk selection as a method of controlling costs for small group business. These
laws may generally limit or eliminate use of preexisting conditions exclusions,
experience rating and industry class rating and may limit the amount of rate
increases from year to year. Under these laws, cost control through provider
contracting and managing care may become more important, and United currently
believes its experience in these areas will allow it to compete effectively.
In addition to changes in applicable laws and rules, United is potentially
subject to governmental audits, investigations and enforcement actions. These
include possible government actions relating to the federal Employee Retirement
Income Security Act ("ERISA"), which regulates insured and self-insured health
coverage plans offered by employers and United's services to such plans and
employers, the Federal Employees Health Benefit Plan ("FEHBP"), federal and
state fraud and abuse laws, and laws relating to utilization management and the
delivery of health care. Any such government action could result in assessment
of damages, civil or criminal fines or penalties, or other sanctions, including
exclusion from participation in government programs. Although United is
currently involved in various government audits, such as under FEHBP or relating
to services for ERISA plans, United does not believe the results of such current
audits will, individually or in the aggregate, have a material adverse effect on
United's financial results.
HMOS. All of the states in which United's health plans offer HMO products
have enacted statutes regulating the activities of those health plans. Most
states require periodic financial reports from HMOs licensed to operate in their
states and impose minimum capital or reserve requirements. Certain of United's
subsidiaries are required to maintain specified capital levels to support their
operations. In addition, certain of United's subsidiaries are required by state
regulatory agencies to maintain restricted cash reserves represented by
interest-bearing instruments, which are held by trustees or state regulatory
agencies to ensure that adequate financial reserves are maintained. Some state
regulations enable agencies to review all contracts entered into by HMOs,
including management contracts, for reasonableness of fees charged and other
provisions.
United's health plans that have Medicare risk contracts are subject to
regulation by HCFA. HCFA has the right to audit health plans operating under
Medicare risk contracts to determine each health plan's compliance with HCFA's
contracts and regulations and the quality of care being rendered to the health
plan's members. To enter into Medicare risk contracts, a health plan must either
be federally qualified or be considered a Competitive Medical Plan under HCFA's
requirements. Health plans that offer a Medicare risk product also must comply
with requirements established by peer review organizations ("PROs"), which are
organizations under contract with HCFA to monitor the quality of health care
received by Medicare beneficiaries. PRO requirements relate to quality assurance
and utilization review procedures. United's health plans that have Medicare cost
contracts are subject to similar regulatory requirements. In addition, these
health plans are required to file certain cost reimbursement reports with HCFA,
which are subject to audit and revision.
United's health plans that have Medicaid contracts are subject to both
federal and state regulation regarding services to be provided to Medicaid
enrollees, payment for those services, and other aspects of
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the Medicaid program. Both Medicare and Medicaid have, or have proposed,
regulations relating to fraud and abuse, physician incentive plans and provider
referrals, which may affect United's operations.
Many of United's health plans have contracts with FEHBP. These contracts are
subject to extensive regulation, including complex rules relating to the
premiums charged. FEHBP has the authority to retroactively audit the rates
charged and has the right to seek premium refunds or institute other sanctions
against health plans participating in the program depending on the outcome of
such audits.
INSURANCE REGULATION. United's insurance subsidiaries are subject to
regulation by the Department of Insurance in each state in which the entity is
licensed. Regulatory authorities exercise extensive supervisory power over
insurance companies in regard to licensing; the amount of reserves that must be
maintained; the approval of forms of insurance policies used; the nature of, and
limitation on, an insurance company's investments; periodic examination of the
operations of insurance companies; the form and content of annual statements and
other reports required to be filed on the financial condition of insurance
companies; and the establishment of capital requirements for insurance
companies. United's insurance company subsidiaries are required to file periodic
statutory financial statements in each jurisdiction in which they are licensed.
Additionally, these companies are periodically examined by the insurance
departments of the jurisdiction in which they are licensed to do business.
INSURANCE HOLDING COMPANY REGULATIONS. Certain of United's health plans and
each of United's insurance subsidiaries are subject to regulation under state
insurance holding company regulations. Such insurance holding company laws and
regulations generally require registration with the state Department of
Insurance and the filing of certain reports describing capital structure,
ownership, financial condition, certain intercompany transactions and general
business operations. Various notice and reporting requirements generally apply
to transactions between companies within an insurance holding company system,
depending on the size and nature of the transactions. Certain state insurance
holding company laws and regulations require prior regulatory approval or, in
certain circumstances, prior notice of certain material intercompany transfers
of assets as well as certain transactions between the regulated companies, their
parent holding companies and affiliates, and acquisitions.
TPAS. Certain subsidiaries of United also are licensed as third-party
administrators ("TPAs") in states where such licensing is required for their
activities. TPA regulations, although differing greatly from state to state,
generally contain certain required administrative procedures, periodic reporting
obligations and minimum financial requirements.
PPOS. Certain of United's subsidiaries' operations may be subject to PPO
regulation in a particular state. PPO regulations generally contain certain
network, contracting, financial and reporting requirements which vary from state
to state.
UTILIZATION REVIEW REGULATIONS. A number of states have enacted laws and/or
adopted regulations governing the provision of utilization review activities and
these laws may apply to certain of United's operations. Generally, these laws
and regulations require compliance with specific standards for the delivery of
services, confidentiality, staffing, and policies and procedures of private
review entities, including the credentials required of personnel.
MCOS. In recent years a number of states have enacted laws enabling
self-insured employers and/or insurance carriers to apply medical management and
other managed care techniques to the medical benefit portion of workers
compensation if such managed care is performed by a state-certified managed care
organization ("MCO"). United, by itself or with its health plans, has generally
sought MCO certification in the states where it is available and where it
markets managed care workers compensation products. MCO laws differ
significantly from state to state, but generally address network and utilization
review activities.
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ERISA. The provision of goods and services to or through certain types of
employee health benefit plans is subject to ERISA. ERISA is a complex set of
laws and regulations that is subject to periodic interpretation by the United
States Department of Labor. ERISA places controls on how United's business units
may do business with employers covered by ERISA, particularly employers that
maintain self-funded plans. The Department of Labor is engaged in an ongoing
ERISA enforcement program which may result in additional constraints on how
ERISA-governed benefit plans conduct their activities. There recently have been
legislative attempts to limit ERISA's preemptive effect on state laws. If such
limitations were to be enacted, they might increase United's liability exposure
under state law-based suits relating to employee health benefits offered by
United's health plans and specialty businesses and may permit greater state
regulation of other aspects of those businesses' operations.
MANAGEMENT INFORMATION SYSTEMS
The Company's health plans, insurance, self-funded and specialty products
use computer-based management information systems for various purposes,
including claims processing, billing, utilization management, underwriting,
marketing and sales tracking, general accounting, medical cost trending, managed
care reporting and financial planning. These systems also support member, group
and provider service functions, including on-line access to membership
verification, claims and referral status, and information regarding hospital
admissions and lengths of stay. In addition, these systems support extensive
analysis of cost and outcome data.
The Company continually evaluates, upgrades and enhances the computer
information systems that support its operations. System development efforts
relating to increased efficiency, capacity and flexibility are ongoing. The
Company's computer processing capabilities support multiple product delivery
systems with attendant tracking and processing for such systems, and an
integrated database of information for increased reporting and research
capabilities, and use automated entry and edit capabilities to speed the capture
and processing of information. Over the past several years, the Company has
upgraded its mainframe computers, enhanced its existing software functionality,
and migrated to various software database environments. This approach allows the
Company to preserve its investment in existing systems as well as exploit new
technologies to help improve either the cost effectiveness of the services
provided, or allow for the introduction of new product capabilities. Following
the MetraHealth acquisition, the Company has been engaged in an extensive review
of its information systems, including integration of multiple systems. The
Company also has outsourced the operations of a substantial portion of its
computer operations centers to a few third parties. Simplification and
integration of the many different systems now servicing the Company's business
is an important component of controlling administrative expenses and effectively
managing United's operations. To the extent that these integration efforts are
not successful, the Company's financial results may be adversely affected.
MARKETING
The Company's marketing strategy and implementation for its health plan,
insurance, self-funded and specialty managed care products are defined and
coordinated by United HealthCare's corporate marketing staff. Primary marketing
responsibility for each of the Company's health plans and specialty managed care
products resides with a marketing director and a direct sales force. In
addition, the Company's health plan, insurance, self-funded and specialty
managed care products are sold through independent insurance agents and brokers.
Marketing efforts are supported by ongoing market research that identifies and
grades prospective customers and establishes specific enrollment goals by
territory and employer. Marketing efforts also are supported by public relations
efforts and advertising programs that may employ television, radio, newspapers,
billboards, direct mail and telemarketing.
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COMPETITION
The managed health care industry evolved primarily as a result of health
care buyers' concerns regarding rising health care costs. The industry's goal is
to infuse greater cost effectiveness and accountability into the health care
system through the development of managed care products, including health plans,
PPOs, and specialized services such as mental health or pharmacy benefit
programs, while increasing the accessibility and quality of health care
services. The industry in which United operates is highly competitive and
significant consolidation has occurred within the industry, creating stronger
competitors. At the same time, there are a number of new entrants to the
industry, which also may increase competitive pressures. The current competitive
markets in certain areas may limit United's ability to price its products at
levels United believes appropriate. These competitive factors could adversely
affect United's financial results.
As managed health care penetration of the health care market and the effects
of health care reforms increase nationwide, the Company expects that obtaining
new contracts for its health plans with large
employer and government groups may increasingly become more difficult and that
competition for smaller employer groups will intensify. In addition, employers
may increasingly choose to self-insure the health care risk, while seeking
benefit administration and utilization review services from third parties to
assist them in controlling and reporting health care costs.
The Company's health plan, insurance, self-funded and specialty managed care
products compete for group and individual membership with other health insurance
plans, Blue Cross/Blue Shield plans, other health plans, HMOs, PPOs, third party
administrators and health care management companies, and employers or groups
that elect to self-insure. The Company also faces competition from hospitals,
health care facilities, and other health care providers who have combined and
formed their own networks to contract directly with employer groups and other
prospective customers for the delivery of health care services. The Company's
ability to increase the number of persons covered by its products or services or
to increase its premiums and fees can be affected by the number and strength of
the Company's competitors in any particular area. The Company believes that the
principal competitive factors affecting the Company and its products include
price, the level and quality of products and service, provider network
capabilities, market share, the offering of innovative products, product
distribution systems, financial strength, and marketplace reputation.
Further, the Company currently believes that factors that generally help it
in regard to competitors are the breadth of its product line, its geographic
scope and diversity, the strength of its underwriting and
pricing practices and staff, its significant market position in certain
geographic areas, the strength of its distribution network, its financial
strength, its generally large provider networks that provide more member choice,
its point-of-service products and experience, and its generally favorable
marketplace reputation. In a number of markets the Company may be at a
disadvantage in regard to competitors with larger market shares, broader
networks, narrower networks (which may allow greater cost control and lower
prices) or a more-established marketplace name and reputation.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 27,800 people;
approximately 225 of which were represented by a union. The Company believes its
employee relations are good.
CAUTIONARY STATEMENTS
The statements contained in the Business section and elsewhere in this Form
10-K, and the statements contained in the Management's Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere in those sections
of the Company's annual report to shareholders incorporated by reference into
this document, all include forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "PSLRA"). When used in
this Form 10-K and in future filings by the
9
<PAGE>
Company with the Securities and Exchange Commission, in the Company's press
releases, presentations to securities analysts or investors, and in oral
statements made by or with the approval of an authorized executive officer of
the Company, the words or phrases "believes," "anticipates," "intends," "will
likely result," "estimates," "projects" or similar expressions are intended to
identify such forward-looking statements. Any of these forward-looking
statements involve risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in the forward-looking
statements.
The following discussion contains certain cautionary statements regarding
United's business that investors and others should consider. This discussion is
intended to take advantage of the "safe harbor" provisions of the PSLRA. In
making these cautionary statements, the Company is not undertaking to address or
update each factor in future filings or communications regarding the Company's
business or results, and is not undertaking to address how any of these factors
may have caused results to differ from discussions or information contained in
previous filings or communications. In addition, any of the matters discussed
below may have affected United's past, as well as current, foward-looking
statements about future results, so that the Company's actual results in the
future may differ materially from those expressed in prior communications.
HEALTH CARE COSTS. A large portion of the revenue received by United is
used to pay the costs of health care services or supplies delivered to its
members. The total health care costs incurred by United are affected by the
number of individual services rendered and the cost of each service. Much of the
Company's premium revenue is set in advance of the actual delivery of services
and incurrence of the related costs, usually on a prospective annual basis.
While United attempts to base the premiums it charges at least in part on its
estimate of future health care costs over the fixed premium period, competition,
regulations and other circumstances may limit United's ability to fully base
premiums on estimated costs. In addition, many factors may and often do cause
actual health care costs to exceed that estimated and reflected in premiums.
These factors may include increased utilization of services, increased cost of
individual services, catastrophes, epidemics, the introduction of new or costly
treatments, general inflation, new mandated benefits or other regulatory
changes, and insured population characteristics. In addition, the Company's
earnings reported for any particular quarter include estimates of covered
services incurred by the Company's enrollees during that period but for which a
claim has not been received or processed. These are estimates and therefore the
Company's earnings may be subject to later adjustment based on the actual costs.
INDUSTRY FACTORS. The managed care industry has recently received
significant amounts of negative publicity. This publicity, in turn, has
contributed to increased legislative activity, regulation and review of industry
practices. These factors may adversely affect the Company's ability to market
its products or services, could necessitate changes in the Company's products
and services, and may increase regulatory burdens under which the Company
operates, further increasing the costs of doing business and adversely affecting
profitability.
COMPETITION. In many of its geographic or product markets, the Company
competes with a number of other entities, some of which may have certain
characteristics or capabilities that give them an advantage in competing with
the Company. The Company believes the barriers to entry in these markets are not
substantial, so that the addition of new competitors can occur relatively
easily. Certain of the Company's customers may decide to perform for themselves
functions or services formerly provided by the Company, which would result in a
decrease in the Company's revenues. Certain of the Company's providers may
decide to market products and services to Company customers in competition with
the Company. In addition, significant merger and acquisition activity has
occurred in the industry in which the Company operates as well as in industries
that act as suppliers to the Company, such as the hospital, physician,
pharmaceutical and medical device industries. This activity may create stronger
competitors or result in higher health care costs. To the extent that there is
strong competition or that competition intensifies in any market, the Company's
ability to retain or increase customers or providers, its revenue
10
<PAGE>
growth, its pricing flexibility, its control over medical cost trends and its
marketing expenses may all be adversely affected.
AARP CONTRACT. In early 1997, the Company finalized its contract
arrangements with the American Association of Retired Persons ("AARP") under
which the Company will provide Medicare supplement health insurance products to
AARP members, effective January 1, 1998. As a result of this agreement, the
Company will significantly expand the number of members served, the products
offered and the services it must provide. The success of the AARP arrangement
will depend, in part, on the Company's ability to service these new members,
develop additional products and services, and price the products and services
competitively.
GOVERNMENT PROGRAMS AND REGULATION. The Company's business is heavily
regulated on a federal, state and local level. The laws and rules governing the
Company's business and interpretations of those laws and rules are subject to
frequent change and broad latitude is given to the agencies administering those
regulations. Existing or future laws and rules could force United to change how
it does business, may restrict United's revenue and/or enrollment growth,
increase its health care and administrative costs, and/ or increase the
Company's liability for medical malpractice or other actions. Regulatory
approvals must be obtained and maintained to market many of United's products
and services. Delays in obtaining or failure to obtain or maintain such
approvals could adversely affect United's revenue or the number of its members,
or could increase costs. A significant portion of United's revenues relate to
federal, state and local government health care coverage programs. These types
of programs, such as the federal Medicare program and the federal and state
Medicaid programs, are generally subject to frequent change including changes
that may reduce the number of persons enrolled or eligible, reduce the revenue
received by United or increase the Company's administrative or health care costs
under such programs. Such changes have in the past and may in the future
adversely affect United's results and its willingness to participate in such
programs.
The Company is also subject to various governmental audits and
investigations. Such activities could result in the loss of licensure or the
right to participate in certain programs, or the imposition of fines, penalties
and other sanctions. In addition, disclosure of any adverse investigation or
audit results or sanctions could negatively affect the Company's reputation in
various markets and make it more difficult for the Company to sell its products
and services.
The National Association of Insurance Commissioners (the "NAIC") has an
effort underway that would impose new minimum capitalization requirements for
health care coverages provided by insurance companies, HMOs and other risk
bearing health care entities. The requirements would take the form of risk-based
capital rules similar to those which currently apply only to insurance
companies. There could be an increase in the capital required for certain of
United's subsidiaries and there may be some potential for disparate treatment
relative to competing products. Failure of the NAIC to act may result in some
form of federal solvency regulation of companies providing Medicare-related
benefit programs.
PROVIDER RELATIONS. One of the significant techniques United uses to manage
health care costs and utilization and monitor the quality of care being
delivered is contracting with physicians, hospitals and other providers. Because
of the geographic diversity of its health plans and the large number of
providers with which most of those health plans contract, United currently
believes it has a limited exposure to provider relations issues. In any
particular market, however, providers could refuse to contract with United,
demand higher payments or take other actions that could result in higher health
care costs, less desirable products for customers and members, or difficulty
meeting regulatory or accreditation requirements.
In some markets, certain providers, particularly hospitals,
physician/hospital organizations or multi-specialty physician groups, may have
significant market positions or near monopolies. In addition,
11
<PAGE>
physician or practice management companies, which aggregate physician practices
for purposes of administrative efficiency and marketing leverage, continue to
expand. These providers may compete directly with the Company. If such providers
refuse to contract with United, use their market position to negotiate favorable
contracts, or place United at a competitive disadvantage, United's ability to
market products or to be profitable in those areas could be adversely affected.
LITIGATION AND INSURANCE. United may be a party to a variety of legal
actions to which any corporation may be subject, including employment and
employment discrimination-related suits, employee benefit claims, breach of
contract actions, tort claims, shareholder suits, including securities fraud,
and intellectual property related litigation. In addition, because of the nature
of its business, United is subject to a variety of legal actions relating to its
business operations, such as claims relating to the denial of health care
benefits, medical malpractice actions, provider disputes including disputes over
withheld compensation and termination of provider contracts, disputes related to
self-funded business including actions alleging claim administration errors and
the failure to disclose network rate discounts and other fee and rebate
arrangements, disputes over copayment calculations, and claims relating to
customer audits and contract performance. Recent court decisions and legislative
activity may have the effect of increasing the Company's exposure for any of
these types of claims. In some cases, substantial non-economic or punitive
damages may be sought. While United currently has insurance coverage for some of
these potential liabilities, others may not be covered by insurance, the
insurers may dispute coverage or the amount of insurance may not be enough to
cover the damages awarded. In addition, certain types of damages, such as
punitive damages, may not be covered by insurance and insurance coverage for all
or certain forms of liability may become unavailable or prohibitively expensive
in the future.
INFORMATION SYSTEMS. United's business is significantly dependent on
effective information systems. United has many different information systems for
its various businesses. The Company's information systems require an ongoing
commitment of resources to maintain and enhance existing systems and develop new
systems. As a result of United's acquisition activities, United is in the
process of attempting to reduce the number of systems and also upgrade and
expand its information systems capabilities. Failure to maintain effective and
efficient information systems could result in loss of existing customers,
difficulty in attracting new customers, customer and provider disputes,
regulatory problems, increases in administrative expenses or other adverse
consequences. In addition, the Company may, from time-to-time, obtain
significant portions of its systems-related or other services or facilities from
independent third parties, which may make the Company's operations vulnerable to
such third parties' failure to perform adequately.
ADMINISTRATION AND MANAGEMENT. Efficient and cost-effective administration
of the Company's operations is integral to United's profitability and
competitive positioning. While United attempts to effectively manage such
expenses, increases in staff-related and other administrative expenses may occur
from time-to-time due to business or product start-ups or expansions, growth or
changes in business, acquisitions, regulatory requirements or other reasons.
Such expense increases are not clearly predictable and increases in
administrative expenses may adversely affect results.
United believes it currently has a relatively experienced, capable
management staff. Loss of certain managers or a number of such managers could
adversely affect United's ability to administer and manage its business.
MARKETING. The Company markets its products and services through both
employed sales people and independent sales agents. Although the Company has a
number of such sales employees and agents, if certain key sales employees or
agents or a large subset of such individuals were to leave the Company, its
ability to retain existing customers and members could be impaired. In addition,
certain of the Company's customers or potential customers consider rating,
accreditation or certification of the Company by various private or governmental
bodies or rating agencies necessary or important. Certain of the Company's
health plans or other business units may not have obtained or may not desire or
be able to obtain or maintain
12
<PAGE>
such accreditation or certification, which could adversely affect the Company's
ability to obtain or retain business with such customers.
ACQUISITIONS. The Company has made several large acquisitions in recent
years and has an active ongoing acquisition program. These acquisitions may
entail certain risks and uncertainties in addition to those present in its
ongoing business operations, unknown liabilities, unforeseen administrative
needs or increased efforts to integrate the acquired operations. Failure to
identify liabilities, anticipate additional administrative needs or effectively
integrate acquired operations could result in reduced revenues, increased
administrative and other costs, or customer confusion or dissatisfaction.
STOCK MARKET. The market prices of the securities of certain of the
publicly-held companies in the industry in which United operates have shown
volatility and sensitivity in response to many factors, including general market
trends, public communications regarding managed care, legislative or regulatory
actions, health care cost trends, pricing trends, competition, earnings or
membership reports of particular industry participants, and acquisition
activity. During 1996, the market price for United's securities experienced
similar volatility. There can be no assurance regarding the level or stability
of United's share price at any time or of the impact of these or any other
factors on the share price.
13
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
FIRST ELECTED AS
NAME AGE POSITION EXECUTIVE OFFICER
- ---------------------------------------- --- ---------------------------------------- -----------------
<S> <C> <C> <C>
William W. McGuire, M.D................. 48 President, Chairman, Chief Executive 1988
Officer and Director
James G. Carlson........................ 44 Executive Vice President, Field 1995
Operations
David A.George.......................... 41 Executive Vice President, Administrative 1996
Services
David P. Koppe.......................... 40 Chief Financial Officer 1992
Sheila T. Leatherman.................... 45 Executive Vice President 1993
David J. Lubben......................... 45 General Counsel and Secretary 1996
Thomas P. McDonough..................... 48 Executive Vice President 1997
Michael A. Mooney....................... 43 Executive Vice President, Underwriting & 1996
Pricing
Jeannine M. Rivet....................... 48 Executive Vice President, Health 1992
Services
Travers H. Wills........................ 53 Executive Vice President and Chief 1992
Operating Officer
</TABLE>
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
Dr. McGuire became a director of the Company in February 1989 and the
chairman of the board in May 1991. Dr. McGuire became an executive vice
president of United in November 1988, was appointed the Company's chief
operating officer in May 1989, the Company's president in November 1989 and the
Company's chief executive officer in February 1991.
Mr. Carlson became United's executive vice president in October 1995. From
March to October 1995, Mr. Carlson was executive vice president of The
MetraHealth Companies, Inc ("MetraHealth"). Mr. Carlson was president and chief
executive officer of HealthSpring, Inc., a developer of primary care physician
practices, from July 1992 to March 1995. From April 1975 to July 1992, Mr.
Carlson was an employee of Prudential Insurance Company. Mr. Carlson's last
position with Prudential Insurance Company was vice president of Group
Insurance.
Mr. George became a vice president of United in October 1995 and an
executive vice president in October 1996. Mr. George was an executive vice
president of MetraHealth from November 1994 to October 1995. Prior to joining
MetraHealth, Mr. George was president of Southern Group Operations for the
Prudential Insurance Company of America from 1989 through November 1994.
Mr. Koppe became the Company's chief financial officer in December 1994. He
has been employed by the Company since June 1983 and served as the Company's
vice president and treasurer from May 1989 to January 1996. Mr. Koppe also
served as the Company's controller from May 1989 until October 1994.
Ms. Leatherman currently serves as an executive vice president of United.
Ms. Leatherman joined the Company in 1989 and served as its vice president of
research and development until June 1992 when she became president of United's
Center for Health Care Evaluation.
Mr. Lubben became the Company's general counsel and secretary in October
1996. Prior to joining United, he was a partner in the law firm of Dorsey &
Whitney LLP. Mr. Lubben first became associated with Dorsey & Whitney in 1977.
14
<PAGE>
Mr. McDonough became executive vice president of the Company in February
1997. From October 1995 through February 1997, he was the Company's senior vice
president, claim services. From August 1995 to October 1995, he was employed by
MetraHealth as senior vice president, claim services. From July 1993 through
July 1995, he was the president of Harrington Services Corporation, and from
February 1988 to July 1993, he was the chief operating officer of Jardine Group
Services Corporation.
Mr. Mooney has been employed by the Company since February 1985 and became
an executive vice president of United in January 1996. Prior to January 1996,
Mr. Mooney served in various capacities in United's Underwriting Department
including, most recently, vice president, underwriting.
Ms. Rivet has been employed by United since July 1990. She became an
executive vice president of the Company in October 1994. She served as the
Company's senior vice president, health plan operations from September 1993 to
September 1994 and the Company's vice president of health service operations
from June 1990 to September 1993.
Mr. Wills has been employed by the Company since November 1992. From
November 1992 until October 1995, he served as United's senior vice president,
specialty operations. He has been the Company's chief operating officer since
October 1995. From 1968 to 1992, Mr. Wills was employed by CIGNA Corporation, a
multi-line insurance company, in various capacities, most recently as president
of MCC Companies, a mental health/substance abuse subsidiary of CIGNA.
15
<PAGE>
ITEM 2. PROPERTIES
As of December 31, 1996, the Company leased approximately 1,140,918
aggregate square feet of space for its principal administrative offices in
Hartford, Connecticut and the greater Minneapolis/St. Paul, Minnesota area. In
connection with its operations outside of the Minneapolis/St. Paul, Minnesota
and Hartford, Connecticut areas, as of December 31, 1996, the Company leased
approximately 5,212,172 aggregate square feet for office space or space for
computer facilities and claims processing centers nationwide and 13,280
aggregate square feet outside of the U.S. Such space corresponds to areas in
which its health plans or managed care services specialty programs operate or
where it has satellite administrative offices. The Company's leases expire at
various dates through 2011. As of December 31, 1996, the Company owned
approximately 699,851 aggregate square feet of space for administrative offices
in various states and its staff model clinic operations in Florida.
ITEM 3. LEGAL PROCEEDINGS
Because of the nature of its business, United is subject to suits relating
to the failure to provide or pay for health care or other benefits, poor
outcomes for care delivered or arranged under United's programs, nonacceptance
or termination of providers, failure to return withheld amounts from provider
compensation, failure of a self-funded plan serviced by United to pay benefits,
improper copayment calculations and other forms of legal actions. Some of these
suits may include claims for substantial non-economic or punitive damages. While
United does not believe that any such actions, or any other types of actions,
currently threatened or pending will, individually or in the aggregate, have a
material adverse effect on United's financial position or results of operations,
the likelihood or outcome of such current or future suits cannot be accurately
predicted and they could adversely affect United's financial results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained under the heading "Investor Information" in the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1996, is incorporated herein by reference.
ITEM. 6. SELECTED FINANCIAL DATA
The information contained under the heading "Financial Highlights" in the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1996, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information contained under the heading "Financial Review" in the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1996, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements together with the Report of
Independent Public Accountants thereon appearing on pages 24 through 38 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1996, are incorporated herein by reference.
16
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held May
14, 1997, is incorporated herein by reference.
Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K, information as to executive officers of the Company is
set forth in Part I of this Form 10-K under separate caption.
ITEM 11. EXECUTIVE COMPENSATION
The information included under the heading "Executive Compensation" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held May 14, 1997, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Information included under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held May 14, 1997, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
appearing under the heading "Certain Relationships and Transactions" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held May 14, 1997, is incorporated herein by reference.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included
in the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1996 and are incorporated herein by reference:
Consolidated Statements of Operations for the Three Years Ended December
31, 1996.
Consolidated Balance Sheets at December 31, 1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity for the Three
Years Ended December 31, 1996.
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1996.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
(a) 2. FINANCIAL STATEMENT SCHEDULES
None
(a) 3. EXHIBITS
<TABLE>
<S> <C>
13(a) Copy of the Company's Second Restated Articles of Incorporation.
13(b) Copy of the Company's Restated Bylaws, as amended. (Incorporated by reference
to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1991.)
14 Certificate of Designation for 5.75% Series A Convertible Preferred Stock
(See Exhibit 3(a).)
*10(a) Employment Agreement dated as of January 6, 1996, between United HealthCare
Corporation and William W. McGuire, M.D. (Incorporated by reference to
Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.)
*10(b) United HealthCare Corporation 1985 Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10(b) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993.)
*10(c) United HealthCare Corporation 1987 Supplemental Stock Option Plan.
(Incorporated by reference to Exhibit 10(d) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993.)
*10(d) United HealthCare Corporation 1988 Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10(e) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992.)
*10(e) United HealthCare Corporation 1990 Stock and Incentive Plan, as amended.
(Incorporated by reference to Exhibit 10(f) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992.)
*10(f) United HealthCare Corporation Amended and Restated 1991 Stock and Incentive
Plan, Amended and Restated Effective August 15, 1996.
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
10(g) Employment Agreement, dated as of November 1, 1994, between United HealthCare
Corporation and Jeannine Rivet. (Incorporated by reference to Exhibit 10(k)
to the Company's Annual Report on Form 10-K for the year-ended December 31,
1994.)
*10(h) Restated Employment Agreement dated as of May 27, 1994, between United
HealthCare Corporation and Travers H. Wills. (Incorporated by reference to
Exhibit 99.1 to the Company's Interim Report on Form 8-K dated May 27,
1994.)
10(i) Employment Agreement dated as of November 1, 1994, between United HealthCare
Corporation and Michael Mooney. (Incorporated by reference to Exhibit 10(m)
to the Company's Annual Report on Form 10-K for the year ended December 31,
1996.)
*10(j) Employment Agreement dated as of December 1, 1994, between United HealthCare
Corporation and David P. Koppe. (Incorporated be reference to Exhibit 10(q)
to the Company's Annual Report on Form 10-K for the year ended December 31,
1994.)
10(k) Employment Agreement dated as of November 1, 1994, between United HealthCare
Corporation and Sheila T. Leatherman. (Incorporated by reference to Exhibit
10(r) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.)
10(l) Employment Agreement dated as of November 1, 1994, between United HealthCare
Corporation and James Conto. (Incorporated by reference to Exhibit 10(s) to
the Company's Annual Report on Form 10-K for the year ended December 31,
1994.)
*10(m) Employment Agreement effective as of October 2, 1995 between United
HealthCare Corporation and James G. Carlson. (Incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995.)
*10(n) Employment Agreement effective as of October 2, 1995, between United
HealthCare Corporation and David A. George.
+10(o) Information Technology Services Agreement between The MetraHealth Companies,
Inc. and Integrated Systems Solutions Corporation dated as of November 1,
1995. (Incorporated by reference to Exhibit 10(t) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.)
+10(p) AARP Health Insurance Agreement by and among American Association of Retired
Persons, Trustees of the AARP Insurance Plan and United HealthCare
Insurance Company dated as of February 26, 1997.
*10(q) United HealthCare Corporation Non-employee Director Stock Option Plan.
(Incorporated by reference to Exhibit 10(x) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994.)
*10(r) Letter Agreement between The MetraHealth Companies, Inc. and Kennett L.
Simmons dated as of October 2, 1995. (Incorporated by reference to Exhibit
10(w) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.)
*10(s) Consulting Agreement between The MetraHealth Companies, Inc. and Kennett L.
Simmons dated as of October 2, 1995. (Incorporated by reference to Exhibit
10(x) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.)
11 Statement regarding computation of per share earnings.
13 Information contained under the headings "Investor Information," "Financial
Highlights," "Financial Review" and the Company's Consolidated Financial
Statements together with the Report of Independent Public Accountants
thereon, for the fiscal year ended December 31, 1996, as required by Rule
601(b) (13) (ii). (E.D.G.A.R. version only)
</TABLE>
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<TABLE>
<S> <C>
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants.
24 Powers of Attorney.
27 Financial Data Schedule. (E.D.G.A.R. version only)
</TABLE>
- ------------------------
+ Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of these Exhibits have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a request
for confidential treatment.
* Denotes compensation plans in which certain directors and named executive
officers participate and which are being filed pursuant to Item
601(b)(10)(iii)(A) of Regulation S-K.
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during the fourth quarter of
1996 or during the period thereafter ending on March 29, 1997:
The company filed a Current Report on Form 8-K dated December 18, 1996. The
only item reported on this filing was Item 5 concerning the dismissal of a
shareholder suit against the Company, RAY LEVY, ET AL. V. UNITED HEALTHCARE
CORPORATION, ET AL.
(c) See Exhibits listed in Item 14 hereof and the Exhibits attached as a
separate section of this Report.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 1997
UNITED HEALTHCARE CORPORATION
By: /s/ WILLIAM W. MCGUIRE, M.D.
-----------------------------------------
William W. McGuire, M.D.
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
/s/ WILLIAM W. MCGUIRE, M.D. Director, Chief Executive
- ------------------------------ Officer (principal March 28, 1997
William W. McGuire, M.D. executive officer)
/s/ DAVID P. KOPPE Chief Financial Officer
- ------------------------------ (principal financial and March 28, 1997
David P. Koppe accounting officer)
*
- ------------------------------ Director March 28, 1997
William C. Ballard, Jr.
*
- ------------------------------ Director March 28, 1997
Richard T. Burke
*
- ------------------------------ Director March 28, 1997
James A. Johnson
*
- ------------------------------ Director March 28, 1997
Thomas H. Kean
*
- ------------------------------ Director March 28, 1997
Douglas W. Leatherdale
- ------------------------------ Director March 28, 1997
Elizabeth J. McCormack
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director March 28, 1997
Robert L. Ryan
*
- ------------------------------ Director March 28, 1997
William G. Spears
*
- ------------------------------ Director March 28, 1997
Kennett L. Simmons
*
- ------------------------------ Director March 28, 1997
Gail R. Wilensky
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By /s/ WILLIAM W. MCGUIRE,
M.D. March 28, 1997
--------------------------
William W. McGuire, M.D.
AS ATTORNEY-IN-FACT
</TABLE>
22
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
13(a) Copy of the Company's Second Restated Articles of Incorporation...................................
13(b) Copy of the Company's Restated Bylaws, as amended. (Incorporated by reference to Exhibit 3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.)...................
14 Certificate of Designation for 5.75% Series A Convertible Preferred Stock (See Exhibit 3(a).).....
10(a) Employment Agreement dated as of January 6, 1996, between United HealthCare Corporation and
William W. McGuire, M.D. (Incorporated by reference to Exhibit 10(b) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.)......................................
10(b) United HealthCare Corporation 1985 Stock Option Plan, as amended. (Incorporated by reference to
Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31,
1993.)..........................................................................................
10(c) United HealthCare Corporation 1987 Supplemental Stock Option Plan. (Incorporated by reference to
Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31,
1993.)..........................................................................................
10(d) United HealthCare Corporation 1988 Stock Option Plan, as amended. (Incorporated by reference to
Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended December 31,
1992.)..........................................................................................
10(e) United HealthCare Corporation 1990 Stock and Incentive Plan, as amended. (Incorporated by
reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992.).............................................................................
10(f) United HealthCare Corporation Amended and Restated 1991 Stock and Incentive Plan, Amended and
Restated Effective August 15, 1996..............................................................
10(g) Employment Agreement, dated as of November 1, 1994, between United HealthCare Corporation and
Jeannine Rivet. (Incorporated by reference to Exhibit 10(k) to the Company's Annual Report on
Form 10-K for the year-ended December 31, 1994.)................................................
10(h) Restated Employment Agreement dated as of May 27, 1994, between United HealthCare Corporation and
Travers H. Wills. (Incorporated by reference to Exhibit 99.1 to the Company's InterimReport on
Form 8-K dated May 27, 1994.)...................................................................
10(i) Employment Agreement dated as of November 1, 1994, between United HealthCare Corporation and
Michael Mooney. (Incorporated by reference to Exhibit 10(m) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.)................................................
10(j) Employment Agreement dated as of December 1, 1994, between United HealthCare Corporation and David
P. Koppe. (Incorporated be reference to Exhibit 10(q) to the Company's Annual Report on Form
10-K for the year ended December 31, 1994.).....................................................
10(k) Employment Agreement dated as of November 1, 1994, between United HealthCare Corporation and
Sheila T. Leatherman. (Incorporated by reference to Exhibit 10(r) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994.).............................................
10(l) Employment Agreement dated as of November 1, 1994, between United HealthCare Corporation and James
Conto. (Incorporated by reference to Exhibit 10(s) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.)..........................................................
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
10(m) Employment Agreement effective as of October 2, 1995 between United HealthCare Corporation and
James G. Carlson. (Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995.).........................................
10(n) Employment Agreement effective as of October 2, 1995, between United HealthCare Corporation and
David A. George.................................................................................
10(o) Information Technology Services Agreement between The MetraHealth Companies, Inc. and Integrated
Systems Solutions Corporation dated as of November 1, 1995. (Incorporated by reference to
Exhibit 10(t) to the Company's Annual Report on Form 10-K for the year ended December 31,
1995.)..........................................................................................
10(p) AARP Health Insurance Agreement by and among American Association of Retired Persons, Trustees of
the AARP Insurance Plan and United HealthCare Insurance Company dated as of February 26,
1997............................................................................................
10(q) United HealthCare Corporation Non-employee Director Stock Option Plan. (Incorporated by reference
to Exhibit 10(x) to the Company's Annual Report on Form 10-K for the year ended December 31,
1994.)..........................................................................................
10(r) Letter Agreement between The MetraHealth Companies, Inc. and Kennett L. Simmons dated as of
October 2, 1995. (Incorporated by reference to Exhibit 10(w) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.)................................................
10(s) Consulting Agreement between The MetraHealth Companies, Inc. and Kennett L. Simmons dated as of
October 2, 1995. (Incorporated by reference to Exhibit 10(x) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.)................................................
11 Statement regarding computation of per share earnings.............................................
13 Information contained under the headings Investor Information, Financial Highlights, Financial
Review and the Company's Consolidated Financial Statements together with the Report of
Independent Public Accountants thereon, for the fiscal year ended December 31, 1996, as required
by Rule 601(b) (13) (ii). (E.D.G.A.R. version only).............................................
21 Subsidiaries of the Registrant....................................................................
23 Consent of Independent Public Accountants.........................................................
24 Powers of Attorney................................................................................
27 Financial Data Schedule. (E.D.G.A.R. version only)................................................
</TABLE>
24
<PAGE>
Exhibit 10(f)
UNITED HEALTHCARE CORPORATION
AMENDED AND RESTATED
1991 STOCK AND INCENTIVE PLAN,
AMENDED AND RESTATED EFFECTIVE AUGUST 15, 1996
1. PURPOSE OF PLAN.
This Plan shall be known as the "United HealthCare Corporation 1991
Stock and Incentive Plan" and is hereinafter referred to as the "Plan". The
purpose of the Plan is to aid in maintaining and developing personnel capable
of contributing to the future success of United HealthCare Corporation, a
Minnesota corporation (the "Company"), to offer such personnel additional
incentives to put forth maximum efforts for the success of the business, and
to afford them an opportunity to acquire a proprietary interest in the
Company through stock options and other awards as provided herein. Options
granted under this Plan may be either incentive stock options ("Incentive
Stock Options") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or options which do not qualify as
Incentive Stock Options. Awards granted under this Plan shall be SARs,
restricted stock or performance awards as hereinafter described.
2. STOCK SUBJECT TO PLAN.
Subject to the adjustments authorized by Section 15 hereof and the
provisions of the remaining subsection of this Section 2, the stock to be
subject to options or other awards under the Plan shall be the Company's
authorized common shares, par value $.01 per share (the "Shares"). Such
shares may be either authorized but unissued shares, or issued shares which
have been reacquired by the Company. Subject to adjustment as provided in
Section 15 hereof, the number of shares on which options may be exercised or
other awards issued under this Plan shall be 3,000,000 shares plus a number
of shares equal to the sum of (i) one and one-half percent of the number of
shares of the Company's Common Stock outstanding as of the December 31
immediately preceding the year in which such options may be granted plus (ii)
options for such number of shares of Common Stock as were available for grant
in any preceding year and were not otherwise granted. If awards lapse,
expire, terminate or are canceled prior to the issuance of shares, or if
shares issued under an option are reacquired by the Company pursuant to this
Plan, those shares will be available for new awards.
3. ADMINISTRATION OF PLAN.
(a) The Plan shall be administered by a committee (the "Committee") of
two or more directors of the Company, none of whom shall be officers or
employees of the Company and all of whom shall be "Non-Employee Directors"
with respect to the Plan within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, and any successor rule. The members of the
Committee shall be appointed by and serve at the pleasure of the Board of
Directors.
(b) The Committee shall have plenary authority in its discretion, but
subject to the express provisions of the Plan: (i) to determine the purchase
price of the Common Shares covered by each option, (ii) to determine the
employees to whom and the time or times at which such options and awards
shall be granted and the number of shares to be subject to each, (iii) to
determine the form of payment to be made upon the exercise of an SAR or in
connection with performance awards, either cash, Common Shares of the Company
or a combination thereof, (iv) to determine the terms of exercise of each
option and award, (v) to accelerate the time at which all or any part of an
option or award may be exercised, (vi) to amend or modify the terms of any
option or award with the consent of the holder of the optionee or grantee,
(vii) to interpret the Plan, (viii) to prescribe, amend and rescind rules and
regulations relating to the Plan, (ix) to determine the terms and provisions
of each option or award agreement under the Plan (any of which agreements
need not be identical), including the designation of those options intended
to
<PAGE>
be Incentive Stock Options, (x) to delegate such of its authority granted
herein as it deems is in the best interests of the Company, and (xi) to make
all other determinations necessary or advisable for the administration of the
Plan, subject to the exclusive authority of the Board of Directors under
Section 16 herein to amend or terminate the Plan. The Committee's
determinations on the foregoing matters, unless otherwise disapproved by the
Board of Directors of the Company, shall be final and conclusive; provided,
however, that the Committee's determinations with respect to the matters set
forth in clauses (ii) and (iii) above, unless delegated as provided in
subsection 3(C) below, shall be final and conclusive without any right of
disapproval by the Board of Directors of the Company.
(c) The Chief Executive Officer of the Company shall have the
authority, as granted by the Committee pursuant to clause (x) of the
preceding subsection, to grant, pursuant to the Plan, options or other awards
to eligible persons who are not considered by the Company as its officers or
directors for purposes of Section 16 of the Securities Exchange Act of 1934,
as amended. The Chief Executive Officer of the Company shall provide
information as to any grants made pursuant to this subsection to the
Committee at its next meeting.
(d) The Committee shall select one of its members as its Chairperson
and shall hold its meetings at such times and places as it may determine. A
majority of its members shall constitute a quorum. All determinations of the
Committee shall be made by not less than a majority of its members. Any
decision or determination reduced to writing and signed by all of the members
of the Committee shall be fully effective as if it had been made by a
majority vote at a meeting duly called and held. The grant of an option or
award shall be effective only if a written agreement shall have been duly
executed and delivered by and on behalf of the Company following such grant.
The Committee may appoint a Secretary and may make such rules and regulations
for the conduct of its business as it shall deem advisable.
4. ELIGIBILITY.
Incentive Stock Options may be granted under this Plan only to any full
or part-time employee (which term as used herein includes, but is not limited
to, officers and directors who are also employees) of the Company and of its
present and future subsidiary corporations within the meaning of Section
424(f) of the Code (herein called "subsidiaries"). Full or part-time
employees, consultants or independent contractors to the Company or one of
its subsidiaries shall be eligible to receive awards and options which do not
qualify as Incentive Stock Options. In determining the persons to whom
options and awards shall be granted and the number of shares subject to each,
the Committee may take into account the nature of services rendered by the
respective employees or consultants, their present and potential
contributions to the success of the Company and such other factors as the
Committee in its discretion shall deem relevant. A person who has been
granted an option or award under this Plan may be granted additional options
or awards under the Plan if the Committee shall so determine; provided,
however, that for Incentive Stock Options granted after December 31, 1986, to
the extent the aggregate fair market value (determined at the time the
Incentive Stock Option is granted) of the Common Shares with respect to which
all Incentive Stock Options are exercisable for the first time by an employee
during any calendar year (under all plans described in subsection (d) of
Section 422 of the Code of his or her employer corporation and its parent and
subsidiary corporations) exceeds $100,000, such options shall be treated as
options which do not qualify as Incentive Stock Options. Nothing in the Plan
or in any agreement thereunder shall confer on any employee any right to
continue in the employ of the Company or any of its subsidiaries or affect in
any way the right of the Company or any of its subsidiaries to terminate his
or her employment at any time.
2
<PAGE>
5. PRICE.
The option price for all Incentive Stock Options granted under the Plan
shall be determined by the Committee but shall not be less than 100% of the
fair market value of the Common Shares at the date of grant of such option.
The option price for options granted under the Plan which do not qualify as
Incentive Stock Options and, if applicable, the price for all awards shall
also be determined by the Committee. For purposes of the preceding sentence
and for all other valuation purposes under the Plan, the fair market value of
the Common Shares shall be as reasonably determined by the Committee, but
shall not be less than the closing price of the stock on the date for which
fair market value is being determined, as reported on any national securities
exchange on which the Common Shares are then traded. If on the date of grant
of any option or award hereunder the Common Shares are not traded on an
established securities market, the Committee shall make a good faith attempt
to satisfy the requirements of this Section 5 and in connection therewith
shall take such action as it deems necessary or advisable.
6. TERM.
Each option and award and all rights and obligations thereunder shall
expire on the date determined by the Committee and specified in the option or
award agreement. The Committee shall be under no duty to provide terms of
like duration for options or awards granted under the Plan, but the term of
an Incentive Stock Option may not extend more than ten (10) years from the
date of grant of such option and the term of options granted under the Plan
which do not qualify as Incentive Stock Options may not extend more than
fifteen (15) years from the date of grant of such option.
7. EXERCISE OF OPTION OR AWARD.
(a) The Committee shall have full and complete authority to determine
whether the option or award will be exercisable in full at any time or from
time to time during the term thereof, or to provide for the exercise thereof
in such installments, upon the occurrence of such events, such as termination
of employment for any reason, and at such times during the term of the option
or award as the Committee may determine and specify in the option or award
agreement.
(b) The exercise of any option or award granted hereunder shall be
effective only at such time as the sale of Common Shares pursuant to such
exercise will not violate any state or federal securities or other laws. To
the extent required in order to comply with Rule 16b-3 of the Securities
Exchange Act of 1934, as amended, in the case of an option or award granted
to a person considered by the Company as one of its officers or directors for
purposes of Section 16 of the Securities Exchange Act of 1934, as amended,
the terms of the option or award will require that such shares are not
disposed of by such officer or director for a period of at least six months
from the date of grant.
(c) An optionee or grantee electing to exercise an option or award
shall give written notice to the Company of such election and of the number
of shares subject to such exercise. The Company will verify the
appropriateness of the election and determine the compensation and related
withholding tax amounts. The exercise amount and applicable taxes must be
tendered by the employee prior to the issuance of shares pursuant to the
exercise. Payment shall be made to the Company in cash (including wire
transfer, bank check, certified check, personal check, or money order), or,
at the discretion of the Committee and as specified by the Committee, (i) by
delivering certificates for the Company's Common Shares already owned by the
optionee or grantee having a fair market value as of the date of grant equal
to the full purchase price of the shares, together with any applicable
withholding taxes, or (ii) a combination of cash and such shares; provided,
however, that an optionee shall not be entitled to tender shares of the
Company's Common Stock pursuant to successive, substantially simultaneous
exercises of options granted under this or any other stock option plan of the
Company. The fair market value of such tendered shares shall be determined
as provided in Section 5 herein. Until such person has been issued the
shares subject to such exercise, he or she shall possess no rights as a
shareholder with respect to such shares.
3
<PAGE>
8. ALTERNATIVE STOCK APPRECIATION RIGHTS.
(a) GRANT. At the time of grant of an option or award under the Plan
(or at any other time), the Committee, in its discretion, may grant a Stock
Appreciation Right ("SAR") evidenced by an agreement in such form as the
Committee shall from time to time approve. Any such SAR may be subject to
restrictions on the exercise thereof as may be set forth in the agreement
representing such SAR, which agreement shall comply with and be subject to
the following terms and conditions and any additional terms and conditions
established by the Committee that are consistent with the terms of the Plan.
(b) EXERCISE. An SAR shall be exercised by the delivery to the Company
of a written notice which shall state that the holder thereof elects to
exercise his or her SAR as to the number of shares specified in the notice
and which shall further state what portion, if any, of the SAR exercise
amount (hereinafter defined) the holder thereof requests be paid to him or
her in cash and what portion, if any, is to be paid in Common Shares of the
Company. The Committee promptly shall cause to be paid to such holder the
SAR exercise amount, less any applicable withholding taxes, either in cash,
in Common Shares of the Company, or in any combination of cash and shares as
the Committee may determine. Such determination may be either in accordance
with the request made by the holder of the SAR or in the sole and absolute
discretion of the Committee. The SAR exercise amount is the excess of the
fair market value of one share of the Company's Common Shares on the date of
exercise over the per share exercise price in respect of which the SAR was
granted, multiplied by the number of shares as to which the SAR is exercised.
For the purposes, hereof, the fair market value of the Company's shares shall
be determined as provided in Section 5 herein.
9. RESTRICTED STOCK AWARDS.
Awards of Common Shares subject to forfeiture and transfer restrictions
may be granted by the Committee. Any restricted stock award shall be
evidenced by an agreement in such form as the Committee shall from time to
time approve, which agreement shall comply with and be subject to the
following terms and conditions and any additional terms and conditions
established by the Committee that are consistent with the terms of the Plan:
(a) GRANT OF RESTRICTED STOCK AWARDS. Each restricted stock award made
under the Plan shall be for such number of Common Shares as shall be
determined by the Committee and set forth in the agreement containing the
terms of such restricted stock award. Such agreement shall set forth a
period of time during which the grantee must remain in the continuous
employment of the Company in order for the forfeiture and transfer
restrictions to lapse. If the Committee so determines, the restrictions may
lapse during such restricted period in installments with respect to specified
portions of the shares covered by the restricted stock award. The agreement
may also, in the discretion of the Committee, set forth performance or other
conditions that will subject the Common Shares to forfeiture and transfer
restrictions. The Committee may, at its discretion, waive all or any part of
the restrictions applicable to any or all outstanding restricted stock
awards, provided that, in the case of restricted stock awards made to a
person considered by the Company as an officer or director for purposes of
Section 16 of the Securities Act of 1934, as amended, the terms of such
restricted stock agreement will provide that the stock so awarded may not be
disposed of for a period of at least six months from the date the award was
made.
(b) DELIVERY OF COMMON SHARES AND RESTRICTIONS. At the time of a
restricted stock award, a certificate representing the number of Common
Shares awarded thereunder shall be registered in the name of the grantee.
Such certificate shall be held by the Company or any custodian appointed by
the Company for the account of the grantee subject to the terms and
conditions of the Plan, and shall bear
4
<PAGE>
such a legend setting forth the restrictions imposed thereon as the
Committee, in its discretion, may determine. The grantee shall have all
rights of a shareholder with respect to the Common Shares, including the
right to receive dividends and the right to vote such shares, subject to the
following restrictions: (i) the grantee shall not be entitled to delivery of
the stock certificate until the expiration of the restricted period and the
fulfillment of any other restrictive conditions set forth in the restricted
stock agreement with respect to such Common Shares; (ii) none of the Common
Shares may be sold, assigned, transferred, pledged, hypothecated or otherwise
encumbered or disposed of during such restricted period or until after the
fulfillment of any such other restrictive conditions; and (iii) except as
otherwise determined by the Committee, all of the shares shall be forfeited
and all rights of the grantee to such shares shall terminate, without further
obligation on the part of the Company, unless the grantee remains in the
continuous employment of the Company for the entire restricted period in
relation to which such Common Shares were granted and unless any other
restrictive conditions relating to the restricted stock award are met. Any
Common Shares, any other securities of the Company and any other property
(except for cash dividends) distributed with respect to the Common Shares
subject to restricted stock awards shall be subject to the same restrictions,
terms and conditions as such restricted Common Shares.
(c) TERMINATION OF RESTRICTIONS. At the end of the restricted period
and provided that any other restrictive conditions of the restricted stock
award are met, or at such earlier time as otherwise determined by the
Committee, all restrictions set forth in the agreement relating to the
restricted stock award or in the Plan shall lapse as to the restricted Common
Shares subject thereto. Upon payment by the grantee to the Company of any
withholding tax required to be paid, a stock certificate for the appropriate
number of Common Shares, free of the restrictions and the restricted stock
legend, shall be delivered to the grantee or his or her beneficiary or
estate, as the case may be.
10. PERFORMANCE AWARDS.
The Committee is further authorized to grant performance awards.
Subject to the terms of this Plan and any applicable award agreement, a
performance award granted under the Plan (i) may be denominated or payable in
cash, Common Shares (including, without limitation, restricted stock), other
securities, other awards, or other property and (ii) shall confer on the
holder thereof rights valued as determined by the Committee, in its
discretion, and payable to, or exercisable by, the holder of the performance
awards, in whole or in part, upon achievement of such performance goals
during such performance periods as the Committee, in its discretion, shall
establish. Subject to the terms of this Plan and any applicable award
agreement, the performance goals to be achieved during any performance
period, the length of any performance period, the amount of any performance
award granted, and the amount of any payment or transfer to be made by the
grantee and by the Company under any performance award shall be determined by
the Committee.
11. INCOME TAX WITHHOLDING AND TAX BONUSES.
(a) In order to comply with all applicable federal, state or local
income tax laws or regulations, the Company may take such action as it deems
appropriate to ensure that all applicable federal, state or local payroll,
withholding, income or other taxes, which are the sole and absolute
responsibility of an optionee or grantee under the Plan, are withheld or
collected from such optionee or grantee prior to his or her receipt of Common
Shares pursuant to the exercise of an option or the satisfaction of the
conditions of any other award. In order to assist an optionee or grantee in
paying all federal and state taxes to be withheld or collected upon exercise
of an option or award which does not qualify as an Incentive Stock Option
hereunder, the Committee, in its absolute discretion and subject to such
additional terms and conditions as it may adopt, shall permit the optionee or
grantee to satisfy such tax obligation by (i) electing to have the Company
withhold a portion of the shares otherwise to be delivered upon exercise of
5
<PAGE>
such option or award with a fair market value, determined in accordance with
Section 5 herein, equal to such taxes or (ii) delivering to the Company
Common Shares other than the shares issuable upon exercise of such option or
award with a fair market value, determined in accordance with Section 5,
equal to such taxes. The election must be made on or before the date that
the amount of tax to be withheld is determined.
(b) The Committee shall have the authority, at the time of grant of an
option under the Plan or at any time thereafter, to approve tax bonuses to
designated optionees or grantees to be paid upon their exercise of options or
awards granted hereunder. The amount of any such payments shall be
determined by the Committee but shall not exceed one hundred percent (100%)
of the excess of the fair market value of the shares received upon exercise
of an option or award over the price paid therefor. The Committee shall have
full authority in its absolute discretion to determine the amount of any such
tax bonus and the terms and conditions affecting the vesting and payment
thereof.
12. ADDITIONAL RESTRICTIONS.
The Committee shall have full and complete authority to determine
whether all or any part of the Common Shares of the Company acquired upon
exercise of any of the options or awards granted under the Plan shall be
subject to restrictions on the transferability thereof or any other
restrictions affecting in any manner the optionee's or grantee's rights with
respect thereto, but any such restriction shall be contained in the agreement
relating to such options or awards.
13. TEN PERCENT SHAREHOLDER RULE.
Notwithstanding any other provision in the Plan, if at the time an
option is otherwise to be granted pursuant to the Plan the optionee owns
directly or indirectly (within the meaning of Section 424(d) of the Code)
Common Shares of the Company possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or its
parent or subsidiary corporations (within the meaning of Section 422(b)(5) of
the Code), then any Incentive Stock Option to be granted to such optionee
pursuant to the Plan shall satisfy the requirements of Section 422(c)(5) of
the Code, and the option price shall be not less than 110% of the fair market
value of the Common Shares of the Company determined as described herein, and
such option by its terms shall not be exercisable after the expiration of
five (5) years from the date such option is granted.
14. NONTRANSFERABILITY.
No option or award granted under the Plan shall be transferable by an
optionee or grantee, otherwise than by will or the laws of descent or
distribution or pursuant to a qualified domestic relations order as defined
by the Code or Title I of the Employee Retirement Income Security Act, or the
rules thereunder. Except as otherwise provided in an option or award
agreement, during the lifetime of an optionee or grantee, the option or award
shall be exercisable only by such optionee or grantee.
15. DILUTION OR OTHER ADJUSTMENTS.
If there shall be any change in the Common Shares through merger,
consolidation, reorganization, recapitalization, dividend in the form of
stock (of whatever amount), stock split or other change in the corporate
structure, appropriate adjustments in the Plan and outstanding options and
awards shall be made by the Committee. In the event of any such changes,
adjustments shall include, where appropriate, changes in the aggregate number
of shares subject to the Plan, the number of shares and the price per share
subject to outstanding options and awards and the amount payable upon
exercise of outstanding awards, in order to prevent dilution or enlargement
of option or award rights.
6
<PAGE>
16. AMENDMENT OR DISCONTINUANCE OF PLAN.
The Board of Directors may amend or discontinue the Plan at any time.
Subject to the provisions of Section 15 no amendment of the Plan, however,
shall without shareholder approval: (a) increase the number of shares
authorized under the Plan as provided in Section 2 herein, (b) decrease the
minimum price provided in Section 5 herein, (c) extend the maximum term under
Section 6, or (d) modify the eligibility requirements for participation in
the Plan. The Committee, or the Company's Chief Executive Officer as
authorized by the Committee, may grant, each year, options and awards for the
number of shares authorized by Section 2 herein without further amendment to
the Plan increasing the number of shares authorized for distribution. The
Board of Directors shall not alter or impair any option or award theretofore
granted under the Plan without the consent of the holder of the option or
award.
17. TIME OF GRANTING.
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board of Directors or by the shareholders of the Company, and
no action taken by the Committee, the Chief Executive Officer or the Board of
Directors (other than the execution and delivery of an option or award
agreement), shall constitute the granting of an option or award hereunder.
18. EFFECTIVE DATE AND TERMINATION OF PLAN.
(a) The Plan was approved by the Board of Directors on
February 15, 1993, and shall be approved by the shareholders of the Company
within twelve (12) months thereof.
(b) Unless the Plan shall have been discontinued as provided in
Section 16 hereof, the Plan shall terminate on February 14, 2003. No option
or award may be granted after such termination, but termination of the Plan
shall not, without the consent of the optionee or grantee, alter or impair
any rights or obligations under any option or award theretofore granted.
7
<PAGE>
Exhibit 10(n)
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made as of the Effective
Date between UHC Management Company, Inc. (the "Company") and David A. George
("Executive").
RECITALS:
The Board of Directors of the Company (the "Board of Directors")
recognizes that outstanding management of the Company is essential to
advancing the best interests of the Company, its shareholders and its
subsidiaries. The Company desires to employ Executive and Executive has
agreed to be employed by the Company under the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the mutual
undertakings contained in this Agreement, the parties agree as follows:
1. EMPLOYMENT. The Company will employ Executive, and Executive
accepts employment by the Company, for the period beginning on the date the
proposed merger transaction between United HealthCare Corporation and The
MetraHealth Companies ("Metra") closes ("Effective Date") and ending on
December 31, 1998 (the "Employment Period"), according to the terms of this
Agreement. This Agreement shall never be of any effect in the event the
proposed merger transaction does not close.
2. DUTIES.
(a) The Company and Executive agree that during the Employment
Period Executive will have such authority and perform such executive duties
as are commensurate with his position. Executive will support the Chief
Executive Officer of the Company in carrying out his responsibilities as
Chief Executive Officer.
(b) Executive (i) will devote his knowledge, skill and best
efforts on a full-time basis to performing his duties and obligations to the
Company (with the exception of absences on account of illness or vacation in
accordance with the Company's policies and civic and charitable commitments
not involving a conflict with the Company's business), and (ii) will comply
with the directions and orders of the Board of Directors and Chief Executive
Officer of the Company with respect to the performance of his duties.
3. COMPENSATION AND BENEFITS.
(a) During the Employment Period, the Company will pay to
Executive the following salary and incentive awards for services rendered to
the Company:
(i) An annualized base salary of not less than $300,000.
Executive's performance will be evaluated at least annually and
annual increases in Executive's base salary will be considered
based on Executive's performance.
<PAGE>
(ii) Executive shall be eligible to participate in the
Company's management incentive compensation plan in accordance with
the terms and conditions of that plan. Executive's management
incentive plan target will be 100% of his base salary. For
calendar year 1995 Executive shall be paid whatever incentive
compensation he would have received under his employment agreement
with Metra, which for 1995 will not be less than $181,000.
(b) During the Employment Period, Executive will be eligible to
participate in a similar manner as other senior executives of the Company in
such employee benefit plans and programs as may be established and maintained
by the Company for its senior management employees.
(c) Executive shall be eligible to participate in the Company's
stock option and stock grant plans in accordance with the terms and
conditions of those plans.
4. TERMINATION OF EMPLOYMENT.
(a) BY THE COMPANY WITHOUT CAUSE. If the Company terminates
Executive's employment without Cause (as defined in paragraph (c) below)
during the Employment Period, the Company will pay Executive severance pay as
follows:
(i) (A) If the Company terminates Executive's employment
without Cause on or before November 14, 1995, Executive will
receive severance pay equal to two years of both base salary and
management incentive plan payments, plus a prorated management
incentive plan payment for the fraction of the management
incentive plan payment period ending on Executive's termination
of employment and any management incentive plan payments
remaining unpaid from the preceding year under the terms of the
management incentive plan. The severance pay will be paid over
a two year period in equal biweekly installments.
(B) If the Company terminates Executive's employment
without Cause after November 14, 1995, Executive will receive
severance pay equal to one year of both base salary and
management incentive plan payments, plus a prorated management
incentive plan payment for the fraction of the management
incentive plan payment period ending on Executive's
termination of employment and any management incentive plan
payments remaining unpaid from the proceeding year under the
terms of the management incentive plan. The severance pay
will be paid over a one year period in equal biweekly
installments.
(ii) The Company will continue coverage under the Company's
group health plan for Executive and his eligible dependents for the
period during which Executive is entitled to receive severance
benefits pursuant to (i). Notwithstanding the foregoing, if the
Company determines that giving such continued coverage could
adversely affect the tax qualification or tax treatment of a
benefit plan, or otherwise have adverse legal ramifications to the
Company, the Company may reimburse Executive for the cost of COBRA
coverage for himself and his eligible dependents, and if
Executive's severance
2
<PAGE>
payments extend beyond the period of his COBRA coverage, pay
Executive a lump sum cash amount that reasonably approximates the
after-tax value to Executive of the balance of his continued
coverage through the severance payment period, in lieu of giving
credit and continued coverage.
(iii) Any unvested stock options or grants awarded
Executive shall continue to vest for a period of two years from the
last day of Executive's employment, in accordance with those
grants' or options' pre-established vesting schedule.
(iv) For purposes of subparagraphs (i) and (ii), Executive's
annual base salary will be calculated at the highest rate in effect
for Executive at any time during the twelve month period preceding
the time of his termination of employment, and Executive's
management incentive payment will be calculated at a rate equal to
the management incentive payment paid or payable to Executive for
the fiscal year preceding his termination of employment.
(b) BY EXECUTIVE FOR GOOD REASON. If Executive voluntarily
terminates employment with the Company during the Employment Period for Good
Reason (as defined in this subsection (b)), Executive will be entitled to
receive the benefits described in subsection (a) for termination by the
Company without Cause. Subject to the provisions of this subsection (b),
these benefits will be provided if Executive voluntarily terminates
employment after (i) the Company reduces Executive's base salary from the
level in effect during the preceding fiscal year, (ii) Executive is not in
good faith considered for management incentive payments as described in
Section 3 (a)(ii), (iii) the Company fails to provide benefits as required by
Section 3 (b), (iv) the Company demotes Executive to a position that is not a
senior management position of comparable scope and responsibility (other than
on account of Executive's disability, as defined in Section 5 below) or (v)
the Company relocates Executive's place of employment to a location more than
100 miles from Reston, Virginia. In order for this subsection (b) to be
effective: (1) Executive must give written notice to the Company indicating
that Executive intends to terminate employment under this section (b), (2)
Executive's voluntary termination under this subsection must occur within 60
days after he has actual knowledge of an event described in clause (i), (ii),
(iii), (iv) or (v) above, or within 60 days after the last in a series of
such events, and (3) the Company must have failed to remedy the event
describe in clause (i), (ii), (iii), (iv) or (v), as the case may be, within
30 days after receiving Executive's written notice. If the Company remedies
the event described in clause (i), (ii), (iii), (iv) or (v), as the case may
be, within 30 days after receiving Executive's written notice, Executive may
not terminate employment under this subsection (b) on account of the event
specified in Executive's notice.
(c) BY THE COMPANY FOR CAUSE OR THE EXECUTIVE WITHOUT GOOD REASON.
If Executive's employment is terminated by the Company for Cause or if
Executive voluntarily terminates employment without Good Reason, as described
in subsection (b) above, this Agreement will immediately terminate. For
purposes of this Agreement, the term "Cause" means (i) the repeated material
failure or refusal of Executive to follow the reasonable directions of
Company's Board of Directors or Executive's supervisor or to adequately
perform any duties reasonably required by Company, (ii) material violations
of Company's Code of Conduct or (iii) the commission of any criminal act or
act of fraud or dishonesty by Executive in connection with Executive's
employment by Company. In the event that Company terminates Executive's
employment under subsection (i) of this Cause definition, Company shall
specify in the notice of termination the basis for Cause. If the Cause
described in the notice is cured to Company's reasonable
3
<PAGE>
satisfaction prior to the end of the 30 day notice period, the notice of
termination of employment shall be withdrawn.
(d) Notwithstanding the foregoing, the amount of severance
benefits under this Agreement will be reduced by 80% of any compensation
earned by Executive from another employer (including self-employment) if
Executive is employed by another employer (including self-employment) during
the period which Executive receives severance benefits.
(e) The amounts under this Agreement will be paid in lieu of
severance benefits under any severance plan or program maintained by the
Company.
5. DISABILITY OR DEATH.
(a) If Executive becomes disabled (as defined below) during the
Employment Period while he is employed by the Company, Executive shall be
entitled to receive continued base salary at the annual rate in effect on the
date of his disability during the remaining Employment Period while he
remains disabled, including a prorated management incentive payment for the
fraction of the management incentive payment measuring period ending on the
date of Executive's disability, plus any management incentive payment
remaining unpaid from the preceding year under the terms of the management
incentive plan. These payments shall be reduced by any amounts that Executive
receives from Company paid for disability insurance, his compensation from
other employment, or from worker's compensation, Social Security or
governmental programs relating to disability. Except as provided in this
Section 5, all of the rights and benefits of Executive under this Agreement
shall cease immediately upon the date of Executive's disability, except that
Executive shall receive any management incentive payment remaining unpaid
from the preceding year under the terms of the management incentive plan.
The term "disability" means a condition, resulting from mental or physical
incapacity, bodily injury or disease, that renders, and for a six consecutive
month period has rendered, Executive unable to perform any and every duty
pertaining to his employment with the Company. A return to work of less than
14 consecutive days will not be considered an interruption in Executive's six
consecutive months of disability. Disability will be determined by the
Company on the basis of medical evidence satisfactory to the Company.
(b) If Executive dies during the Employment Period while he is
employed by the Company, the Company will pay to the personal representative
of Executive's estate Executive's base salary for the month in which his
death occurs, plus a prorated management incentive payment for the fraction
of the management incentive payment measuring period ending on the date of
Executive's death, plus any management incentive payment remaining unpaid
from any preceding year under the terms of the management incentive plan.
Insofar as practicable, the prorated management incentive payment will be
paid within 90 days after the end of the management incentive payment
measuring period. Except for the foregoing payments, this Agreement
terminates on the date of Executive's death.
(c) Except as provided in (a) above, the foregoing benefits will
be provided in addition to any death and other benefits provided under any
Company benefit plan in which Executive participates.
6. CONFIDENTIAL INFORMATION. Executive agrees that during and after
the term of this Agreement Executive shall keep confidential all confidential
information and trade secrets of the Company, or any subsidiaries or
affiliates of the Company and shall not disclose such information to any
person
4
<PAGE>
without the prior approval of the Company, or use such information for any
purpose other than in the course of fulfilling his duties pursuant to this
Agreement. Upon termination of this Agreement, Executive shall return any
documents, records, data, books or materials of or pertaining to the Company
or its subsidiaries or affiliates in his possession or control and any of his
work papers in his possession or control containing confidential information
or trade secrets. The Company acknowledges that Executive already has
substantial experience and expertise in the health insurance and managed
health care business, and use of that experience and expertise in other
employment will not be deemed a violation of this Agreement.
7. NON-COMPETITION.
(a) Executive agrees that (i) until the expiration of the
Employment Period under Section 1, and (ii) for a period of two years after
the last day of Executive's employment if Executive's employment is
terminated by the Company without Cause (as provided in Section 4(a)) or
Executive voluntarily terminates his employment for Good Reason (as provided
in Section 4(b)), in either case on or before November 14, 1995, or for a
period of one year if the termination occurs after November 14, 1995,
Executive agrees not to engage, directly or indirectly (whether as officer,
director, employee, consultant or by ownership or otherwise) in a competitive
business in the Company's market area.
(b) Executive agrees that if (i) Executive's employment is
terminated by Company for Cause, (ii) Executive terminates his employment
without Good Reason, or (iii) upon termination of this agreement at the end
of the term, Company shall have the option of electing to pay Executive the
periodic payments set forth in Section 4 (a) (i) for up to one year and that
if Company so elects, Executive agrees not to engage, directly or indirectly
(whether as officer, director, employee, consultant or by ownership or
otherwise) in a competitive business in the Company's market area for so long
as Company is making those periodic payments to Executive.
(c) Notwithstanding the foregoing, nothing in this Agreement shall
prohibit or penalize the ownership by Executive of investments in shares of a
competitive business that are registered under Section 12 of the Securities
Exchange Act of 1934 and constitute, together with all such investments owned
by any immediate family member of affiliate of, or person acting in concert
with, Executive, less than 5% of the outstanding registered investments in
such business. As used herein, the term "competitive business" means a
business entity that markets health insurance, managed health care, health
maintenance organizations, or the administration of health insurance
programs, and the term "market area" means any state or possession in which
the Company is engaged in business on the date of the Executive's termination
of employment.
8. NONSOLICITATION. Executive agrees that (i) during the Employment
Period, and (ii) for the longer of a one-year period after Executive's
termination of employment for any reason, and any period with respect to
which the Company is required to make payments pursuant to Section 4(a) or
4(b) or elects to make payments pursuant to Section 7(b), Executive will not
(a) induce or attempt to induce, directly or indirectly, any of the Company's
employees to terminate their employment with the Company nor (b) solicit the
sale of any product or service that constitutes a competitive business to any
entity which on the date of Executive's termination of employment was
purchasing (or with which substantial negotiations were then in progress for
the purchase of) the Company's services or products.
5
<PAGE>
9. INDEMNIFICATION. The Company will pay all reasonable fees and
expenses, if any, (including, without limitation, legal fees and expenses)
that are incurred by Executive to enforce this Agreement and that result from
an actual or threatened breach of this Agreement by the Company.
10. PAYMENT OF COMPENSATION AND TAXES. All amounts payable under this
Agreement (other than stock-related compensation, which will be paid
according to the terms of the Company's stock incentive plan) will be paid in
cash, subject to required income and payroll tax withholdings.
11. ASSIGNMENT. The rights and obligations of the Company under this
Agreement will inure to the benefit of and will be binding upon the
successors and assigns of the Company. If the Company is consolidated or
merged with or into another corporation, or if another entity purchases all
or substantially all of the Company's assets, the surviving or acquiring
corporation will succeed to the Company's rights and obligations under this
Agreement. Executive's rights under this Agreement may not be assigned or
transferred in whole or in part, except that the personal representative of
Executive's estate will receive any amounts payable under this Agreement
after the death of Executive. The Company may arrange for one or more of its
affiliates to act as the Company for purposes of administering and providing
Executive's compensation and benefits under this Agreement.
12. RIGHTS UNDER THE AGREEMENT. The right to receive benefits under
this Agreement will not give Executive any proprietary interest in the
Company or any of its assets. Benefits under the Agreement will be payable
from the general assets of the Company, and there will be no required funding
of amounts that may become payable under the Agreement. Executive will for
all purposes be a general creditor of the Company. The interest of Executive
under the Agreement cannot be assigned, anticipated, sold, encumbered or
pledged and will not be subject to the claims of Executive's creditors. The
foregoing provisions of this Section 12 shall not apply to the extent (if
any) that they conflict with the rights of the Executive under the stock
option plans referred to in Section 3(c).
13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
and understanding between the Company and Executive with respect to the
matters referred to herein and supersedes all prior agreements and
understandings between Executive and the Company or any affiliate of the
Company, including Metra, except as specifically noted herein, with respect
to the employment of Executive after the Effective Date and any other matters
referred to herein.
14. NOTICE. Any written notice required to be given by one party to
the other party hereunder shall be deemed effective if mailed by registered
mail:
To the Company c/o:
UHC Management Company, Inc.
9900 Bren Rd E
Minnetonka, MN 55343
Attention: Vice President Human Resources
with a copy to: General Counsel
To Executive at:
6
<PAGE>
12522 Knollbrook Dr.
Clifton, VA 22024
or such other address as may be stated in notice given under this Section 14.
15. DISPUTE RESOLUTION AND REMEDIES. Any dispute arising between the
parties relating to this Agreement or to Executive's employment by Company
shall be resolved by binding arbitration pursuant to the Rules of the
American Arbitration Association. In no event may the arbitration be
initiated more than one year after the date one party first gave written
notice of the dispute to the other party. The arbitrators shall interpret
and construe this Agreement pursuant to controlling law but may not in any
case award any punitive or exemplary damages. The parties acknowledge that
Executive's failure to comply with the Confidentiality, Nonsolicitation and
Non-Competition provisions of this Agreement will cause immediate and
irreparable injury to Company and that therefore the arbitrators, or a court
of competent jurisdiction if an arbitration panel cannot be immediately
convened, will be empowered to provide injunctive relief, including temporary
or preliminary relief, to restrain any such failure to comply.
16. MISCELLANEOUS. To the extent not governed by federal law, this
Agreement will be construed in accordance with the laws of the State of
Minnesota, without reference to its conflict of law rules. No provisions of
this Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and the writing is signed
by Executive and the Company. A waiver of any breach of or compliance with
any provision or condition of this Agreement is not a waiver of similar or
dissimilar provisions or conditions. The invalidity or unenforceability of
any provision of this Agreement will not affect the validity or
enforceability of any other provision of this Agreement, which will remain in
full force and effect. This Agreement may be executed in one or more
counterparts, all of which will be considered one and the same agreement.
WITNESS the following signatures.
UHC Management Company, Inc.
Dated 6/25/95 By: /S/KEVIN H. ROCHE
---------------------- -------------------------
Executive
Dated 6/25/95 /S/ DAVID A. GEORGE
---------------------- -------------------------
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<PAGE>
AARP HEALTH INSURANCE AGREEMENT
BY AND AMONG
AMERICAN ASSOCIATION OF RETIRED PERSONS,
TRUSTEES OF THE AARP INSURANCE PLAN
AND
UNITED HEALTHCARE INSURANCE COMPANY
DATED AS OF FEBRUARY 26, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1
DESCRIPTION OF AGREEMENT. . . . . . . . . . 2
1.1 CONTRACT DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . 2
1.2 ENTIRE AGREEMENT; AMENDMENT. . . . . . . . . . . . . . . . . . 2
1.3 CORRELATION AND INTENT . . . . . . . . . . . . . . . . . . . . 2
1.4 SCOPE OF SERVICES. . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 2
DEFINITIONS . . . . . . . . . . . . . 3
2.1 AARP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 AARP MARKS . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 AARP TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 AARP'S REPRESENTATIVE. . . . . . . . . . . . . . . . . . . . . 3
2.5 ACTIVE LIFE RESERVES . . . . . . . . . . . . . . . . . . . . . 3
2.6 ADMINISTRATIVE SERVICE FEE . . . . . . . . . . . . . . . . . . 3
2.7 AMORTIZATION INTEREST RATE . . . . . . . . . . . . . . . . . . 3
2.8 APPLICABLE LAWS. . . . . . . . . . . . . . . . . . . . . . . . 3
2.9 ASSOCIATED AGREEMENTS. . . . . . . . . . . . . . . . . . . . . 3
2.10 BASIC PERCENTAGE . . . . . . . . . . . . . . . . . . . . . . . 4
2.11 BUSINESS DAY . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.12 CHANGE OF LAW. . . . . . . . . . . . . . . . . . . . . . . . . 4
2.13 CLAIMS DATABASES . . . . . . . . . . . . . . . . . . . . . . . 4
2.14 CODE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.15 COMMENCEMENT DATE. . . . . . . . . . . . . . . . . . . . . . . 4
2.16 COMPENSATION PERCENTAGE. . . . . . . . . . . . . . . . . . . . 4
2.17 CONTRACT DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . 4
2.18 CPI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.19 CPR MODEL. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.20 CPR RULES. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.21 DAC TAX. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.22 DATABASES. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.23 DEFICIT CARRYFORWARD . . . . . . . . . . . . . . . . . . . . . 5
2.24 DEFICIT CARRYFORWARD ACCOUNT . . . . . . . . . . . . . . . . . 5
2.25 DEVELOPED MARKS. . . . . . . . . . . . . . . . . . . . . . . . 5
2.26 DEVELOPED SYSTEMS. . . . . . . . . . . . . . . . . . . . . . . 5
2.27 DISCLOSER. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.28 EVENT OF FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . 5
2.29 EXISTING PROGRAM . . . . . . . . . . . . . . . . . . . . . . . 5
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2.30 EXPENSE INCURRED TYPE PLAN . . . . . . . . . . . . . . . . . . 5
2.31 FIXED OVERHEAD COSTS . . . . . . . . . . . . . . . . . . . . . 5
2.32 FUTURE PRODUCTS. . . . . . . . . . . . . . . . . . . . . . . . 5
2.33 GHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.34 GHIP VENDORS . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.35 GROSS UP . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.36 GROWTH FACTOR. . . . . . . . . . . . . . . . . . . . . . . . . 6
2.37 GROWTH INCENTIVE PERCENTAGE. . . . . . . . . . . . . . . . . . 6
2.38 INCENTIVE PERCENTAGE . . . . . . . . . . . . . . . . . . . . . 6
2.39 INCURRED CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . 6
2.40 INCURRED PREMIUM REFUNDS . . . . . . . . . . . . . . . . . . . 6
2.41 INCURRED TAX ITEMS . . . . . . . . . . . . . . . . . . . . . . 6
2.42 INDEMNITY TYPE PLAN. . . . . . . . . . . . . . . . . . . . . . 6
2.43 INVESTMENT INCOME CREDIT . . . . . . . . . . . . . . . . . . . 6
2.44 INVESTMENT INCOME CREDIT RATE. . . . . . . . . . . . . . . . . 6
2.45 LOSS ADJUSTMENT EXPENSE RESERVE. . . . . . . . . . . . . . . . 7
2.46 LOSS RATIO . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.47 MANAGING REPRESENTATIVE. . . . . . . . . . . . . . . . . . . . 7
2.48 MEMBER CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . 7
2.49 MEMBER SERVICES AGREEMENT. . . . . . . . . . . . . . . . . . . 7
2.50 MEMBER SERVICES VENDOR . . . . . . . . . . . . . . . . . . . . 7
2.51 OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . 7
2.52 OPERATING PLAN . . . . . . . . . . . . . . . . . . . . . . . . 7
2.53 OPERATIONAL ISSUE. . . . . . . . . . . . . . . . . . . . . . . 7
2.54 PASS-THROUGH EXPENSES. . . . . . . . . . . . . . . . . . . . . 7
2.55 PERFORMANCE EXPERIENCE . . . . . . . . . . . . . . . . . . . . 9
2.56 POLICY YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.57 PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.58 PROGRAM AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 9
2.59 PROGRAM ISSUE. . . . . . . . . . . . . . . . . . . . . . . . . 9
2.60 PROJECTED MEMBERSHIP . . . . . . . . . . . . . . . . . . . . . 9
2.61 PROPRIETARY INFORMATION. . . . . . . . . . . . . . . . . . . . 9
2.62 PROPRIETARY SYSTEMS. . . . . . . . . . . . . . . . . . . . . . 9
2.63 PRUDENTIAL . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.64 PRUDENTIAL AGREEMENT . . . . . . . . . . . . . . . . . . . . . 9
2.65 PRUDENTIAL'S AARP OPERATIONS . . . . . . . . . . . . . . . . . 9
2.66 RECIPIENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.67 REINSURANCE AGREEMENT. . . . . . . . . . . . . . . . . . . . . 9
2.68 RECORDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.69 RELATED PLAN . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.70 REPRESENTATIVES. . . . . . . . . . . . . . . . . . . . . . . . 9
2.71 RESOLUTION PROCEDURE . . . . . . . . . . . . . . . . . . . . . 10
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2.72 RETENTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.73 RSF. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.74 RSF BALANCE. . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.75 RSF BALANCE PERCENTAGE . . . . . . . . . . . . . . . . . . . . 10
2.76 SALES AND MARKETING AGREEMENT. . . . . . . . . . . . . . . . . 10
2.77 SALES AND MARKETING VENDOR . . . . . . . . . . . . . . . . . . 10
2.78 SERVICE ENHANCEMENT. . . . . . . . . . . . . . . . . . . . . . 10
2.79 SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.80 SHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.81 SHIP DATABASES . . . . . . . . . . . . . . . . . . . . . . . . 10
2.82 SHIP EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . 11
2.83 SHIP GROSS PREMIUMS. . . . . . . . . . . . . . . . . . . . . . 11
2.84 SHIP INSURED . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.85 SHIP NET PREMIUMS. . . . . . . . . . . . . . . . . . . . . . . 11
2.86 SHIP PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.87 SHIP PORTFOLIO . . . . . . . . . . . . . . . . . . . . . . . . 11
2.88 SHIP PRODUCTS. . . . . . . . . . . . . . . . . . . . . . . . . 11
2.89 START-UP COSTS . . . . . . . . . . . . . . . . . . . . . . . . 11
2.90 TARGET AARP ALLOWANCE. . . . . . . . . . . . . . . . . . . . . 12
2.91 TARGET INCURRED CLAIMS . . . . . . . . . . . . . . . . . . . . 12
2.92 TARGET LOSS RATIO. . . . . . . . . . . . . . . . . . . . . . . 12
2.93 TARGET MEMBER CONTRIBUTIONS. . . . . . . . . . . . . . . . . . 12
2.94 TARGET PREMIUM REFUNDS . . . . . . . . . . . . . . . . . . . . 12
2.95 TARGET RETENTION . . . . . . . . . . . . . . . . . . . . . . . 12
2.96 TARGET RSF FUNDING . . . . . . . . . . . . . . . . . . . . . . 12
2.97 TAX BASE . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.98 TAX BENEFIT. . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.99 TAX REIMBURSEMENT. . . . . . . . . . . . . . . . . . . . . . . 12
2.100 TAX RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.101 TAX TIMING EXPENSES. . . . . . . . . . . . . . . . . . . . . . 12
2.102 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.103 TERMINATION COSTS. . . . . . . . . . . . . . . . . . . . . . . 13
2.104 TRANSFER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . 14
2.105 TRANSFERRED ASSETS . . . . . . . . . . . . . . . . . . . . . . 14
2.106 TRANSFERRED ASSETS GROSS UP. . . . . . . . . . . . . . . . . . 14
2.107 TRANSFERRED EQUIPMENT. . . . . . . . . . . . . . . . . . . . . 14
2.108 TRANSFERRED EMPLOYEES. . . . . . . . . . . . . . . . . . . . . 14
2.109 TRUE-UP INTEREST RATE. . . . . . . . . . . . . . . . . . . . . 14
2.110 UNITED . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.111 UNITED'S AARP OPERATIONS . . . . . . . . . . . . . . . . . . . 14
2.112 UNITED'S MARKS . . . . . . . . . . . . . . . . . . . . . . . . 14
2.113 UNITED'S REPRESENTATIVE. . . . . . . . . . . . . . . . . . . . 14
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2.114 UNITED'S TAX RATE. . . . . . . . . . . . . . . . . . . . . . . 14
2.115 VENDOR OPERATING EXPENSES. . . . . . . . . . . . . . . . . . . 15
2.116 VENDOR PASS-THROUGH EXPENSES . . . . . . . . . . . . . . . . . 15
ARTICLE 3
RESPONSIBILITIES OF UNITED . . . . . . . . . 15
3.1 SERVICES PRIOR TO THE COMMENCEMENT DATE. . . . . . . . . . . . 15
3.1.1 DESIGNATION OF UNITED'S REPRESENTATIVE . . . . . . . . 15
3.1.2 PROCEDURES . . . . . . . . . . . . . . . . . . . . . . 16
3.1.3 DEDICATED STAFF. . . . . . . . . . . . . . . . . . . . 16
3.1.4 ACCEPTANCE AND ENHANCEMENT OF SYSTEMS AND DATABASES,
ETC. . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.1.5 ACCEPTANCE TESTING . . . . . . . . . . . . . . . . . . 18
3.1.6 EQUIPMENT AND SUPPLIES . . . . . . . . . . . . . . . . 18
3.1.7 PRUDENTIAL AGREEMENTS. . . . . . . . . . . . . . . . . 18
3.1.8 TRANSFER OF EXISTING BUSINESS. . . . . . . . . . . . . 19
3.2 SERVICES AFTER THE COMMENCEMENT DATE.. . . . . . . . . . . . . 20
3.2.1 COMPLETION AND CONTINUATION OF INITIAL SERVICES. . . . 20
3.2.2 UNDERWRITING OF SHIP . . . . . . . . . . . . . . . . . 20
3.2.3 PRODUCT DEVELOPMENT. . . . . . . . . . . . . . . . . . 21
3.2.4 FUTURE PRODUCTS. . . . . . . . . . . . . . . . . . . . 22
3.2.5 SERVICE STANDARDS. . . . . . . . . . . . . . . . . . . 22
3.2.6 OPERATING PLAN . . . . . . . . . . . . . . . . . . . . 23
3.2.7 FINANCIAL BOOKS AND RECORDS. . . . . . . . . . . . . . 23
3.2.8 REPORTS. . . . . . . . . . . . . . . . . . . . . . . . 24
3.2.9 AUDITS AND INSPECTION. . . . . . . . . . . . . . . . . 24
3.3 MEMBER CONTRIBUTION RATE ADJUSTMENTS . . . . . . . . . . . . . 25
3.3.1 PROJECTED MEMBERSHIP; TARGET AARP ALLOWANCE. . . . . . 25
3.3.2 TARGET OPERATING EXPENSES. . . . . . . . . . . . . . . 25
3.3.3 TARGET INCURRED CLAIMS . . . . . . . . . . . . . . . . 26
3.3.4 TARGET PREMIUM REFUNDS . . . . . . . . . . . . . . . . 26
3.3.5 TARGET RSF FUNDING . . . . . . . . . . . . . . . . . . 27
3.3.6 TARGET RETENTION . . . . . . . . . . . . . . . . . . . 27
3.3.7 DETERMINATION OF MEMBER CONTRIBUTION RATES . . . . . . 27
3.3.8 RATE APPROVAL AND IMPLEMENTATION . . . . . . . . . . . 28
3.3.9 SPECIFICATION OF TARGET LOSS RATIO . . . . . . . . . . 28
3.3.10 STATE MANDATED RATE ADJUSTMENTS. . . . . . . . . . . . 29
3.4 COMPLIANCE WITH LAW. . . . . . . . . . . . . . . . . . . . . . 29
3.4.1 GENERAL. . . . . . . . . . . . . . . . . . . . . . . . 29
3.4.2 NOTICE . . . . . . . . . . . . . . . . . . . . . . . . 29
3.5 SALE OF ASSETS; SUBCONTRACTS, ETC. . . . . . . . . . . . . . . 29
3.5.1 ASSET SALES. . . . . . . . . . . . . . . . . . . . . . 29
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3.5.2 SUBCONTRACTS . . . . . . . . . . . . . . . . . . . . . 29
3.6 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.6.1 GENERAL. . . . . . . . . . . . . . . . . . . . . . . . 30
3.6.2 TAX REIMBURSEMENT. . . . . . . . . . . . . . . . . . . 30
3.6.3 TAX BENEFIT FROM DEPRECIATION AND AMORTIZATION . . . . 31
3.6.4 TAX EFFECT OF DISPOSAL OF TRANSFERRED ASSETS . . . . . 31
3.7 EXCLUSIVITY. . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.8 CONFLICTING APPROVALS. . . . . . . . . . . . . . . . . . . . . 31
3.9 AARP EVALUATIONS . . . . . . . . . . . . . . . . . . . . . . . 32
3.10 CESSATION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . 32
3.10.1 GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.10.2 PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.11 RELATED PLANS. . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE 4
RESPONSIBILITIES OF AARP AND AARP TRUST . . . . . . 33
4.1 AARP'S REPRESENTATIVE. . . . . . . . . . . . . . . . . . . . . 33
4.2 GRANT OF RIGHT TO USE AARP MARKS . . . . . . . . . . . . . . . 33
4.2.1 GRANT. . . . . . . . . . . . . . . . . . . . . . . . . 33
4.2.2 NOTATIONS. . . . . . . . . . . . . . . . . . . . . . . 33
4.2.3 APPROVAL RIGHTS. . . . . . . . . . . . . . . . . . . . 33
4.2.4 OWNERSHIP OF MARKS . . . . . . . . . . . . . . . . . . 34
4.2.5 PROTECTION OF AARP MARKS . . . . . . . . . . . . . . . 34
4.2.6 INFRINGEMENTS. . . . . . . . . . . . . . . . . . . . . 34
4.3 EQUIPMENT TRANSFER . . . . . . . . . . . . . . . . . . . . . . 34
4.4 DATABASE AND SYSTEMS TRANSFER. . . . . . . . . . . . . . . . . 34
4.5 EMPLOYEE HIRE. . . . . . . . . . . . . . . . . . . . . . . . . 34
4.6 OTHER ASSETS AND INFORMATION . . . . . . . . . . . . . . . . . 35
4.7 PRUDENTIAL AGREEMENTS. . . . . . . . . . . . . . . . . . . . . 35
4.8 COOPERATION OF THIRD PARTIES . . . . . . . . . . . . . . . . . 35
4.9 OVERSIGHT. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.10 AARP EVALUATIONS . . . . . . . . . . . . . . . . . . . . . . . 35
4.11 OTHER PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . 35
4.12 INSPECTION . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE 5
REPRESENTATIONS AND WARRANTIES . . . . . . 36
5.1 REPRESENTATIONS AND WARRANTIES OF UNITED . . . . . . . . . . . 36
5.1.1 ORGANIZATION AND OUTSTANDING . . . . . . . . . . . . . 36
5.1.2 AUTHORIZATION. . . . . . . . . . . . . . . . . . . . . 36
5.1.3 CONSENTS AND APPROVALS . . . . . . . . . . . . . . . . 36
5.1.4 ACTIONS PENDING. . . . . . . . . . . . . . . . . . . . 36
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5.1.5 NO CONFLICT OR VIOLATION . . . . . . . . . . . . . . . 36
5.1.6 LICENSES AND PERMITS . . . . . . . . . . . . . . . . . 37
5.1.7 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . 37
5.1.8 DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . 38
5.1.9 FINANCIAL CONDITION. . . . . . . . . . . . . . . . . . 38
5.2 REPRESENTATIONS AND WARRANTIES OF AARP AND AARP TRUST. . . . . 38
5.2.1 ORGANIZATION AND STANDING. . . . . . . . . . . . . . . 38
5.2.2 AUTHORIZATION. . . . . . . . . . . . . . . . . . . . . 38
5.2.3 CONSENTS AND APPROVALS . . . . . . . . . . . . . . . . 39
5.2.4 ACTIONS PENDING. . . . . . . . . . . . . . . . . . . . 39
5.2.5 NO CONFLICT OR VIOLATION . . . . . . . . . . . . . . . 39
5.2.6 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . 40
5.2.7 FINANCIAL CONDITION. . . . . . . . . . . . . . . . . . 40
5.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . 40
ARTICLE 6
ALLOWANCES AND COMPENSATION . . . . . . . . . 40
6.1 AARP ALLOWANCE . . . . . . . . . . . . . . . . . . . . . . . . 40
6.2 UNITED ADMINISTRATION CHARGES. . . . . . . . . . . . . . . . . 40
6.2.1 ADMINISTRATIVE SERVICE FEE . . . . . . . . . . . . . . 40
6.2.2 CHANGES IN ADMINISTRATIVE SERVICE FEE. . . . . . . . . 41
6.2.3 PASS-THROUGH EXPENSES. . . . . . . . . . . . . . . . . 42
6.2.4 START-UP COSTS . . . . . . . . . . . . . . . . . . . . 42
6.2.5 PERFORMANCE CHARGES. . . . . . . . . . . . . . . . . . 42
6.3 UNITED RISK AND PROFIT CHARGES . . . . . . . . . . . . . . . . 43
6.3.1 BASIC PERCENTAGE . . . . . . . . . . . . . . . . . . . 43
6.3.2 INCENTIVE PERCENTAGE . . . . . . . . . . . . . . . . . 44
6.3.3 TAX CHANGES. . . . . . . . . . . . . . . . . . . . . . 45
6.4 INVESTMENT INCOME CREDITS. . . . . . . . . . . . . . . . . . . 45
6.4.1 SHIP PORTFOLIO . . . . . . . . . . . . . . . . . . . . 45
6.4.2 CASH TRANSFERS . . . . . . . . . . . . . . . . . . . . 45
6.4.3 INVESTMENT INCOME CREDIT CALCULATION . . . . . . . . . 46
6.4.4 INVESTMENT INCOME CREDIT RATE. . . . . . . . . . . . . 46
6.4.5 INVESTMENT STRATEGY. . . . . . . . . . . . . . . . . . 47
6.4.6 INVESTMENT MANAGER . . . . . . . . . . . . . . . . . . 47
6.4.7 INVESTMENT PERFORMANCE; OWNERSHIP. . . . . . . . . . . 47
6.5 TAX-TIMING EXPENSE . . . . . . . . . . . . . . . . . . . . . . 47
6.6 TAX REIMBURSEMENT. . . . . . . . . . . . . . . . . . . . . . . 47
6.6.1 IN ORDINARY COURSE . . . . . . . . . . . . . . . . . . 47
6.6.2 AUDIT ADJUSTMENTS. . . . . . . . . . . . . . . . . . . 48
6.6.3 GROSS UP . . . . . . . . . . . . . . . . . . . . . . . 48
6.6.4 VALUATION OF TRANSFERRED ASSETS. . . . . . . . . . . . 48
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6.6.5 UPON TERMINATION . . . . . . . . . . . . . . . . . . . 48
6.7 PAYMENT OF ALLOWANCES AND COMPENSATION . . . . . . . . . . . . 49
6.8 REGULATORY IMPACT. . . . . . . . . . . . . . . . . . . . . . . 49
6.9 OWNERSHIP OF FUNDS . . . . . . . . . . . . . . . . . . . . . . 49
ARTICLE 7
PROPERTY RIGHTS IN AND CONFIDENTIALITY OF INFORMATION. . . 49
7.1 MEMBER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 49
7.1.1 CLAIMS DATABASES . . . . . . . . . . . . . . . . . . . 49
7.1.2 OTHER INFORMATION. . . . . . . . . . . . . . . . . . . 49
7.2 MEMBER COMMUNICATIONS. . . . . . . . . . . . . . . . . . . . . 50
7.2.1 AARP OWNERSHIP.. . . . . . . . . . . . . . . . . . . . 50
7.2.2 AARP APPROVAL. . . . . . . . . . . . . . . . . . . . . 50
7.3 RETURN UPON TERMINATION. . . . . . . . . . . . . . . . . . . . 50
7.4 UNITED MARKS AND MARKS DEVELOPED FOR THE SHIP. . . . . . . . . 51
7.4.1 UNITED MARKS . . . . . . . . . . . . . . . . . . . . . 51
7.4.2 DEVELOPED MARKS. . . . . . . . . . . . . . . . . . . . 51
7.5 SECURITY ARRANGEMENTS. . . . . . . . . . . . . . . . . . . . . 52
7.6 PROPRIETARY INFORMATION. . . . . . . . . . . . . . . . . . . . 52
7.6.1 PROPRIETARY INFORMATION. . . . . . . . . . . . . . . . 52
7.6.2 COVENANTS. . . . . . . . . . . . . . . . . . . . . . . 53
7.7 PROPRIETARY AND DEVELOPED SYSTEMS. . . . . . . . . . . . . . . 54
7.7.1 PROPRIETARY SYSTEMS. . . . . . . . . . . . . . . . . . . . . . 54
7.7.2 DEVELOPED SYSTEMS. . . . . . . . . . . . . . . . . . . . . . . 54
ARTICLE 8
RESERVE REQUIREMENTS;
RATE STABILIZATION FUND . . . . . . . . . . 55
8.1 PURPOSE OF RESERVES. . . . . . . . . . . . . . . . . . . . . . 55
8.2 RATE STABILIZATION FUND. . . . . . . . . . . . . . . . . . . . 55
8.3 EXPERIENCE RATING. . . . . . . . . . . . . . . . . . . . . . . 55
8.3.1 EXPERIENCE RATING DEFICIT. . . . . . . . . . . . . . . 55
8.3.2 EXPERIENCE RATING GAIN . . . . . . . . . . . . . . . . 56
8.4 MONTHLY REVIEW AND INTERIM ADJUSTMENT. . . . . . . . . . . . . 56
8.5 ANNUAL REVIEW AND RECONCILIATION . . . . . . . . . . . . . . . 56
8.6 DISPOSITION UPON TERMINATION . . . . . . . . . . . . . . . . . 56
ARTICLE 9
INTERACTION WITH OTHER GHIP VENDORS . . . . . . . 56
9.1 GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
9.2 MEMBER SERVICES VENDOR . . . . . . . . . . . . . . . . . . . . 57
9.2.1 RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . 57
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9.2.2 AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 57
9.3 SALES AND MARKETING VENDOR . . . . . . . . . . . . . . . . . . 57
9.3.1 RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . 57
9.3.2 AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 58
9.3.3 AARP APPROVAL RIGHTS . . . . . . . . . . . . . . . . . 58
9.4 VENDOR INTERACTION . . . . . . . . . . . . . . . . . . . . . . 58
9.4.1 DEFAULTS BY OTHER GHIP VENDORS . . . . . . . . . . . . 58
9.4.2 ACCESS TO INFORMATION. . . . . . . . . . . . . . . . . 59
9.5 GOVERNANCE OF INTERVENDOR DISPUTES . . . . . . . . . . . . . . 59
9.5.1 GENERAL. . . . . . . . . . . . . . . . . . . . . . . . 59
9.5.2 VENDOR REPRESENTATIVES . . . . . . . . . . . . . . . . 59
9.5.3 INFORMAL DISPUTE RESOLUTION. . . . . . . . . . . . . . 60
9.5.4 MEDIATION. . . . . . . . . . . . . . . . . . . . . . . 60
9.5.5 ARBITRATION. . . . . . . . . . . . . . . . . . . . . . 61
9.5.6 MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . 63
9.6 TERMINATION OF OTHER GHIP VENDORS. . . . . . . . . . . . . . . 63
9.7 COMPENSATION OF OTHER GHIP VENDORS . . . . . . . . . . . . . . 63
9.7.1 VENDOR OPERATING EXPENSES. . . . . . . . . . . . . . . 63
9.7.2 VENDOR PASS-THROUGH EXPENSES . . . . . . . . . . . . . 63
ARTICLE 10
TERM AND TERMINATION. . . . . . . . . . . 64
10.1 TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
10.2 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . 64
10.3 NOTICES AND EFFORTS TO CURE. . . . . . . . . . . . . . . . . . 66
10.4 TERMINATION WITH SUCCESSOR CARRIER . . . . . . . . . . . . . . 66
10.4.1 TRANSFER OF SHIP PLANS . . . . . . . . . . . . . . . . 66
10.4.2 CLAIMS LIABILITY . . . . . . . . . . . . . . . . . . . 66
10.4.3 TRANSFER OF RESERVES . . . . . . . . . . . . . . . . . 67
10.4.3.1 TRANSFER OF RESERVES . . . . . . . . . . . . 67
10.4.3.2 PROVISIONAL SETTLEMENT . . . . . . . . . . . 67
10.4.3.3 FINAL SETTLEMENT . . . . . . . . . . . . . . 67
10.4.3.4 UNSCHEDULED TERMINATION. . . . . . . . . . . 68
10.4.3.5 VENDOR EXPENSES. . . . . . . . . . . . . . . 69
10.4.3.6 BENEFITS EXPECTATION . . . . . . . . . . . . 69
10.4.3.7 REQUIRED RSF BALANCE . . . . . . . . . . . . 69
10.4.4 PERMITTED PARTIAL TRANSFERS. . . . . . . . . . . . . . 70
10.4.5 TRANSFER OF DATABASES. . . . . . . . . . . . . . . . . 70
10.4.6 TRANSFER OF APPLICATIONS SYSTEMS . . . . . . . . . . . 70
10.4.7 TRANSFER OF DEVELOPED SYSTEMS. . . . . . . . . . . . . 70
10.4.8 OBLIGATIONS OF UNITED PRIOR TO TERMINATION . . . . . . 71
10.4.9 COOPERATION. . . . . . . . . . . . . . . . . . . . . . 71
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10.4.10 REMOVAL OF CERTAIN UNITED MARKS. . . . . . . . . . . . 71
10.5 TERMINATION WITHOUT SUCCESSOR CARRIER. . . . . . . . . . . . . 71
10.5.1 RSF BALANCE. . . . . . . . . . . . . . . . . . . . . . 72
10.5.2 PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . 72
10.5.3 RATE ACTIVITY. . . . . . . . . . . . . . . . . . . . . 72
10.5.4 SALE PROHIBITED. . . . . . . . . . . . . . . . . . . . 72
10.5.5 PROVISIONAL AND FINAL SETTLEMENT . . . . . . . . . . . 72
10.6 RIGHTS AND OBLIGATIONS OF PARTIES UPON TERMINATION . . . . . . 73
10.6.1 TERMINATION COSTS. . . . . . . . . . . . . . . . . . . 73
10.6.2 POST-TERMINATION REPORTS . . . . . . . . . . . . . . . 73
10.6.3 DISPOSITION OF EMPLOYEES . . . . . . . . . . . . . . . 73
ARTICLE 11
DISPUTE RESOLUTION . . . . . . . . . . . 73
11.1 INFORMAL PROCEDURES. . . . . . . . . . . . . . . . . . . . . . 73
11.2 FORMAL PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . 74
11.2.1 MEDIATION. . . . . . . . . . . . . . . . . . . . . . . 74
11.2.2 ARBITRATION. . . . . . . . . . . . . . . . . . . . . . 74
11.3 COSTS AND FEES . . . . . . . . . . . . . . . . . . . . . . . . 75
11.4 SPECIFIC PERFORMANCE . . . . . . . . . . . . . . . . . . . . . 75
11.5 JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . 75
11.6 LIABILITY LIMITATION . . . . . . . . . . . . . . . . . . . . . 75
ARTICLE 12
RELATIONSHIP OF THE PARTIES . . . . . . . . . 75
12.1 INDEPENDENT CONTRACTORS. . . . . . . . . . . . . . . . . . . . 75
12.2 NOT LEGAL REPRESENTATIVES. . . . . . . . . . . . . . . . . . . 76
12.2.1 UNITED. . . . . . . . . . . . . . . . . . . . . . . . . 76
12.2.2 AARP AND AARP TRUST . . . . . . . . . . . . . . . . . . 76
ARTICLE 13
INDEMNIFICATION . . . . . . . . . . . . 76
13.1 INDEMNIFICATION BY UNITED. . . . . . . . . . . . . . . . . . . 76
13.2 INDEMNIFICATION BY AARP. . . . . . . . . . . . . . . . . . . . 77
13.3 NOTICE; DEFENSE OF CLAIM . . . . . . . . . . . . . . . . . . . 77
13.4 FAILURE TO DEFEND ACTION . . . . . . . . . . . . . . . . . . . 78
13.5 SURVIVAL OF INDEMNITIES. . . . . . . . . . . . . . . . . . . . 78
13.6 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . 78
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ARTICLE 14
GENERAL PROVISIONS . . . . . . . . . . . 79
14.1 FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . . . . . 79
14.1.1 EVENTS . . . . . . . . . . . . . . . . . . . . . . . . 79
14.1.2 NOTICE AND CURE. . . . . . . . . . . . . . . . . . . . 79
14.1.3 TERMINATION. . . . . . . . . . . . . . . . . . . . . . 80
14.2 FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . . . . 80
14.3 NO THIRD PARTY BENEFICIARIES . . . . . . . . . . . . . . . . . 80
14.4 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . 80
14.5 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
14.6 NO WAIVER, ETC.. . . . . . . . . . . . . . . . . . . . . . . . 81
14.7 AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 82
14.7.1 GENERAL. . . . . . . . . . . . . . . . . . . . . . . . 82
14.7.2 ANCILLARY AGREEMENTS . . . . . . . . . . . . . . . . . 82
14.7.3 RENEGOTIATION. . . . . . . . . . . . . . . . . . . . . 82
14.7.4 CONFLICTS AMONG AGREEMENTS . . . . . . . . . . . . . . 82
14.8 EXPERIENCE/RESERVE ACCOUNTING. . . . . . . . . . . . . . . . . 82
14.9 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
14.10 BINDING EFFECT . . . . . . . . . . . . . . . . . . . . . . . . 82
14.11 ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 82
14.12 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . 83
14.13 CERTAIN CALCULATIONS . . . . . . . . . . . . . . . . . . . . . 83
14.14 ACKNOWLEDGEMENT. . . . . . . . . . . . . . . . . . . . . . . . 83
14.15 RELATED PLANS. . . . . . . . . . . . . . . . . . . . . . . . . 83
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AARP HEALTH INSURANCE AGREEMENT
This AARP HEALTH INSURANCE AGREEMENT (this "Agreement") dated as of
February 26, 1997, by and among the American Association of Retired Persons, a
District of Columbia not-for-profit corporation ("AARP"), the Trustees of the
AARP Insurance Plan ("AARP Trust," as hereinafter more fully defined), and
United HealthCare Insurance Company, a Connecticut stock insurance company
("United").
W I T N E S S E T H:
WHEREAS, AARP is a nonprofit, nonpartisan membership corporation for
persons of age 50 and over whose goals include the advancement of the
education, well-being and social welfare of its members and older persons
generally;
WHEREAS, AARP, through extensive research, has determined that the social
welfare of its members will benefit from access to a group health insurance
program (the "GHIP," as hereinafter more fully defined) sponsored by AARP and
provided by independent insurers and other contractors;
WHEREAS, AARP is the sole and exclusive owner of all proprietary and other
property rights and interest in the name, acronym and symbol "AARP" under which
services to its membership are known and identified;
WHEREAS, AARP and its independent consultants have determined that United
is qualified to offer the health insurance program component of the GHIP
comprised of group Medicare supplement, hospital indemnity and certain other
medical insurance coverages and other products as agreed to by the parties (the
"SHIP," as hereinafter more fully defined) and certain related services
described herein (the "Services," as hereinafter more fully defined) to
participants in the GHIP and other AARP members; and
WHEREAS, United desires to offer the SHIP and related Services to
participants in the GHIP and other AARP members;
NOW, THEREFORE, in consideration of the premises and the material
representations, warranties, conditions, covenants and agreements herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
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ARTICLE 1
DESCRIPTION OF AGREEMENT
1.1 CONTRACT DOCUMENTS. As used herein, "Contract Documents" means this
Agreement, written modifications of this Agreement and the following
exhibits and schedules, which are attached hereto and are specifically
made a part of this Agreement:
Exhibit 2.90 - United's Start-Up Personnel
Exhibit 3.1.3(a) - Dedicated United Personnel
Exhibit 3.1.5 - Software Acceptance Test Standards
Exhibit 3.2.4 - Future Products
Exhibit 3.2.5 - Administrative Services
Performance Standards
Exhibit 3.2.8(a) - Reporting Standards
Exhibit 4.2.1 - AARP Marks
Exhibit 5.1 - United Disclosure Schedule
Exhibit 5.1.9 - Agency Ratings of United
Exhibit 5.2 - AARP/AARP Trust Disclosure Schedule
Exhibit 6.2.1(b) - Analysis for Administrative Functions
Exhibit 6.5 - Tax Timing Expense
Exhibit 7.4.2 - Developed Marks
Exhibit 7.7.2 - Developed Systems
Exhibit 9.5.2 - Vendor Managing Representatives
1.2 ENTIRE AGREEMENT; AMENDMENT. The Contract Documents collectively set
forth the full and complete understanding of the parties with respect to
the subject matter thereof, and supersede any and all negotiations,
agreements or representations made or dated prior thereto. Each of the
Contract Documents may only be amended by written instruments executed by
each party to such Contract Document.
1.3 CORRELATION AND INTENT. It is the intent of the Contract Documents that
United undertake to provide the SHIP and the Services. If there is any
inconsistency among this Agreement and the Exhibits hereto, the terms of
this Agreement, as and if amended, shall govern.
1.4 SCOPE OF SERVICES. The description of the SHIP and the Services set
forth herein and in the Exhibits hereto is not intended to list every
element and detail to be provided by United, AARP and AARP Trust. If
necessary, United, AARP and AARP Trust shall propose and implement
modifications to the Contract Documents as are reasonably necessary to
reflect additional elements and details.
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ARTICLE 2
DEFINITIONS
Words and abbreviations that have well-known technical or trade meanings
are used in the Contract Documents in accordance with such recognized meanings.
The following terms are used in the Contract Documents with the following
respective meanings.
2.1 AARP has the meaning set forth in the first paragraph of this Agreement.
2.2 AARP MARKS has the meaning set forth in Section 4.2.1 hereof.
2.3 AARP TRUST means the trust created and existing under the laws of the
District of Columbia pursuant to that certain Restatement of Agreement
and Declaration of Trust dated as of February, 1980 among AARP and the
several trustees named therein, as amended.
2.4 AARP'S REPRESENTATIVE means the person designated by AARP and AARP Trust
from time to time in accordance with Section 4.1 hereof.
2.5 ACTIVE LIFE RESERVES means, for any SHIP Plan, the reserves established
to cover the excess in the value of future benefits and expenses over the
value of future premiums.
2.6 ADMINISTRATIVE SERVICE FEE has the meaning set forth in Section 6.2.1(a)
hereof.
2.7 AMORTIZATION INTEREST RATE means the yield on the three-year Treasury
securities at constant maturity, as published in Federal Reserve
Statistical Release H.15 (or any successor publication), for the month in
which an expense would have been charged in the absence of amortization,
plus fifty hundredths of one percent. The rate so defined is a
semiannually compounded rate that will be converted to an effective
annual rate for the purpose of any calculation.
2.8 APPLICABLE LAWS means all laws, ordinances, judgments, decrees,
injunctions, writs and orders of any court or governmental agency or
authority, and all codes, rules, regulations and orders applicable to
the performance of the Services or the provision of the SHIP.
2.9 ASSOCIATED AGREEMENTS means the AARP GHIP Management Agreement among
AARP, AARP Trust and Hartford Fire Insurance Company; the AARP Sales and
Marketing Agreement among AARP, AARP Trust and Seabury & Smith, Inc.; the
AARP Long Term Care Insurance Agreement among AARP, AARP Trust and
Metropolitan Life Insurance Company; and all other agreements pertaining
to the GHIP that may from time to time be entered into between United and
any other GHIP Vendor relating to the
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subject matter of this Agreement; as each such agreement may be amended
from time to time.
2.10 BASIC PERCENTAGE means a percentage determined as set forth in Section
6.3.1 hereof.
2.11 BUSINESS DAY means every day other than the Friday after Thanksgiving and
any other day on which commercial banks are not authorized to conduct
business, or are required to close, in the District of Columbia or the
State of New York. In the event that an obligation to be performed under
this Agreement falls due on a day which is not a Business Day, the
obligation shall be deemed due on the next Business Day thereafter.
2.12 CHANGE OF LAW means any change in, or change in the interpretation of, or
adoption of, any Applicable Law, or other legislative or administrative
action of the United States of America, any state, territory or the
District of Columbia or any agency, department, authority, political
subdivision or other instrumentality thereof, or a final decree, judgment
or order of a court, including temporary restraining orders, or a final
decree, judgment or order of any arbitrator or a court interpreting this
Agreement or any other Contract Document which occurs subsequent to the
date hereof.
2.13 CLAIMS DATABASES means all of the computer databases containing
information pertaining to the administration of claims made under the
SHIP Plans, and any data repository or file subsequently developed to
replace any of the foregoing.
2.14 CODE means the Internal Revenue Code of 1986, as amended, and the
Treasury Regulations from time to time promulgated thereunder.
2.15 COMMENCEMENT DATE means January 1, 1998.
2.16 COMPENSATION PERCENTAGE means a percentage determined pursuant to Section
6.3 hereof.
2.17 CONTRACT DOCUMENTS means this Agreement and the other documents
referenced in Section 1.1 hereof, collectively.
2.18 CPI means with respect to any particular Policy Year, the Consumer Price
Index for Urban Wage Earners and Clerical Workers (CPI-W), All Items
(1982-84 = 100) (All Cities), published by the United States Department
of Labor, Bureau of Labor Statistics, for the month of December preceding
the commencement of that Policy Year. If the name of the index as
described above is changed, or a similar index is substituted by the
United States Government, all references in this Agreement to the CPI
shall be deemed to refer to the renamed or substituted index. If the
publication of the index described above is discontinued and no similar
index is substituted by the United States Government, then the parties
shall substitute a comparable index by agreement.
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2.19 CPR MODEL means the CPR Model Mediation Procedure for Business Disputes.
2.20 CPR RULES means the CPR Rules for Nonadministered Arbitration of Business
Disputes.
2.21 DAC TAX means deferred acquisition cost tax, as defined in section 848 of
the Code.
2.22 DATABASES means the Claims Databases and the SHIP Databases,
collectively.
2.23 DEFICIT CARRYFORWARD has the meaning set forth in Section 8.3.1 hereof.
2.24 DEFICIT CARRYFORWARD ACCOUNT means an account to be maintained by United
to track the amount of the net cumulative Deficit Carryforward from time
to time.
2.25 DEVELOPED MARKS has the meaning set forth in Section 7.4.2 hereof.
2.26 DEVELOPED SYSTEMS has the meaning set forth in Section 7.7.2 hereof.
2.27 DISCLOSER has the meaning set forth in Section 7.6.2(a) hereof.
2.28 EVENT OF FORCE MAJEURE has the meaning set forth in Section 14.1.1
hereof.
2.29 EXISTING PROGRAM means the AARP group health insurance program provided
by Prudential as of the date hereof, including without limitation the
health insurance component thereof.
2.30 EXPENSE INCURRED TYPE PLAN means any SHIP Plan which is not an Indemnity
Type Plan. An Expense Incurred Type Plan includes both standard and
nonstandard policies.
2.31 FIXED OVERHEAD COSTS means, exclusively, expenses for real estate leases.
2.32 FUTURE PRODUCTS has the meaning set forth in Section 3.2.4 hereof.
2.33 GHIP means the AARP group health and long-term care insurance plans and
all related benefits and services as provided under this Agreement and
the agreement among AARP, AARP Trust and the vendor for the AARP
long-term care insurance program, excluding the dental and vision
policies.
2.34 GHIP VENDORS means, collectively, the Member Services Vendor, the Sales
and Marketing Vendor and United and its permitted successors and assigns
pursuant to this Agreement as the GHIP health insurance vendor.
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2.35 GROSS UP means the amount of Taxes subject to reimbursement pursuant to
Section 6.6.1 hereof multiplied by [[1/(1-United's Tax Rate)]-1].
2.36 GROWTH FACTOR means a percentage determined by dividing the number of
SHIP Insureds for a Policy Year by the number of SHIP Insureds for the
preceding Policy Year less 100 percent. In making the determination of
the number of SHIP Insureds for all affected Policy Years, the reference
shall be to the number of SHIP Insureds at the end of each applicable
Policy Year, and shall only apply to SHIP Insureds with Medicare
supplement coverage hereunder.
2.37 GROWTH INCENTIVE PERCENTAGE means a percentage determined as set forth in
EXHIBIT 3.2.5 hereto.
2.38 INCENTIVE PERCENTAGE means a percentage determined as set forth in
Section 6.3.2 hereof.
2.39 INCURRED CLAIMS means, for a Policy Year, the sum of (i) claims paid by
United under the SHIP Plans, (ii) the Active Life Reserves at the end of
the Policy Year and (iii) the amount of the reserves established by
United to cover claims incurred but not yet paid as of the end of such
Policy Year (including claims incurred but not yet reported, claims in
course of settlement and claims incurred under extension of benefit
provisions); less the amount of the corresponding reserves established at
the beginning of such Policy Year.
2.40 INCURRED PREMIUM REFUNDS means, for a Policy Year, the individual member
refunds of SHIP Net Premium paid during the Policy Year, whether provided
pursuant to legal requirements or otherwise, plus the amount of reserves
established for such payments as of the end of such Policy Year less the
amount of the corresponding reserves established at the beginning of such
Policy Year; provided, however, that such Incurred Premium Refunds relate
only to SHIP Net Premiums earned by United.
2.41 INCURRED TAX ITEMS means, with respect to a Policy Year, the costs
incurred by United with respect to the SHIP for (i) state and local
premium and franchise taxes, (ii) retaliatory taxes, (iii) insurance
department expense assessments (iv) guaranty fund assessments and (v)
state and health pool assessments.
2.42 INDEMNITY TYPE PLAN means any SHIP Plan which solely provides benefits in
a fixed amount for the occurrence of the covered event.
2.43 INVESTMENT INCOME CREDIT has the meaning set forth in Section 6.4
hereof.
2.44 INVESTMENT INCOME CREDIT RATE has the meaning set forth in Section 6.4.4
hereof.
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2.45 LOSS ADJUSTMENT EXPENSE RESERVE means the reserves established to cover
the costs of processing claims incurred but not yet paid.
2.46 LOSS RATIO for a Policy Year means the quotient obtained by dividing the
Incurred Claims by the Member Contributions for that Policy Year.
2.47 MANAGING REPRESENTATIVE has the meaning set forth in Section 9.6.2
hereof.
2.48 MEMBER CONTRIBUTIONS for a Policy Year means the sum of the monthly
amounts earned for that Policy Year in respect of the SHIP from each SHIP
Insured during that Policy Year.
2.49 MEMBER SERVICES AGREEMENT means that certain AARP GHIP Management
Agreement, to be entered into among AARP, AARP Trust and the Member
Services Vendor pertaining to member services for the GHIP.
2.50 MEMBER SERVICES VENDOR means Hartford Fire Insurance Company, and its
permitted successors and assigns from time to time as the provider of
member services for the GHIP, as more fully described in Section 9.2
hereof.
2.51 OPERATING EXPENSES means, for any Policy Year, the sum of (i) the
Administrative Service Fee for such Policy Year, and (ii) the Pass-
Through Expenses for such Policy Year.
2.52 OPERATING PLAN means the operating plan pertaining to the delivery of the
Services and the SHIP to be developed by United as more fully set forth
in Section 3.2.6 hereof.
2.53 OPERATIONAL ISSUE has the meaning set forth in Section 9.6.3 hereof.
2.54 PASS-THROUGH EXPENSES means all reasonably incurred and documented costs
incurred by United from and after the Commencement Date for the following
items:
(i) postage costs;
(ii) Medicare carrier crossover fees;
(iii) product development costs approved by AARP;
(iv) costs relating to the elimination of leases and empty space
resulting from re-engineering following transfer of the SHIP from
Prudential to United;
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(v) employee severance costs arising from implementation of the new
business model (but excluding any costs subject to United's
indemnification obligation pursuant to Section 13.1(iv) hereof);
(vi) costs of relocating systems from the Prudential data center, or
otherwise relating to disconnecting from Prudential systems, in
connection with the transfer of the SHIP from Prudential to
United, which costs are not paid by the Member Services Vendor;
(vii) costs of year 2000 changes to the SHIP systems, which costs are
not paid by Prudential or the Member Services Vendor;
(viii) costs of changes to SHIP systems required by the new business
model;
(ix) costs relating to any claims backlog issues existing as of the
Commencement Date or arising within 15 days thereafter;
(x) payments to Prudential pursuant to Section 3.1.8(d) hereof;
and
(xi) other costs approved by AARP.
The foregoing costs will be determined based on any agreed upon accrual
accounting principles consistently applied, subject to the following:
(A) time of individuals will be charged at PER DIEM rates equal to their
respective PER DIEM salaries; provided that the applicable rates will
include a load of 75 percent for systems personnel and of 55 percent for
all other personnel to cover other directly related costs (such load
factors to be adjusted to the extent that the underlying expenses already
are being recovered as Operating Expenses);
(B) travel expenses will be charged as reasonably incurred and documented;
and
(C) equipment expenses will be charged as reasonably incurred and documented;
provided, however, that no such expense for a single item of equipment in
excess of $100,000 may be charged without the prior approval of AARP,
which approval will not be unreasonably withheld.
Pass-Through Expenses shall not include expenses relating to the
following, which shall be solely for the account of United: (x) fees and
expenses of in-house and outside legal counsel; and (y) fees and expenses
of consultants; except in each case as approved in advance by AARP.
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2.55 PERFORMANCE EXPERIENCE means the difference (whether positive or
negative) between the Loss Ratio and the Target Loss Ratio.
2.56 POLICY YEAR means January 1 through December 31 inclusive.
2.57 PROCEDURES means the systems, schedules and procedures established by
United pursuant to Section 3.1.2 hereof required to be followed by United
in the performance of the Services and the provision of the SHIP.
2.58 PROGRAM AGREEMENT has the meaning set forth in Section 9.6.1 hereof.
2.59 PROGRAM ISSUE has the meaning set forth in Section 9.6.3 hereof.
2.60 PROJECTED MEMBERSHIP has the meaning set forth in Section 3.3.1 hereof.
2.61 PROPRIETARY INFORMATION has the meaning set forth in Section 7.6.1
hereof.
2.62 PROPRIETARY SYSTEMS has the meaning set forth in Section 7.7.1 hereof.
2.63 PRUDENTIAL means The Prudential Insurance Company of America.
2.64 PRUDENTIAL AGREEMENT means that certain Extended and Restated Agreement
among AARP, AARP Trust and Prudential dated as of January 1, 1992, as
amended.
2.65 PRUDENTIAL'S AARP OPERATIONS means the AARP operations of Prudential
headquartered in Ft. Washington, Pennsylvania and conducted at certain
other locations throughout the country, as more fully defined in Section
7 of the Prudential Agreement.
2.66 RECIPIENT has the meaning set forth in Section 7.6.2(a) hereof.
2.67 REINSURANCE AGREEMENT has the meaning set forth in Section 3.1.7(a)
hereof.
2.68 RECORDS means data stored in any form whatsoever, including, but not
limited to, hard copies, computer tapes and disk drives, CD-ROM or other
physical or electronic media.
2.69 RELATED PLAN means any policy that Prudential was required to issue to
any person who was not an AARP member either (i) pursuant to the
insurance laws or regulations of any state in order for Prudential to
make the SHIP available in that state or (ii) which AARP and Prudential
otherwise agreed to include, in whole or in part, in the experience
rating for the SHIP.
2.70 REPRESENTATIVES has the meaning set forth in Section 9.5.2 hereof.
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2.71 RESOLUTION PROCEDURE has the meaning set forth in Section 11.1 hereof.
2.72 RETENTION means, for any Policy Year, the sum of the following items:
(***)
2.73 RSF has the meaning set forth in Section 8.2 hereof.
2.74 RSF BALANCE means the amount held under the RSF from time to time.
2.75 RSF BALANCE PERCENTAGE for any Policy Year means the RSF Balance at the
end of such Policy Year, divided by the amount of Member Contributions
for that Policy Year.
2.76 SALES AND MARKETING AGREEMENT means that certain Sales and Marketing
Agreement to be entered into among AARP, AARP Trust and the Sales and
Marketing Vendor pertaining to sales and marketing services for the GHIP.
2.77 SALES AND MARKETING VENDOR means Seabury & Smith, Inc. and its permitted
successors and assigns from time to time as the provider of the sales and
marketing services for the GHIP, as more fully described in Section 9.3
hereof.
2.78 SERVICE ENHANCEMENT means a change in the services provided hereunder
which has the impact of decreasing the Incurred Claims under the SHIP
Plans.
2.79 SERVICES means the services to be performed by United pursuant to and in
accordance with Article 3 hereof.
2.80 SHIP means the SHIP Plans and the related Services that United is
obligated to provide hereunder, but excluding (i) any dental or vision
insurance coverages and (ii) any Related Plan, except as otherwise
agreed.
2.81 SHIP DATABASES means all computer databases to the extent they contain
information pertaining to the SHIP and SHIP Plans other than as to the
administration of claims thereunder, and any data repository or file
subsequently developed to replace any of the foregoing.
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the Securities and Exchange Commission (the "SEC") pursuant to Rule 24b-2
of the Securities and Exchange Act of 1934, as amended (the "Exchange Act").
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2.82 SHIP EMPLOYEES has the meaning set forth in Section 3.1.3(b) hereof.
2.83 SHIP GROSS PREMIUMS for a Policy Year means the amount of Member
Contributions minus the AARP allowance determined under Section 6.1
hereof for such Policy Year.
2.84 SHIP INSURED means an individual who is a insured under any SHIP Plan.
2.85 SHIP NET PREMIUMS for a Policy Year means the amount of Member
Contributions minus the sum of Vendor Operating Expenses, Vendor
Pass-Through Expenses and the AARP allowance determined under Section 6.1
hereof for such Policy Year.
2.86 SHIP PLAN means any health insurance plan underwritten by United pursuant
to this Agreement, including without limitation any such plan described
by any master group insurance policy issued to AARP Trust by United (or
its affiliates) and insured or reinsured by United (or its affiliates) at
any time during the term of this Agreement.
2.87 SHIP PORTFOLIO has the meaning set forth in Section 6.4.1 hereof.
2.88 SHIP PRODUCTS means the SHIP Plans and the Future Products, collectively.
2.89 START-UP COSTS means all reasonably incurred and documented costs
incurred by United during the period from September 9, 1996 until the
Commencement Date, in connection with the provision of the Services for
time, travel and equipment purchases (subject to the limitations set
forth below). Such costs will be determined based on agreed upon accrual
accounting principles consistently applied, subject to the following:
(i) the individuals whose time may be charged as Start-Up Costs are
identified on EXHIBIT 2.89 hereto (which EXHIBIT 2.89 may be
amended from time to time by United to include additional
personnel);
(ii) time of individuals will be charged at PER DIEM rates equal to
their respective PER DIEM salaries; provided that the applicable
hourly rates will include a load of 75 percent for systems
personnel and of 55 percent for all other personnel to cover
other directly related costs (such load factors to be adjusted to
the extent that the underlying expenses already are being
recovered as Operating Expenses);
(iii) travel expenses will be charged as reasonably incurred and
documented; and
(iv) equipment expenses will be charged as reasonably incurred and
documented, provided, however, that no such expense for a single
item of equipment in
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excess of $100,000 may be charged without the prior approval of
AARP, which approval shall not be unreasonably withheld.
Start-Up Costs shall not include expenses relating to the following,
which shall be solely for the account of United: (A) fees and expenses of
in- house legal counsel; (B) fees and expenses of outside legal counsel
except for services related to regulatory filings pertaining to the
transfer of the SHIP to United or as approved in advance by AARP; and (C)
fees and expenses of consultants not approved in advance by AARP.
2.90 TARGET AARP ALLOWANCE has the meaning set forth in Section 3.3.1 hereof.
2.91 TARGET INCURRED CLAIMS has the meaning set forth in Section 3.3.3(b)
hereof.
2.92 TARGET LOSS RATIO means the quotient obtained by dividing the Target
Incurred Claims by the Target Member Contributions for a Policy Year.
2.93 TARGET MEMBER CONTRIBUTIONS means the amount needed to fund the Target
AARP Allowance, Target Retention, Target Incurred Claims, Target Premium
Refunds and Target RSF Funding, and recognizing Projected Membership.
2.94 TARGET PREMIUM REFUNDS has the meaning set forth in Section 3.3.4 hereof.
2.95 TARGET RETENTION has the meaning set forth in Section 3.3.6(b) hereof.
2.96 TARGET RSF FUNDING has the meaning set forth in Section 3.3.5 hereof.
2.97 TAX BASE has the meaning set forth in Section 3.6.2 hereof.
2.98 TAX BENEFIT has the meaning set forth in Section 3.6.3 hereof.
2.99 TAX REIMBURSEMENT has the meaning set forth in Section 3.6.2 hereof.
2.100 TAX RETURN means any return, report, information return or other document
filed or required to be filed or supplied as part of any such filing to
any authority with respect to Taxes.
2.101 TAX TIMING EXPENSES has the meaning set forth in Section 6.5 hereof.
2.102 TAXES means all taxes, duties, charges, fees, levies or other
assessments, however denominated, including any interest or additions,
but excluding any fines or penalties, attributable thereto, imposed by
any foreign or United States federal, state or local taxing authority,
including but not limited to, income, payroll, withholding, unemployment
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insurance, social security, sales, use, excise, franchise, premium, gross
receipts, occupation, real and personal property, stamp, transfer, ad
valorem, workers' compensation, profits, license, employment, estimated,
severance and other taxes, duties, fees, assessments or charges of any
kind whatever in respect of the SHIP.
2.103 TERMINATION COSTS means all reasonably incurred and documented costs
incurred by United during the period from the date upon which it is
notified that this Agreement will not be renewed or that it has been
terminated until the date upon which United has performed all of its
obligations pursuant to Article 10 hereof, for the following items:
(i) costs of termination related services for time and travel;
(ii) employee severance costs (subject to the limitations of Section
10.4.6 hereof);
(iii) costs of unexpired leases (but only in the event of an
unscheduled termination);
(iv) capital losses, if any, realized on liquidation of the SHIP
Portfolio (but only in the event of an unscheduled termination);
(v) Tax costs pertaining to the period prior to the date of
termination which would otherwise be subject to reimbursement
hereunder but for the termination; and
(vi) write-off of undepreciated assets or unamortized costs.
The foregoing costs will be determined based on agreed upon accrual
accounting principles consistently applied, subject to the following:
(A) time of individuals will be charged at PER DIEM rates equal to
their respective PER DIEM salaries; provided that the applicable
hourly rates will include a load of 75 percent for systems
personnel and 55 percent for all other personnel to cover other
directly related costs (such load factors to be adjusted to the
extent that the underlying expenses already are being recovered
as Operating Expenses); and
(B) travel expenses will be charged as reasonably incurred and
documented.
Termination Costs shall not include expenses relating to the following,
which shall be solely for the account of United: (x) fees and expenses of
in-house and outside legal counsel; and (y) fees and expenses of
consultants not approved in advance by AARP.
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2.104 TRANSFER AGREEMENT means a certain Transfer Agreement that may be entered
into among Prudential and the several GHIP Vendors providing for the
early transfer of the GHIP from Prudential to the GHIP Vendors.
2.105 TRANSFERRED ASSETS means all assets, tangible or intangible, transferred
by Prudential to United which had been utilized in the performance of
Prudential's AARP Operations, including, but not limited to, Transferred
Equipment transferred pursuant to Section 4.3 hereof, Databases and
systems described in Section 4.4 hereof, workforce in place described in
Section 4.5 hereof, state and local licenses, and leases.
2.106 TRANSFERRED ASSETS GROSS UP means, in connection with the computation of
the Tax Reimbursement provided in Section 3.6.2 hereof, the amount of
Taxes that would be due on the Tax Base described in Section 3.6.2
hereof, calculated as follows:
Gross Up = [[(1/(1 Tax Rate))(Tax Base)]-(Tax Base)].
For this purpose, "Tax Rate" means the highest rate of income tax
applicable from federal, state and local taxing authorities on the income
recognized by United from the acquisition of the Transferred Assets.
2.107 TRANSFERRED EQUIPMENT means all furniture, fixtures and equipment
transferred to United by Prudential as contemplated by Section 4.3
hereof.
2.108 TRANSFERRED EMPLOYEES has the meaning set forth in Section 3.1.3(b)
hereof.
2.109 TRUE-UP INTEREST RATE means the yield on one-year Treasury securities at
constant maturity, as published in Federal Reserve Statistical Release
H.15 (or any successor publication), for the month in which this
Agreement is terminated, plus twenty-five hundredths of one percent. The
rate so defined is a semiannually compounded rate that will be converted
to an effective annual rate for the purpose of any calculation.
2.110 UNITED has the meaning set forth in the first paragraph hereof.
2.111 UNITED'S AARP OPERATIONS means the AARP operations of United, as more
fully described herein.
2.112 UNITED'S MARKS has the meaning set forth in Section 7.4.1 hereof.
2.113 UNITED'S REPRESENTATIVE means the person designated by United from time
to time in accordance with Section 3.1.1 hereof.
2.114 UNITED'S TAX RATE has the meaning set forth in Section 6.5 hereof.
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2.115 VENDOR OPERATING EXPENSES for a Policy Year means the total of the
operating expenses incurred by the Member Services Vendor, the Sales and
Marketing Vendor and other vendors approved by AARP Trust pursuant to the
annual budgeting process for the SHIP for that Policy Year (including
amortization of such GHIP Vendors' respective start-up costs).
2.116 VENDOR PASS-THROUGH EXPENSES means, for any Policy Year, the total of the
operating expenses incurred by the Member Services Vendor, the Sales and
Marketing Vendor and other vendors approved by AARP Trust outside the
annual budgeting process for the SHIP and chargeable to the SHIP for that
Policy Year (subject to the limitations set forth in Section 9.7 hereof).
ARTICLE 3
RESPONSIBILITIES OF UNITED
3.1 SERVICES PRIOR TO THE COMMENCEMENT DATE. Prior to the Commencement Date,
United shall provide the following services (collectively with the
services described in this Article 3, the "Services"):
3.1.1 DESIGNATION OF UNITED'S REPRESENTATIVE. Simultaneous with the
execution hereof, United shall appoint an individual ("United's
Representative") who shall have authority to act on its behalf
under this Agreement, except that such representative shall have
no authority to amend this Agreement. United promptly shall
notify AARP and AARP Trust of such appointment. The appointment
of United's Representative, and any successor thereto, shall be
subject to AARP's approval, which shall not be unreasonably
withheld. The direct operational management of the Services
shall be the responsibility of United's Representative.
United's Representative will represent United to AARP and AARP
Trust with respect to all operational matters. United may, upon
30 days' (or such lesser period as may be reasonable under the
circumstances) prior written notice to AARP, change United's
Representative. If requested by AARP for good cause, United
shall change United's Representative as soon as practicable. All
communications, notices and instructions given in writing to
United's Representative shall have the same effect as if given to
United hereunder, except where expressly indicated otherwise
herein. United's Representative will be charged with: (i)
ensuring performance of the Services in accordance with annually
established service and quality objectives; (ii) maintaining
liaison with AARP; and (iii) attending such periodic meetings of
AARP Trust to which he or she may be invited, at which meetings
he or she will to report on material developments affecting the
status of the SHIP.
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3.1.2 PROCEDURES. As outlined in the Exhibits hereto, United has
delivered to AARP information setting forth in reasonable detail
the procedures and schedules United will follow in performing the
Services and providing the SHIP hereunder (together with the
procedures contained in the Exhibits hereto, the "Procedures").
Such Procedures are (i) in material compliance with all
Applicable Laws; (ii) in accordance with the Contract Documents;
and (iii) consistent with those requirements relating to
accounting, reporting and other administrative matters as may be
reasonably requested by AARP. United shall prepare and deliver
to AARP from time to time any proposed amendment or modification
to the Procedures that United reasonably may deem necessary,
advisable or desirable in the performance of the Services and
provision of the SHIP. AARP shall notify United within 30 days
of receipt of any Procedures, or amendments or modifications
thereto, if it objects to any such Procedures, or amendments, or
modifications thereto, which notice shall describe in appropriate
detail the reasons for such objection. AARP may from time to time
request United to, and United shall, either (a) amend or modify
the Procedures as reasonably requested by AARP, or (b) use it
best efforts to resolve AARP's objections to the amendments or
modifications to the Procedures reasonably proposed by United.
3.1.3 DEDICATED STAFF.
(a) From and after the date hereof, United shall make available
the personnel identified in EXHIBIT 3.1.3(a) hereto to
manage as appropriate the Services and the SHIP, and shall
undertake commercially reasonable efforts to ensure that
such persons remain available to manage as appropriate the
Services and the SHIP until at least June 30, 1998.
(b) As required by Section 10.2(a)(i) of the Prudential
Agreement, United shall offer to employ all of the persons
who are serving in positions principally related to the
Services to be provided by United hereunder and (i) who are
actively employed by Prudential immediately prior to the
Commencement Date, with such employment to commence no
later than the Commencement Date, (ii) who are on an
approved leave of absence from the SHIP-related activities
of Prudential's AARP Operations on the Commencement Date
and who are prepared to return to work within 12 weeks
after the date of the commencement of the leave of absence,
with such employment to commence promptly following any
such person's return from such a leave of absence, or (iii)
who United is required to offer to employ under Applicable
Law, with such employment to commence when and as required
by Applicable Law. United shall not be required to offer
employment to any employee or former employee of
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Prudential except as provided in this Section 3.1.3(b).
The persons who are offered and who accept said employment
are referred to collectively herein as the "SHIP
Employees."
(c) United shall offer employment, salary and benefits to the
persons identified in paragraph (b) above that, taken as a
whole, are substantially similar to the employment, salary
and benefits provided by Prudential to such persons when
such offer of employment is made. United shall credit each
SHIP Employee with prior years of service at Prudential for
purposes of eligibility and vesting in any of the qualified
employee retirement and welfare plans offered by United.
(d) United shall permit any SHIP Employee who is entitled to
receive a distribution of a vested account balance in
Prudential's defined contribution plan to make a direct
rollover of the distribution to a qualified plan sponsored
by United. United shall permit any SHIP Employee who
receives a distribution from the Prudential defined benefit
pension plan to make a direct rollover of the distribution
to a qualified plan approved by United.
(e) The SHIP Employees shall be employees at will of United,
and nothing herein shall be construed to create any
employment agreement or right to continue as employees of
United. As of the Commencement Date, the SHIP Employees
will be covered by and subject to the employment policies
and procedures of United. If United terminates or lays off
any SHIP Employee on or after the Commencement Date, United
shall be responsible for compliance with all Applicable
Laws pertaining thereto, including all federal, state and
local labor and employment laws.
(f) United shall hire or otherwise make available all
administrative and other personnel in addition to the
personnel referred to in the preceding subsections (a) and
(b) above which, in United's reasonable judgment, are
necessary for the orderly and efficient performance of the
Services from and after the date hereof in accordance with
all standards set forth in the Contract Documents.
(g) All personnel assigned to United's AARP Operations who are
to interact on a regular basis with AARP and/or its members
shall undergo a training period (unless they previously
shall have been so trained) at United's expense to
familiarize them with the special needs of AARP members and
the manner in which to communicate with older persons.
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3.1.4 ACCEPTANCE AND ENHANCEMENT OF SYSTEMS AND DATABASES, ETC. United
shall accept the Databases and all related applications systems
software to be transferred to it by Prudential as contemplated by
Section 4.4 hereof. In addition, United, in concert with the
Member Services Vendor, shall make any changes and enhancements
to the foregoing as may be necessary for the orderly and
efficient provision of the SHIP and the Services beginning on the
Commencement Date.
3.1.5 ACCEPTANCE TESTING. United, in concert with the other GHIP
Vendors, shall perform tests of the Databases and related
applications systems software as described in EXHIBIT 3.1.5
hereto to ensure that the performance and other testing criteria
set forth therein are satisfied prior to the Commencement Date.
3.1.6 EQUIPMENT AND SUPPLIES. United shall accept the Transferred
Equipment from Prudential (by sale or other means) as
contemplated by Section 4.3 hereof. In addition, throughout the
term hereof, United shall procure and maintain all materials,
supplies, equipment and consumables which are reasonably
necessary or advisable for the performance of the Services in
accordance with this Agreement. In the event that the equipment
transfer contemplated by Section 4.3 hereof is not completed
prior to the Commencement Date, United shall procure materials,
supplies, equipment and consumables as set forth above, for which
it shall be reimbursed as Start-Up Costs or through a charge made
in the retrospective experience rating for the SHIP as described
in Section 8.3 hereof.
3.1.7 PRUDENTIAL AGREEMENTS.
(a) United shall undertake commercially reasonable efforts to
enter into an agreement or agreements with Prudential
(collectively the "Reinsurance Agreement") whereby United
shall assume liability for all SHIP Plans as of the
Commencement Date. United shall not be obligated, directly
or through reinsurance, for any person covered under the
Existing Program who rejects, or is deemed to have rejected
pursuant to Applicable Law, coverage as a SHIP Insured.
(b) United shall undertake commercially reasonable efforts to
enter into such other agreements and arrangements with
Prudential as may be necessary and appropriate to
effectuate the orderly transfer of the Services and the
SHIP from Prudential to United, including without
limitation the Transfer Agreement.
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(c) Notwithstanding any other provision hereof to the contrary,
the failure of United fully and timely to perform any of
its obligations hereunder as a result of the failure or
refusal of Prudential fully and timely to cooperate in the
transfer of the SHIP to United as contemplated hereby shall
not give rise to a breach by United of its obligations
hereunder and shall not entitle AARP or AARP Trust to
receive any damages from United hereunder or expose United
to any financial penalty hereunder (including any penalty
set forth in Section 6.2.5 hereof). Notwithstanding
Prudential's failure or refusal to cooperate in the
transfer of the SHIP to United as contemplated hereunder,
United shall be required, after reasonable consultation
with AARP and after reaching agreement with AARP on
appropriate compensation therefor, to undertake any
commercially reasonable action that might enable it to
perform the Services and provide the SHIP as contemplated
hereunder.
3.1.8 TRANSFER OF EXISTING BUSINESS.
(a) In the event that the SHIP business is transferred from
Prudential to United prior to the Commencement Date,
United, subject to the terms of the Transfer Agreement,
shall maintain the premium rates then in effect for the
remainder of the applicable premium rate guarantee periods;
provided, however, that United may pursue regulatory
approval of any rate authorized by AARP Trust.
(b) United shall develop rates effective for Policy Year 1998
and obtain rate approval from AARP Trust and appropriate
state regulatory authorities in accordance with the
procedures set forth in Section 3.3 hereof.
(c) As soon after the date hereof as reasonably practicable,
and in any event not later than March 31, 1997, United
shall prepare and file in the District of Columbia and in
all other jurisdictions where required by Applicable Laws
for the continuance of the SHIP Plans (i) certificates
and/or policies for all pre-standard Expense Incurred Type
Plan policies maintained by Prudential pursuant to the
existing SHIP and (ii) certificates and/or new policies on
terms substantially identical to (A) all standard Expense
Incurred Type Plan certificates and (B) all Indemnity Type
Plan policies maintained by Prudential pursuant to the
existing SHIP; provided, however, that United shall not
file any such policies in any jurisdiction other than the
District of Columbia, Connecticut, Florida and New York
without the prior approval of AARP, which shall not be
unreasonably withheld. The benefits and rates (if any)
contained in all such filings shall be subject to the prior
approval of AARP Trust.
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(d) United hereby assumes and agrees to pay Prudential when and
as due (***) in respect of the health insurance component of
the Existing Program; provided, however, that (i) United
shall not pay or be obligated to pay any amount to
Prudential by reason of this Section 3.1.8(d) unless and
until such time as AARP notifies United that Prudential has
cooperated fully in the smooth transfer of the GHIP to the
successor carriers pursuant to the Prudential Agreement,
(ii) any such payments by United shall be included in
Retention for the Policy Year in which made, and (iii) if
this Agreement is terminated when all such payments required
to be made by United under this clause (d) have not been
made, United shall have no further obligations in respect
thereof.
3.2 SERVICES AFTER THE COMMENCEMENT DATE. From and after the Commencement
Date, United shall provide the following Services:
3.2.1 COMPLETION AND CONTINUATION OF INITIAL SERVICES. United shall
promptly perform all Services required to be performed under
Section 3.1 hereof which are not fully performed as of the
Commencement Date, and shall continue to perform those Services
set forth in Section 3.1 hereof which are to continue after the
Commencement Date, including but not limited to the hiring of
employees.
3.2.2 UNDERWRITING OF SHIP. United shall serve as the underwriter of
the SHIP Plans as such SHIP Plans may be modified from time to
time in accordance with this Agreement. In furtherance and not
in limitation of the foregoing, United shall be responsible for
the following functions:
(a) United shall be responsible for policy underwriting,
actuarial review and analysis, trend analysis, pricing and
reserving for all SHIP Plans.
(b) United shall be responsible for claims review, adjudication
(including confirmation of eligibility and other applicable
limits), appeals, payment, review to minimize fraud and
abuse and utilization review for all SHIP Plans.
(c) United shall continue on a regular and timely basis to
prepare and timely file with all regulatory agencies with
which it shall be necessary so to do, such group health
insurance policies, certificates, forms, advertising
materials and other materials to be used in connection
therewith as shall be necessary to provide, without
interruption of coverage or benefit, entitlement of insured
members to the SHIP Plans (provided, that United shall not
file any policies in any jurisdiction other than the
District of
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
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Columbia, Connecticut, Florida and New York without the
prior approval of AARP, which approval shall not be
unreasonably withheld).
(d) United shall, as long as the appropriate premiums are
paid therefor, do all things reasonably necessary to keep
the SHIP Plans, as they may be modified from time to
time, in full force and effect and in compliance with all
pertinent statutes and regulations, state and federal.
Without limiting the generality of the foregoing, United
shall make or cause to be made any filings required by
Applicable Law, attend any hearings or conferences
necessary to providing and servicing the SHIP Plans and
respond to any written or oral communications regarding
the SHIP, whether such communications are directed to
AARP, AARP Trust or United, and shall provide prompt
notice to AARP of the foregoing; provided that AARP and
AARP Trust shall notify United promptly in writing of any
such hearings, conferences or communications of which they
become aware.
(e) United shall delete from the SHIP any SHIP Plan or other
Service which is no longer warranted in view of changes
in Applicable laws or which AARP advises United is no
longer necessary or appropriate to service the continuing
social welfare needs of the AARP members as they relate to
group health insurance.
3.2.3 PRODUCT DEVELOPMENT.
(a) To enhance the value of the SHIP to AARP members, United,
in consultation with AARP and AARP Trust, shall use its
best efforts to offer group health insurance products
that, together with the other value-added features,
differentiate the SHIP from insurance programs offered by
other vendors. United shall use its best efforts to
offer products having a competitive benefit and cost
structure, determined on a basis that includes due
consideration of the method of distribution and product
design. The design and development of the SHIP by United
shall take into account the social welfare needs of AARP
members and of older persons generally.
(b) United and AARP shall to continue to improve benefits and
maintain premiums at competitive levels under the
existing SHIP, to continue to modify the SHIP with a view
towards providing for AARP members the best program of
group health insurance available to older persons
including for AARP members who do not yet have or are not
eligible for Medicare, to supplement the coverage
available to them under Medicare,
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to broaden the insurance options available to them and to
make available coverage where none may otherwise be
generally available or may be unaffordable because of age
or health status. Accordingly, United periodically will
review and recommend to AARP Trust such modifications,
changes and revisions in, of and to the SHIP as United
shall deem to be in the best social welfare interests of
AARP members. The terms and conditions associated with
United's offering of any Service Enhancements shall be
documented in appropriate amendments or exhibits to this
Agreement.
(c) United will annually review the benefits and premiums for
existing and proposed SHIP products and services and
prepare recommendations to AARP Trust. In conjunction
with AARP, United shall engage in new AARP product
development focused on meeting members' changing social
welfare needs as they relate to group health insurance
and providing increased access, in a financially prudent
manner, to SHIP Products. All changes or enhancements to
services, plans or products are subject to prior approval
by AARP and AARP Trust. AARP and AARP Trust will
reasonably cooperate with United in the development,
pricing and testing of such proposed new products and
Services.
3.2.4 FUTURE PRODUCTS.
(a) From and after the Commencement Date (or the date hereof
if agreed to by the parties), United, in consultation
with AARP, shall undertake the product development
activities described in Section 3.2.3 hereof with respect
to the additional products and services listed in EXHIBIT
3.2.4 hereto (collectively, the "Future Products").
(b) The terms and conditions associated with United's
offering of any new or Future Products, including but not
limited to the terms relating to the services to be
provided, implementation, performance standards, timing
and compensation, will be documented in amendments or
exhibits to this Agreement.
3.2.5 SERVICE STANDARDS. United, in conjunction with AARP, AARP
Trust and the other GHIP Vendors, and subject to the approval
of AARP and AARP Trust, annually shall establish service and
quality standards for specific administrative functions such as
determining eligibility where underwriting is applicable, claim
processing, handling telephone calls transferred from the
Member Services Vendor, complaints, requests for information
and general correspondence. United shall undertake
commercially reasonable efforts to attain the agreed upon
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service and quality standards and will report the results to
AARP and AARP Trust pursuant to Section 3.2.8 hereof. The
initial service and quality standards are set forth in EXHIBIT
3.2.5 hereto.
3.2.6 OPERATING PLAN. United shall prepare and update annually a
comprehensive Operating Plan which shall include planning and
budgetary projections for the coming Policy Year and for the
succeeding five Policy Years (or for the subsequent term of
this Agreement, if shorter). The Operating Plan shall be
prepared after consultation with the Member Services Vendor and
the Sales and Marketing Vendor and shall give due consideration
to their recommendations, and shall be subject to the approval
of AARP and AARP Trust. To enable evaluation of cost
effectiveness and other criteria as reasonably specified from
time to time by AARP, the Operating Plan and budget at a
minimum shall set forth United's: (i) service and quality
objectives; (ii) staffing goals; (iii) projection of the
anticipated participation in the SHIP by the AARP membership
and the expected transactions of the SHIP participants for the
coming year; (iv) for transaction driven services the fee per
transaction and the expected total fees; (v) response to
regulatory and governmental developments and other external
environmental matters which are material to the SHIP; (vi)
relevant developments in United's own corporate environment
appropriate for disclosure which are material to the SHIP;
(vii) description of how the SHIP is addressing the social
welfare needs of the AARP members; and (viii) issues or
concerns regarding the actuarial sustainability of the SHIP.
The Operating Plan also shall track the results of the
implementation of the Operating Plans for preceding Policy
Years and provide an analysis of the Operating Plan compared to
actual performance.
3.2.7 FINANCIAL BOOKS AND RECORDS.
(a) In addition to the other record keeping requirements set
forth in the Contract Documents, United, the Member
Services Vendor, and the Sales and Marketing Vendor as
appropriate, shall prepare and maintain, on a current
basis, in accordance with accrual accounting principles
consistently applied, accurate and complete financial
books and records and accounts of all transactions
related to the Services and the SHIP including such
information as may be necessary to verify calculations
made pursuant to the Contract Documents, the Member
Services Agreement and the Sales and Marketing Agreement.
United shall maintain accurate cost ledgers and
accounting records regarding the Services and the SHIP,
in accordance with accrual accounting principles
consistently applied. United shall establish and
maintain an information system to provide storage and
ready retrieval of operating data pertaining to the
Services and the SHIP,
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including such information necessary to verify
calculations, if any, made pursuant to this Agreement and
the Associated Agreements. United shall furnish to AARP
and AARP Trust, on an annual basis, an audit report as to
the financial books and records maintained by United
hereunder.
(b) United shall prepare and maintain, on a current basis,
adequate documentation of all applications and operating
systems and programs with respect to the SHIP Databases
and the provision of the Services and the SHIP by United
hereunder.
3.2.8 REPORTS.
(a) All reports to be prepared by United pursuant to this
Agreement shall be prepared in accordance with the
reporting requirements set forth in EXHIBIT 3.2.8(a)
hereto.
(b) United will provide to AARP the management and other
reports reasonably requested by AARP from time to time.
(c) United shall provide the Member Services Vendor with not
less than monthly updates with respect to all SHIP
Products and pricing specifications therefor in
electronic form as requested by the Member Services
Vendor.
(d) United will render such other reports as AARP shall
reasonably request from time to time.
(e) All reports provided by United to AARP or AARP Trust
relating to the experience rating of the SHIP Plans or
the RSF shall be on a consolidated basis.
3.2.9 AUDITS AND INSPECTION.
(a) Subject only to the limitations of Section 3.2.9(b)
hereof, during normal business hours and upon reasonable
notice, United shall permit AARP, AARP Trust and their
respective authorized representatives to inspect and
audit all records reasonably related to the operation of
the GHIP in the possession of United as they from time to
time may reasonably request. Such access shall be
reasonable in scope, frequency and duration and, to the
extent commercially reasonable, shall be via electronic
data transfer.
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(b) Neither AARP nor AARP Trust shall have access to AARP
members' claim files (other than paid claim data) or
medical information unless the express written consent of
the AARP member has been secured, or such access is
necessary to comply with Applicable Law.
3.3 MEMBER CONTRIBUTION RATE ADJUSTMENTS.
3.3.1 PROJECTED MEMBERSHIP; TARGET AARP ALLOWANCE.
(a) On or prior to March 31 of each year, United, in
consultation with the Member Services Vendor and the
Sales and Marketing Vendor, will advise AARP Trust as to
its preliminary projection for the enrolled SHIP
population for the coming Policy Year.
(b) On or prior to July 15 of each Year, United in
consultation with the Member Services Vendor and the
Sales and Marketing Vendor, will advise AARP Trust as to
its final projection for the enrolled SHIP population for
the coming year, and as to its final projection of the
amount of the allowance to be payable to AARP pursuant to
Section 6.1 hereof for the coming year.
(c) On or prior to August 15 of each year, AARP Trust will
advise United whether it approves of its projection for
the enrolled SHIP population and AARP allowance pursuant
to Section 6.1 hereof for the coming Policy Year. The
projected SHIP enrollment approved by AARP Trust pursuant
to this Section 3.3.1 is herein referred to as the
"Projected Membership," and the projected AARP allowance
approved by AARP Trust pursuant to this Section 3.3.1 is
herein referred to as the "Target AARP Allowance."
3.3.2 TARGET OPERATING EXPENSES.
(a) On or prior to March 31 of each year, (i) pursuant to the
Associated Agreements the Member Services Vendor and
Sales and Marketing Vendor each will submit to AARP Trust
and United preliminary estimates as to their respective
Vendor Operating Expenses for the coming Policy Year, and
(ii) United then shall submit to AARP Trust its
preliminary estimates as to its Operating Expenses for
the coming Policy Year.
(b) Following the submission of the pricing estimates
pursuant to subsection (a), United shall negotiate in
good faith with the other GHIP Vendors making such
submissions with a view to resolving any differences as
to
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such pricing estimates and giving due consideration to
the social welfare needs to the AARP membership.
(c) On or prior to June 1 of each Policy Year, (i) pursuant
to the Associated Agreements the Member Services Vendor
and Sales and Marketing Vendor each will submit to AARP
Trust and United their final estimates as to their
respective Vendor Operating Expenses for the coming
Policy Year, and (ii) United shall submit to AARP Trust
its final estimate as to its Operating Expenses for the
coming Policy Year.
(d) On or prior to June 15 of each year, AARP Trust will
advise (i) the Member Services Vendor, the Sales and
Marketing Vendor and United whether it approves of their
final Vendor Operating Expense estimates pertaining to
the SHIP for the coming Policy Year submitted pursuant to
paragraph (c) above and (ii) United whether it approves
of its final Operating Expenses estimate submitted
pursuant to paragraph (c) above.
3.3.3 TARGET INCURRED CLAIMS.
(a) On or prior to April 15 of each Policy Year, United shall
report to AARP Trust its incurred and paid claims
experience for the preceding Policy Year based on the
best information then available. United shall furnish one
report including claims information by paid month and
incurred month for the period of time beginning with plan
inception (whether or not the date of plan inception
occurs prior to the Commencement Date) and continuing
through March 31 of such Policy Year (but in no event
shall this period of time exceed 63 months). A second
report shall include claims information in the aggregate
for the period in excess of 63 months.
(b) On or prior to June 1 of each Policy Year, United shall
submit to AARP Trust its projected Incurred Claims
experience (including projected changes in Active Life
Reserves) for the next Policy Year, and all other
relevant factors. The projected Incurred Claims approved
by AARP Trust pursuant to this paragraph (b) are herein
referred to as the "Target Incurred Claims."
3.3.4 TARGET PREMIUM REFUNDS.
(a) On or prior to June 15 of each year, United will advise
AARP Trust of its projected Incurred Premium Refunds for
the coming Policy Year.
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(b) On or prior to August 15 of each year, AARP Trust will
advise United whether it approves of its projection for
the Incurred Premium Refunds for the coming Policy Year.
The projected Incurred Premium Refunds approved by AARP
Trust pursuant to this Section 3.3.4 are herein referred
to as the "Target Premium Refunds."
3.3.5 TARGET RSF FUNDING.
(a) On or prior to June 15 of each year, United will advise
AARP Trust of its recommended RSF funding level for the
coming Policy Year.
(b) On or prior to August 15 of each year, AARP Trust will
advise United whether it approves of its recommendation
for the RSF funding level for the coming Policy Year.
The projected RSF funding level approved by AARP Trust
pursuant to this Section 3.3.5 is herein referred to as
the "Target RSF Funding."
3.3.6 TARGET RETENTION.
(a) On or prior to June 15 of each year, United shall submit
to AARP Trust its estimate as to its Retention for the
coming Policy Year.
(b) On or prior to August 15 of each year, AARP Trust will
advise United if it approves its estimated Retention for
the following Policy Year. The estimated Retention
approved by AARP Trust pursuant to this Section 3.3.6(b)
is herein referred to as "Target Retention."
3.3.7 DETERMINATION OF MEMBER CONTRIBUTION RATES.
(a) On or prior to July 15 of each Policy Year, United shall
submit to AARP Trust a detailed projection of the
financial position of the SHIP for the coming Policy
Year, including its recommended Member Contribution
levels by geographic area and SHIP Plan and projected
aggregate Member Contributions for the coming Policy
Year. Such projection shall be based on Target
Membership, Target Retention, Target Incurred Claims,
Target Premium Refunds, Target AARP Allowance and Target
RSF Funding, an allowance for employee severance costs
and such other adjustments as agreed to by AARP Trust.
(b) AARP Trust, with the assistance of its independent
actuaries, shall review the final estimates and
projections submitted by United pursuant to the preceding
paragraph (a). On or prior to August 15 of each Policy
Year,
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AARP Trust will advise United if it approves of
such final estimates and projections, which approval
shall not be unreasonably withheld if such items are
based on actuarial principles and related standards.
(c) The Target Member Contribution rates by geographic area
and plan approved by AARP Trust shall be the rates
applicable to SHIP Products for the next Policy Year,
subject to such modifications, if any, as may be made
pursuant to paragraph (e) below.
(d) The Member Contribution rates generally will be set to
achieve a RSF Balance Percentage of (***) or of such
other percentage as may be agreed by the parties. The
parties may agree to increase the RSF Balance Percentage
as reasonably required to ensure the financial stability
of the SHIP, to protect SHIP Insureds in case of
termination of this Agreement without a successor
carrier and to provide for development of new products.
(e) United may periodically propose for approval by AARP
Trust (which approval shall not be unreasonably withheld)
such interim Member Contribution rate or benefit
adjustments as are reasonably warranted by virtue of
changes in, but not limited to, interest rates, lapses,
and death rates, expense charges, Medicare benefit,
coinsurance or deductible amounts and demonstrable trends
in medical care costs, material changes in AARP members'
health care utilization, or changes in Medicare or other
present or future governmental programs or in regulations
having a material bearing on benefits payable under the
program. In each such instance, United shall first
demonstrate to the reasonable satisfaction of AARP Trust
that failure to approve the premium rate or benefit
adjustments so proposed by United would render it
materially more difficult to maintain the stability of
the SHIP.
3.3.8 RATE APPROVAL AND IMPLEMENTATION. Upon receiving AARP Trust
approval of the recommended Member Contribution rates, United
shall immediately undertake to obtain any and all necessary
regulatory approvals of such rates. On the first day of each
month thereafter, United shall provide progress reports to AARP
Trust summarizing the approval or disapproval of such rates by
state regulatory agencies, including the nature of any ongoing
discussions with such agencies regarding rate approval issues.
3.3.9 SPECIFICATION OF TARGET LOSS RATIO. On or prior to September 1
of each Policy Year, United and AARP Trust shall agree on the
specification of a Target Loss Ratio for the next Policy Year.
The Target Loss Ratio shall be determined by
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
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dividing the Target Incurred Claims by the Target Member
Contributions. United will undertake its best efforts to cause
the Loss Ratio for the SHIP Plans to be not less than (***)
for any Policy Year.
3.3.10 STATE MANDATED RATE ADJUSTMENTS. United will utilize all
commercially reasonable means at its disposal to assist states
in their review of rate submissions and to encourage adoption
of recommended rates. If, however, if individual states mandate
other than the recommended rates, United will implement the
mandated rates and will immediately report the same to AARP
and AARP Trust.
3.4 COMPLIANCE WITH LAW.
3.4.1 GENERAL. United shall comply in all material respects with all
Applicable Laws in connection with the provision of the SHIP
and the performance by it of the Services, including but not
limited to obtaining any necessary regulatory approvals of
marketing materials and policy certificates and rates.
3.4.2 NOTICE. Within ten Business Days of the receipt by United of
notification from any federal or state agency with jurisdiction
over the licensure or operation of United of noncompliance with
any Applicable Law, United shall provide AARP with a copy of
such notification, together with information regarding any
corrective action it has taken to comply with such law.
3.5 SALE OF ASSETS; SUBCONTRACTS, ETC.
3.5.1 ASSET SALES. Except as provided in this Section 3.5 and in
Section 10.5.6 hereof, United shall not sell or transfer all or
any material portion of the business or assets (other than
invested assets of the SHIP Portfolio) comprising the SHIP
without the prior consent of AARP, which consent shall not be
unreasonably withheld. United may sell all or any portion of
the equipment (i) which constitute Transferred Assets or (ii)
the purchase price of which is otherwise chargeable to the
SHIP, provided that in either case that such sale will not
adversely affect United's ability to perform the Services and
that the sale proceeds are credited against other amounts
payable to United pursuant to Section 6.3 hereof.
3.5.2 SUBCONTRACTS. United may subcontract all or any portion of the
Services or the SHIP to any direct or indirect wholly-owned
subsidiary of United without the approval of AARP. Except as
provided in the preceding sentence United may not enter into
any subcontract involving the payment in any Policy Year of an
amount exceeding $250,000 without first notifying AARP thereof,
or in excess
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
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of $500,000 without obtaining the prior approval of AARP and
AARP Trust; provided, however, that in the event of an
emergency, United may enter into subcontracts to deal with such
emergency without AARP's consent, and provided further that
United promptly notifies AARP of any such action. In the event
that United subcontracts any work under this Section 3.5,
United shall be solely responsible for such subcontracted
Services, AARP will look solely to United as if the services
were performed by United, and United will require each such
subcontractor to comply with the security arrangements and
confidentiality provisions appropriate to this Agreement.
Notwithstanding the foregoing, United may not enter into any
reinsurance arrangement in respect of the SHIP, other than
ordinary course coinsurance, indemnity reinsurance or stop loss
reinsurance arrangements, with any party other than a direct or
indirect-majority owned subsidiary of United without the prior
consent of AARP, which consent shall not be unreasonably
withheld. Nothing herein shall establish any contractual
relationship between AARP or AARP Trust and any subcontractor
or supplier, and neither AARP nor AARP Trust shall have any
obligation to pay or cause the payment of any moneys to any
subcontractor or supplier. Any subcontract pertaining to the
provision of Services (whether or not approved by AARP) shall
not relieve United of its contractual obligations hereunder
pertaining to the delivery of such Services.
3.6 TAXES.
3.6.1 GENERAL. Except as otherwise expressly provided by any
Contract Document or Associated Agreement, United shall pay all
Taxes imposed on United pursuant to Applicable Law that are
incurred by it by reason of or result from its performance of
the Services and provision of the SHIP, provided that United
shall be entitled to recover such Taxes to the extent expressly
provided by this Agreement or by the applicable provisions of
any other Contract Document or Associated Agreement.
3.6.2 TAX REIMBURSEMENT. Notwithstanding any provision to the
contrary in Section 3.6.1 hereof, United shall be reimbursed,
in the manner contemplated by Section 6.6 hereof, for the
(***). United shall be reimbursed, in the
manner contemplated by Section 6.6 hereof, for costs associated
with any audit examination by any governmental taxing authority
or administrative or judicial proceedings resulting therefrom,
which arise in conjunction with such income
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
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recognition. The amount of any Tax Reimbursement shall be
excluded from the determination of Start-Up Costs.
3.6.3 TAX BENEFIT FROM DEPRECIATION AND AMORTIZATION. To the extent
that United receives any reduction of taxes ("Tax Benefit")
from the subsequent depreciation and amortization of the
Transferred Assets, AARP Trust shall be entitled to receive
annually this Tax Benefit and the associated gross up, computed
under the same principles as the Tax Reimbursement, based on
the federal, state and local income tax rates applicable to
United in effect in the applicable year. Such Tax Benefit
shall be credited against United's compensation described in
Article 6 hereof.
3.6.4 TAX EFFECT OF DISPOSAL OF TRANSFERRED ASSETS. United shall be
reimbursed, in the manner described in Section 6.6 hereof, for
the effect (federal, state or local), including tax
reimbursement and the associated gross up, computed under the
same principles as the Tax Reimbursement, based on the federal,
state and local income tax rates applicable to United in effect
in the applicable year, of the gain on disposition of a
component of the Transferred Assets. Alternatively, to the
extent of a loss on the disposition of a component of the
Transferred Assets, AARP Trust shall be entitled to the
reduction of taxes and the associated gross up, computed under
the same principles as the Tax Reimbursement, based on the
federal, state and local income tax rates applicable to United
in effect in the applicable year. Such further Tax
Reimbursement or Tax Benefit shall be added to or credited
against United's compensation described in Article 6 hereof.
3.7 EXCLUSIVITY. United shall not market group health insurance products
or programs comparable to those offered pursuant to the SHIP to any
other nonemployer group without the prior consent of AARP and AARP
Trust; provided, however, that United may continue to offer all of its
health insurance products and programs existing as of the date of this
Agreement and any health insurance products and programs offered by any
other entity as of the date of its acquisition by United, in each case
without regard to the comparability of such products to those offered
pursuant to the SHIP. This Section 3.7 also shall not preclude United
from directly or indirectly offering any products which it presently
offers or from developing any products for sale through its affiliated
health maintenance organizations.
3.8 CONFLICTING APPROVALS. To the extent that United is required hereby to
obtain approvals, consents, directions or recommendations from any
party other than AARP or AARP Trust with respect to the Services or the
SHIP, in the event of any inconsistency between any such approval,
consent, direction or recommendation receival from AARP or AARP
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Trust, on the one hand, and another party, on the other hand, the
approval, consent, direction or recommendation issued by AARP or AARP
Trust shall be controlling.
3.9 AARP EVALUATIONS. United will use its best efforts to remedy any
deficiencies set forth in the evaluations delivered to United pursuant
to Section 4.10 hereof.
3.10 CESSATION OF BUSINESS.
3.10.1 GENERAL. If United determines that the SHIP is not or will not
be financially sustainable, it may terminate this Agreement as
provided in, and subject to the terms and conditions of, this
Section 3.10.
3.10.2 PROCEDURE. During the January of any Policy Year or during the
30-day period following a Change of Law which has either a
material adverse effect on United's ability to perform its
obligations under the Contract Documents or a material adverse
economic effect on United's provision of the SHIP or the
Services, United may notify AARP and AARP Trust that it has
concluded that the SHIP is not or will not be financially
sustainable. If AARP disagrees with United's conclusion, AARP
shall provide United with written notice thereof within 30 days
of receipt of United's notice and the parties shall promptly
select a mutually agreed upon actuarial firm to which, the sole
of which shall be paid equally by United and Hartford and not
charged to the SHIP, shall provide a recommendation as to
whether United's conclusion is reasonable. If the parties are
unable to agree upon an actuarial firm within 30 days of AARP's
receipt of United's notice, then the actuarial firm shall be
selected in accordance with the CPR Rules. The actuarial firm
shall be directed to reach a conclusion within 90 days of its
appointment. The recommendation of the actuarial firm shall be
binding on the parties. If the actuarial firm concludes that
United's conclusion is not reasonable, then United shall not be
entitled to cease writing new SHIP business. If the actuarial
firm concludes that United's determination is reasonable,
United shall be authorized to terminate this Agreement pursuant
to Section 10.2(i) hereof.
3.11 RELATED PLANS. The terms and conditions of any services to be provided
in connection with any Related Plan shall be set forth in separate
agreements among AARP, AARP Trust and United.
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ARTICLE 4
RESPONSIBILITIES OF AARP AND AARP TRUST
4.1 AARP'S REPRESENTATIVE. Simultaneously with the execution hereof, AARP
and AARP Trust jointly shall appoint an individual ("AARP's
Representative") who shall have authority to act on their behalf under
this Agreement, except that such representative shall have no authority
to amend this Agreement. AARP and AARP Trust promptly shall notify
United of such appointment. AARP may, upon 30 days' (or such lesser
period as may be reasonable under the circumstances) prior written
notice to United, change AARP's Representative. All communications,
requirements and instructions given in writing to AARP's Representative
shall have the same effect as if given to AARP hereunder, except where
expressly indicated otherwise herein.
4.2 GRANT OF RIGHT TO USE AARP MARKS.
4.2.1 GRANT. For the term of this Agreement, AARP hereby grants to
United the exclusive, nonassignable right to use the AARP name,
symbol, acronym and marks set forth in EXHIBIT 4.2.1 hereto as
from time to time amended (collectively, the "AARP Marks")
solely in connection with the provision of the SHIP and the
Services and as reasonably required for the performance by it
of its post-termination obligations in accordance herewith;
provided, however, that such grant is subject to compliance by
United with the obligations and covenants set forth in this
Section 4.2. AARP may unilaterally amend EXHIBIT 4.2.1
hereto, upon 30 days' notice to United, to include any new AARP
Mark.
4.2.2 NOTATIONS. At the request of AARP, United shall apply the
notice (E.G., the "-REGISTERED TRADEMARK" symbol, the "SM" symbol
(SM) or the "TM" symbol (TM)) specified by AARP. AARP will
provide United with written notice of changes to the notation
requirements for the AARP Marks. United shall implement such
changes as soon as reasonably practicable, provided that United
shall not be required to remove, replace or reprint any
advertising, promotional materials, paper goods and any other
materials and supplies that contain the AARP Marks with the
former notations, except as would be necessary in the ordinary
course of United's business.
4.2.3 APPROVAL RIGHTS. Use of the AARP Marks by United, including
their use in United generated direct mailings, advertisements,
brochures or any other form of contact with AARP members
initiated by or on behalf of United or its agents, will be
subject to the prior approval of AARP.
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4.2.4 OWNERSHIP OF MARKS. AARP owns the AARP Marks and United
recognizes their substantial value and associated goodwill.
United will not alter, modify, dilute or misuse the AARP Marks,
bring them into disrepute, or challenge AARP's rights in them.
4.2.5 PROTECTION OF AARP MARKS. United will not attempt to register
the AARP Marks, and, at AARP's expenses, will reasonably
cooperate with AARP in protecting, defending and registering
them as they relate to the SHIP.
4.2.6 INFRINGEMENTS. United will promptly advise AARP of any
infringements of the AARP Marks known to United. AARP will
have the sole right to take legal action with regard to any
such infringements.
4.3 EQUIPMENT TRANSFER. Within a reasonable time after the execution
hereof, AARP will request that Prudential transfer to United (by sale
or other means) the equipment used by Prudential's AARP Operations in
performing the services comparable to the Services described herein,
for use by United, and that such transfer be effective on the
Commencement Date.
4.4 DATABASE AND SYSTEMS TRANSFER. Within a reasonable time after the
execution hereof, AARP will request that Prudential transfer to United
(by sale or other means) copies of the Databases, SHIP administration
computer files and all related applications systems (i) as of May 1,
1997 for testing and development review, (ii) as of August 1, 1997 for
regulatory review and (iii) with the final transfer to occur on or
before the Commencement Date. AARP shall request that Prudential
provide the Databases and applications systems to United scrubbed and
cleaned in a computer readable format on or before the Commencement
Date. AARP will also request that Prudential grant United access to
the Databases, SHIP administration computer files and all related
applications systems to assist in the transition processes contemplated
under this Agreement, including but not limited to Sections 3.1.4 and
3.1.5 hereof.
4.5 EMPLOYEE HIRE. Within a reasonable time after the execution hereof,
AARP will request that Prudential encourage all of the persons who are
to receive an offer of employment from United as provided in Section
3.1.3(b) hereof to accept such offer. AARP shall request Prudential to
take all appropriate action to cause such hire of employees to be
effective no later than the Commencement Date. AARP also shall request
that Prudential, as promptly as possible after the date hereof, (i)
grant United access to its personnel currently involved with the
SHIP-related activities of Prudential's AARP Operations in order to
assist in the transition processes contemplated under this Agreement,
(ii) provide United with copies of any and all records pertaining to
the SHIP Employees (including personnel, payroll and benefits received,
in whatever format) that United shall reasonably request in order to
meet its obligations hereunder in respect of
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<PAGE>
the SHIP Employees and (iii) otherwise cooperate with United to
effectuate the orderly transition of the employment of the SHIP
Employees from Prudential to United as contemplated hereby. AARP also
shall request that Prudential, on the Commencement Date, provide United
with the original copies of any and all Records pertaining to the SHIP
Employees, including without limitation the Records described in clause
(ii) above.
4.6 OTHER ASSETS AND INFORMATION. AARP will transfer or undertake
commercially reasonable efforts to cause to be transferred (by sale or
other means) to United (by AARP, its representatives or other GHIP
Vendors) such other information as United from time to time may
reasonably require in order to perform the Services and provide the
SHIP.
4.7 PRUDENTIAL AGREEMENTS. AARP and AARP Trust shall undertake
commercially reasonable efforts to enter into such agreements and
arrangements with Prudential as may be necessary and appropriate to
effectuate the orderly transfer of the Services and SHIP from
Prudential to United, including without limitation the Transfer
Agreement.
4.8 COOPERATION OF THIRD PARTIES. AARP will undertake commercially
reasonable efforts to obtain the cooperation of Prudential, the Member
Services Vendor and the Sales and Marketing Vendor in effectuating all
of the transactions contemplated hereby.
4.9 OVERSIGHT. AARP will oversee the operations of the GHIP to monitor
whether it (i) satisfies the needs of the AARP members and (ii)
supports the social welfare mission of the AARP. AARP also will
facilitate cooperation among the GHIP Vendors.
4.10 AARP EVALUATIONS. For each Policy Year, in connection with the
Operating Plans and premium rate related proposals submitted by United
under Sections 3.2.6 and 3.3 hereof, AARP shall evaluate whether or not
United has adequately performed the Services and is adequately
satisfying the health insurance needs and promoting the social welfare
of AARP's members. AARP shall deliver in writing AARP's evaluation of
United's provision of the Services within 90 days after the end of the
applicable evaluation period.
4.11 OTHER PROGRAMS. AARP and AARP Trust intend to sponsor health care
choices for AARP members in an educational manner, giving appropriate
consideration to all available options.
4.12 INSPECTION. During normal business hours and upon reasonable notice,
AARP Trust shall permit United to inspect all Records reasonably
related to the operation of the SHIP maintained by or on behalf of AARP
Trust as United may from time to time reasonably request. Such access
shall be reasonable in scope, frequency and duration and, to the extent
commercially reasonable, shall be via electronic data transfer.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES
5.1 REPRESENTATIONS AND WARRANTIES OF UNITED. United hereby represents and
warrants to AARP and AARP Trust as follows as of the date hereof.
5.1.1 ORGANIZATION AND OUTSTANDING. United is a stock insurance
company duly organized, validly existing and in good standing
under the laws of the State of Connecticut and has the
corporate power and authority to own, lease and operate its
assets and to carry on its business as it is now being
conducted.
5.1.2 AUTHORIZATION. United has the full corporate power and
authority to enter into this Agreement and to perform its
obligations hereunder. The execution and delivery of this
Agreement and the performance by United of its obligations
under this Agreement have been duly and validly authorized and
approved by all requisite corporate action of United and no
other acts or proceedings on its part, including approvals,
consents or authorizations by any of its policyholders, are
necessary to authorize the execution, delivery and performance
of this Agreement or the transactions contemplated hereby.
This Agreement constitutes the legal, valid and binding
obligation of United and is enforceable in accordance with its
terms, except to the extent that enforcement may be limited by
bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights and the obligations of debtors
generally and by general principles of equity, regardless of
whether considered in a proceeding at law or in equity.
5.1.3 CONSENTS AND APPROVALS. Except as set forth in EXHIBIT 5.1
hereto, no consent, approval, non-disapproval, authorization,
ruling, order of, notice to or registration with, any
governmental or regulatory authority or any person,
partnership, corporation, firm, trust or other entity is
required on the part of United in connection with the execution
and delivery of this Agreement or the consummation by United of
the transactions contemplated hereby.
5.1.4 ACTIONS PENDING. There is no action, suit, investigation or
proceeding pending or, to the knowledge of United, threatened
against United or any properties or rights of United, by or
before any court, arbitrator or administrative or governmental
body, which action, suit, investigation or proceeding could
reasonably be expected to impair the ability of United to
perform its obligations under this Agreement.
5.1.5 NO CONFLICT OR VIOLATION. Except as disclosed in EXHIBIT 5.1
hereto, the execution, delivery and performance of this
Agreement and any other
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agreements contemplated hereby and the consummation of the
transactions contemplated hereby and thereby by United in
accordance with the respective terms and conditions hereof and
thereof will not (i) violate any provision of United's articles
of incorporation, bylaws or other charter or organizational
document, (ii) violate, conflict with or result in the breach
of any of the terms of, result in any modification of,
accelerate or permit the acceleration of the performance
required by, otherwise give any other contracting party the
right to terminate, or constitute (with notice or lapse of
time, or both) a default under, any contract or other agreement
to which United is party or by or to which it or any of its
assets or properties may be bound or subject, (iii) violate any
order judgment, injunction, award or decree of any court,
arbitrator or governmental or regulatory body against, or
binding upon, or any agreement with, or condition imposed by,
any governmental or regulatory body, foreign or domestic,
binding upon United, or upon the assets, operations or business
of United, (iv) violate any Applicable Law that relates to
United or to the assets, operations or business of United,
which violation might result in any adverse change in the GHIP
or impair the ability United to perform its obligations under
this Agreement, (v) result in the creation of any lien, charge
or encumbrance on any of the assets or properties of United
which assets or properties relate to the ability of United to
perform its obligations under this Agreement, or (vi) result in
the breach of the terms and conditions or cause an impairment
of any license or government authorization relating to the
policies to be issued by United in connection with the GHIP;
which, in any of the cases referred to the preceding clauses
(i) through (vi) would materially adversely affect the ability
of United to perform its obligations under this Agreement.
5.1.6 LICENSES AND PERMITS. Except as disclosed in EXHIBIT 5.1
hereto, United is duly qualified, has all necessary
governmental licenses and permits, and is in good standing in
every jurisdiction where the nature of the administration and
servicing of the GHIP requires it to be qualified or licensed.
There are no pending, or to the knowledge of United,
threatened, suits or proceedings with respect to the
suspension, revocation, restriction, amendment or nonrenewal of
any such governmental license or permit, and no event which
(whether with notice or lapse of time or both) will or could
result in a suspension, revocation, restriction, amendment or
nonrenewal of any such governmental license or permit has
occurred. United is not operating under any agreement with the
insurance regulatory authority of any state which restricts its
authority to do business or requires it to take, or refrain
from taking, any action that could adversely impact the
administration and servicing of the GHIP.
5.1.7 COMPLIANCE WITH LAWS. United is in compliance with all
Applicable Laws in all jurisdictions in which United is
presently doing business, except where the
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failure to be in compliance with such Applicable Laws would not
impair in any material respect United's ability to perform its
obligations hereunder.
5.1.8 DISCLOSURE. No document, certificate or schedule provided by
United in connection with this Agreement or the transactions
contemplated hereby contains any untrue statement of a material
fact or omits to state any material fact required to be stated
therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not
misleading.
5.1.9 FINANCIAL CONDITION. United is not insolvent, has not filed or
had filed against it a petition in bankruptcy, has not made an
assignment for the benefit of creditors or otherwise had a
receiver or trustee appointed with respect to its properties or
affairs and has not incurred any obligations, contingent or
otherwise, which would cause it to become insolvent. EXHIBIT
5.1.9 hereto sets forth United's current ratings by the two
rating agencies identified therein.
5.2 REPRESENTATIONS AND WARRANTIES OF AARP AND AARP TRUST. AARP and AARP
Trust hereby jointly and severally represent and warrant to United as
follows as of the date hereof.
5.2.1 ORGANIZATION AND STANDING. AARP is a not-for-profit
corporation duly organized, validly existing and in good
standing under the laws of the District of Columbia and has the
power and authority to own, lease and operate its assets and to
carry on its activities as it is now being conducted. AARP
Trust is a trust duly organized, validly existing and in good
standing under the laws of the District of Columbia and has the
power and authority to own, lease and operate its assets and to
carry on its activities as it is now being conducted.
5.2.2 AUTHORIZATION. AARP and AARP Trust each has the full power and
authority to enter into this Agreement and to perform its
obligations hereunder. The execution and delivery of this
Agreement and the performance by AARP and AARP Trust of their
respective obligations under this Agreement have been duly and
validly authorized and approved by all requisite action of AARP
and AARP Trust and no other acts or proceedings on their part,
including approvals, consents or authorizations by any of its
members, are necessary to authorize the execution, delivery and
performance by AARP and AARP Trust of this Agreement or the
transactions contemplated hereby. This Agreement constitutes
the legal, valid and binding obligation of AARP and AARP Trust
and is enforceable against them in accordance with its terms,
except to the extent that enforcement may be limited by
bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights and the obligations of
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debtors generally and by general principles of equity,
regardless of whether considered in a proceeding at law or in
equity.
5.2.3 CONSENTS AND APPROVALS. No consent, approval, non-disapproval,
authorization, ruling, order of, notice to or registration
with, any governmental or regulatory authority or any person,
partnership, corporation, firm, trust, or other entity is
required on the part of AARP or AARP Trust in connection with
the execution and delivery of this Agreement or the
consummation by AARP and AARP Trust of the transactions
contemplated hereby.
5.2.4 ACTIONS PENDING. Except as set forth in EXHIBIT 5.2 hereto,
there is no action, suit, investigation or proceeding pending,
or to the knowledge of AARP or AARP Trust threatened, against
AARP or AARP Trust or any properties or rights of AARP or AARP
Trust, by or before any court, arbitrator or administrative or
governmental body, which could reasonably be expected to impair
the ability of AARP or AARP Trust to perform their respective
obligations under this Agreement.
5.2.5 NO CONFLICT OR VIOLATION. The execution, delivery and
performance of this Agreement and any other agreements
contemplated hereby and the consummation of the transactions
contemplated hereby and thereby by AARP in accordance with the
respective terms and conditions hereof and thereof will not (i)
violate any provision of the articles of association, bylaws,
trust agreement or other charter or organizational document of
AARP or AARP Trust, (ii) violate, conflict with or result in
the breach of any of the terms of, result in any modification
of, accelerate or permit the acceleration of the performance
required by, otherwise give any other contracting party the
right to terminate, or constitute (with notice or lapse of
time, or both) a default under, any contract or other agreement
to which AARP or AARP Trust is a party or by or to which they
or any of their assets or properties may be bound or subject,
(iii) violate any order, judgment, injunction, award or decree
of any court, arbitrator or governmental or regulatory body
against, or binding upon, or any agreement with, or condition
imposed by, any governmental or regulatory body, foreign or
domestic, binding upon AARP or AARP Trust, or upon the assets
or operations of AARP or AARP Trust, (iv) violate any statute,
law or regulation of any jurisdiction as each statute, law or
regulation relates to AARP or AARP Trust or to the assets or
operations of AARP or AARP Trust, which violation might result
in any adverse change in the GHIP or impair the ability of AARP
or AARP Trust to perform their respective obligations under
this Agreement, or (v) result in the creation of any lien,
charge or encumbrance on assets or properties of AARP or AARP
Trust which assets or properties relate to the ability of AARP
or AARP Trust to perform
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their respective obligations under this Agreement; which, in
any of the cases referred to in the preceding clauses (i)
through (vi) would materially adversely affect the ability of
AARP or AARP Trust to perform its obligations under this
Agreement.
5.2.6 COMPLIANCE WITH LAWS. AARP and AARP Trust each are in
compliance with all Applicable Laws in all jurisdictions in
which they are presently doing business, except where the
failure to be in compliance with such Applicable Laws would not
impair in any material respect AARP's or AARP Trust's ability
to perform its obligations hereunder.
5.2.7 FINANCIAL CONDITION. Neither AARP nor AARP Trust is insolvent,
nor has either filed or had filed against it a petition in
bankruptcy, made an assignment for the benefit of creditors or
otherwise had a receiver or trustee appointed with respect to
its properties or affairs or incurred any obligations,
contingent or otherwise, which would cause it to become
insolvent.
5.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made by the parties in this Agreement shall survive the
termination hereof for a period of two years.
ARTICLE 6
ALLOWANCES AND COMPENSATION
6.1 AARP ALLOWANCE. AARP shall be entitled to receive an allowance for
AARP's sponsorship of the SHIP and the license to use the AARP Marks in
connection therewith. For each Policy Year, this allowance shall be
equal to the sum of (i) four percent of the first $1 billion in Member
Contributions plus (ii) two and one-half percent of the Member
Contributions in excess of $1 billion. This allowance shall be payable
in accordance with Section 6.7 hereof.
6.2 UNITED ADMINISTRATION CHARGES.
6.2.1 ADMINISTRATIVE SERVICE FEE.
(a) For all Services other than those services for which
specific reimbursement is made pursuant to this
Agreement, United shall receive a fee (the
"Administrative Service Fee") per SHIP Insured per
calendar month in amounts determined as provided in this
Section 6.2.1.
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(b) On or prior to October 15, 1997, United will submit for
approval by AARP Trust its projected Administrative
Service Fees in the form of a cost accounting budget for
the provision of the Services to apply to Policy Year
1998. United's submission will be at a sufficient level
of detail for AARP Trust to understand and approve
expenses by category, substantially as reflected in
EXHIBIT 6.2.1(b) hereto. The expenses approved by AARP
Trust will constitute the Administrative Service Fees for
Policy Year 1998.
(c) On or prior to October 15, 1998, United will submit for
approval by AARP Trust its projected Administrative
Service Fees in the form of per member, per month
charges, to apply to Policy Years 1999 through 2001.
These per member, per month charges may depend on a
specific anticipated enrollment level and variables
including without limitation key levels of service, such
as member enrollment, number of claims per member and
changes in the CPI. The expenses approved by AARP Trust
will constitute the Administrative Service Fees for
Policy Year 1999 through 2001. United's submission will
be at a sufficient level of detail for AARP Trust to
understand and approve expenses by category,
substantially as reflected in EXHIBIT 6.2.1(b) hereto.
(d) Notwithstanding the foregoing provisions of this Section
6.2, in the event that early transfer occurs and United's
administration of the SHIP commences prior to January 1,
1998, then on or prior to October 15, 1997 United may
propose for approval by AARP Trust an administrative
budget in the form of per member, per month charges to
apply in Policy Years 1998 through 2000. United's
submission will be at a sufficient level of detail for
AARP Trust to understand and approve expenses by
category, substantially as reflected in EXHIBIT 6.2.1(b)
hereto.
6.2.2 CHANGES IN ADMINISTRATIVE SERVICE FEE. The parties agree to
adjust the Administrative Service Fee payable for any Policy
Year if in that Policy Year there occurs any material increase
in United's costs resulting from (i) a Change of Law, (ii) an
Event of Force Majeure, (iii) a change in the Services or any
SHIP Plan made at the request, or with the approval, of AARP or
AARP Trust, (iv) a change in the services or products provided
by any other GHIP Vendor or (v) any restructuring or
reengineering of the manner whereby the Services or any SHIP
Plan are provided; provided, that any adjustment in the
Administrative Service Fee for any Policy Year made pursuant to
this sentence shall be consistent in magnitude with the impact
on United's costs of the cause giving rise to the adjustment.
The Administrative Service Fee and each factor
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contributing thereto shall, as appropriate, be calculated on an
interpolated basis to the nearest one thousandth of one percent.
6.2.3 PASS-THROUGH EXPENSES. United will provide AARP Trust with a
budget for Pass-Through Expenses pursuant to Section 3.3.2
hereof. United's budget proposal will be at sufficient level
of detail to enable AARP Trust to understand and approve
specific items. United shall be reimbursed for all
Pass-Through Expenses through a charge made in the
retrospective experience rating for the SHIP pursuant to
Section 8.3 hereof for the Policy Year in which the
Pass-Through Expense is incurred. Notwithstanding the
foregoing, AARP Trust may require that specific Pass-Through
Expenses identified in clauses (iii), (v), and (xi) of the
definition thereof be capitalized and included in Retention
over a period of years specified by AARP Trust, which shall be
no longer than that which is consistent with the expected
useful life of the item, provided, however, that the
capitalization period shall not extend beyond the term of this
Agreement. Any such Pass-Through Expenses, together with
interest at the Amortization Interest Rate, shall be charged
over the specified term in equal annual installments.
6.2.4 START-UP COSTS. AARP shall request Prudential to pay United
for any Start-Up Costs and shall authorize Prudential to pay
such Start-Up Costs. United shall provide Prudential with an
itemized statement of such Start-Up Costs for the period ending
December 31, 1996 and for each calendar quarter (or portion
thereof) through and including the Commencement Date. AARP
shall request Prudential to pay the invoiced amounts within 30
days of receipt. Any such Start-Up Costs which are either (i)
not billed to Prudential as of the Commencement Date or (ii)
billed to Prudential as of the Commencement Date but not paid
in due course shall be charged to the experience rating for the
SHIP pursuant to Section 8.3 hereof. Notwithstanding the
foregoing, AARP Trust may require that specific Start-Up
Expenses be capitalized and included in Retention over a period
of years specified by AARP Trust, which shall be no longer than
that which is consistent with the expected useful life of the
item, provided, however, that the capitalization period shall
not extend beyond the term of this Agreement. Any such Start-Up
Cost, together with interest at the Amortization Interest Rate,
shall be charged over the specified term in equal annual
installments.
6.2.5 PERFORMANCE CHARGES. United shall be accountable for the
attainment of standards of performance described in EXHIBIT
3.2.5 hereto. If United fails to satisfy the applicable
performance standards, it shall be subject to the charges
specified in EXHIBIT 3.2.5 hereto. United shall measure
performance against these standards on a continuous basis and
shall report to AARP quarterly. As
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part of the preparation of the annual accounting, United shall
prepare a report showing actual performance for the Policy Year
compared with the agreed standards, and the amount of penalty
owing (if any). United's Administrative Service Fees will be
adjusted by the amount of any charges payable for the Policy
Year. The maximum charge that shall be payable with respect to
any Policy Year will be (***) of United's
Administrative Service Fees for the year. AARP will have the
right to conduct an independent audit of United's reporting and
administration to verify the charges payable.
6.3 UNITED RISK AND PROFIT CHARGES. United shall be entitled to receive
compensation for assuming the risk associated with the SHIP. Such
compensation payable to United for a Policy Year shall equal the
product of the Compensation Percentage multiplied by the SHIP Net
Premiums for such Policy Year. The Compensation Percentage shall equal
the sum of the Basic Percentage (determined pursuant to Section 6.3.1
hereof) and the Incentive Percentage (determined pursuant to Section
6.3.2 hereof); provided, however, that in no event shall the
Compensation Percentage be less than (***) for any Policy Year.
6.3.1 BASIC PERCENTAGE. The Basic Percentage for a Policy Year
will be determined by reference to the RSF Balance Percentage
(determined as of the end of the previous Policy Year) in
accordance with the following table:
Basic Percentage
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH FIFTH AND
POLICY POLICY POLICY POLICY FOLLOWING
YEAR YEAR YEAR YEAR POLICY YEARS
---- ---- ---- ---- ------------
(***)
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
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BASIC PERCENTAGE
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH FIFTH AND
POLICY POLICY POLICY POLICY FOLLOWING
YEAR YEAR YEAR YEAR POLICY YEARS
---- ---- ---- ---- ------------
(***)
Coincident with any adjustment in the (***) agreed to by the
parties pursuant to (***) hereof, the foregoing table will be
realigned such that the applicable (***) for the new (***) will be
the same as the (***) for the (***) level above. The (***) shall
be interpolated to the nearest one-thousandth of (***) if
the (***) falls between any of the (***) specified in the
foregoing table.
6.3.2 INCENTIVE PERCENTAGE. The Incentive Percentage for a Policy
Year will be based on the Performance Experience for such
Policy Year in accordance with the following table:
INCENTIVE PERCENTAGE
--------------------------------------
FIRST THIRD AND
PERFORMANCE TWO FOLLOWING
EXPERIENCE POLICY YEARS POLICY YEARS
---------- ------------ ------------
(***)
The Incentive Percentage shall be interpolated to the nearest
one-thousandth of one percent if the Performance Experience
falls between the ranges specified in the foregoing table. The
Incentive Percentage applicable at any time during
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
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a Policy Year shall be determined by reference to United's best
estimate of the year-to-date Performance Experience.
6.3.3 TAX CHANGES. The Risk and Profit Charge has been negotiated on
the basis of the federal income Tax rates and methodologies
currently applicable to United with respect to its ordinary
income. If such rates or methodologies are changed, other than
as a result of a voluntary change by United, AARP Trust or
United may propose for approval by the other, which approval
shall not be unreasonably withheld, that the Risk and Profit
Charge set forth in this Section 6.3 be changed so as to yield
United the same rate of return as would have applied had there
been no such change in such Tax rates or methodologies.
6.4 INVESTMENT INCOME CREDITS. As a part of the retrospective experience
rating for the SHIP (as described in Section 8.3 hereof), the Retention
for the SHIP for each Policy Year shall include a credit for the amount
of United's investment income (the "Investment Income Credit") that is
deemed to be associated with the SHIP, in accordance with the following
provisions.
6.4.1 SHIP PORTFOLIO. For the purpose of determining the Investment
Income Credit, United will maintain for the SHIP separate
accounting for a distinct portfolio or portfolios of assets
(the "SHIP Portfolio") associated with the SHIP. Such assets
shall be owned by and shall remain part of the general account
of United. The assets of the SHIP Portfolio shall be credited
with investment income from the date of deposit to the date of
withdrawal.
6.4.2 CASH TRANSFERS. Cash transfers shall be made to and from the
SHIP Portfolio with respect to the following items:
(a) SHIP Net Premiums received.
(b) Claims paid.
(c) Amounts Paid with respect to Incurred Premium Refunds.
(d) Target Retention: One-twelfth of the Target Retention,
gross to the Investment Income Credit and net of Vendor
Operating Expenses and Vendor Pass-Through Expenses, for
the Policy Year, which transfer shall be made on the
fifteenth day of each calendar month (or next following
Business Day).
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(e) Annual Accounting Settlement: A transfer will be made to
reflect the difference between the Target Retention gross
to the Investment Income Credit and net of the Vendor
Operating Expenses and the Vendor Pass-Through Expenses
and the actual Retention gross to the Investment Income
Credit and net of the Vendor Operating Expenses and the
Vendor Pass-Through Expenses. The transfer identified in
the immediately preceding sentence will be made as soon
as possible after the review pursuant to Section 8.5
hereof has been completed, and will include interest
accrued at the Investment Income Credit Rate for that
Policy Year from the midpoint of the Policy Year to the
time at which the transfer occurs.
(f) Any other credits or charges made under this Agreement or
otherwise agreed to by United, AARP and AARP Trust,
including without limitation any charges made pursuant to
Section 6.4.3(c) hereof. If the credit does not result
from an identifiable cash flow item, then the cash
transfer in respect of any such item will be made at the
time the credit or charge becomes effective, or at such
other time as is agreed to by United, AARP and AARP Trust.
6.4.3 INVESTMENT INCOME CREDIT CALCULATION. The Investment Income
Credit for a given Policy Year shall be equal to the sum of the
following:
(a) the interest and dividend income earned on the assets of
the SHIP Portfolio during that Policy Year, as determined
according to the accounting principles underlying
United's statutory annual statement (the "statutory
accounting rules"), plus
(b) the capital gains and losses realized on the assets of
the SHIP Portfolio during that Policy Year, as determined
according to statutory accounting rules then in effect,
less
(c) investment management fees and corporate accounting and
other portfolio administration costs payable to United,
each in such amounts as may be agreed among the parties
from time to time.
6.4.4 INVESTMENT INCOME CREDIT RATE. The Investment Income Credit
Rate for a given Policy Year shall be calculated as follows:
(a) the amount of the Investment Income Credit for that Policy
Year, divided by
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(b) the amount, determined as nearly as practicable, of the
average invested assets in the SHIP Portfolio during that
Policy Year, with appropriate adjustment for interest and
dividends received.
6.4.5 INVESTMENT STRATEGY. The funds in the SHIP Portfolio shall be
invested according to a written investment strategy. The
investment strategy shall be proposed by United, and shall be
subject to approval by AARP Trust.
6.4.6 INVESTMENT MANAGER. The investments held in the SHIP Portfolio
shall be managed by employees of United or its affiliates, or
by another investment manager or managers selected by United
and approved by AARP Trust. If at any time United and AARP
Trust shall not have agreed to any investment manager, United
may employ for this purpose any investment manager or managers
that at that time each manage at least ten percent of the
admitted invested assets of United's combined insurance
companies, or ten percent of the consolidated invested assets
of United and its affiliates (exclusive of the assets of the
SHIP Portfolio) determined as of the December 31 last preceding.
6.4.7 INVESTMENT PERFORMANCE; OWNERSHIP. United does not guarantee
the preservation of the principal amount of the assets
comprising the SHIP Portfolio, and does not guarantee the
achievement of any specific rate of return on the assets
comprising the SHIP Portfolio. United shall not impose any
investment liquidation charge in connection with the scheduled
termination of this Agreement. The SHIP Portfolio shall not
constitute an asset of AARP or AARP Trust, nor shall AARP or
AARP Trust have any interest in the income derived therefrom.
6.5 TAX-TIMING EXPENSE. United shall be compensated for the tax-timing
costs identified in EXHIBIT 6.5 hereto (collectively the "Tax-Timing
Expenses") through a charge made in the retrospective experience rating
for each of the items described in EXHIBIT 6.5 hereto. The charges
will generally be a function of United's marginal federal and state
income Tax rate for the rating period ("United's Tax Rate") and the
Investment Income Credit Rate for that period.
6.6 TAX REIMBURSEMENT.
6.6.1 IN ORDINARY COURSE. United shall be entitled to charge or
credit the retrospective experience rating for the SHIP (as
described in Section 8.3 hereof) for any costs, losses,
damages, liabilities, amounts paid in settlement, and
out-of-pocket costs and expenses (including reasonable fees,
charges and expenses of outside attorneys and other outside
experts and advisors, but excluding any penalties or fines
except as expressly provided in clause (iv) below) incurred by
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United and its affiliates with respect to the following: (i) a
Change of Law with respect to Taxes; (ii) Taxes payable by
United in respect of its receipt of the Transferred Assets (as
more fully provided in Sections 3.6.2 to 3.6.4 hereof); (iii)
any Taxes arising from audit adjustment of any Tax Return of
United, including any carryover adjustments; or (iv) penalties
or fines on any Taxes to the extent caused by the action or
inaction of Prudential or any GHIP Vendor other than United, or
to the extent arising from a position taken at the direction of
or with the express consent of AARP or AARP Trust; provided,
however, that nothing herein shall entitle United to recover
more than once for any item hereunder.
6.6.2 AUDIT ADJUSTMENTS. To the extent that United's Tax Returns are
adjusted upon examination so as to eliminate, reduce, increase
or create tax timing costs for prior periods, the charges for
prior tax-timing costs shall be recalculated to be consistent
with such adjustment including any carryover adjustments. The
difference between the charge previously made and the
recalculated charge shall be reflected in the retrospective
experience rating of the SHIP (as described in Section 8.3
hereof) for the Policy Year in which such adjustment is agreed
to by United and such taxing authority. United shall notify
AARP Trust concerning the existence of any audit of its Tax
Returns having a potential impact upon the SHIP, and shall
consult with AARP Trust regarding its strategy and position
with regard to any such audit.
6.6.3 GROSS UP. United shall be entitled to make a change in the
retrospective experience rating of the SHIP (as described in
Section 8.3 hereof) for any Gross Up related to any tax
reimbursement amount to which United is entitled pursuant to
clauses (ii) and (iv) of Section 6.6.1 hereof.
6.6.4 VALUATION OF TRANSFERRED ASSETS. United shall employ a
qualified valuation expert to determine the value of the
Transferred Assets. The cost of such valuation shall
constitute a Pass-Through Expense.
6.6.5 UPON TERMINATION. In the event of a termination with a
successor carrier under Section 10.4 hereof: (i) AARP shall
cause such successor carrier to reimburse and indemnify United
for items contained in Sections 6.6.1, 6.6.2 and 6.6.3 hereof
to the extent United has been unable to recover such items
prior to termination pursuant to such Sections 6.6.1, 6.6.2 and
6.6.3; and (ii) United shall credit to the final accounting any
DAC Tax gain that results from the recording of reinsurance
premiums payable to a successor carrier at termination as
negative considerations.
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6.7 PAYMENT OF ALLOWANCES AND COMPENSATION. The Vendor Operating Expenses
and Vendor Pass-Through Expenses payable to the GHIP Vendors other than
United, the SHIP Net Premiums payable to United and the allowances
payable to AARP described in this Article 6 shall be paid monthly out
of the Member Contributions actually received by the Member Services
Vendor on behalf of AARP Trust, on the tenth day of the month following
the month for which the Member Contributions apply.
6.8 REGULATORY IMPACT. In the event of the occurrence of a Change of Law
having a material cost impact upon the provision of the SHIP and
delivery of the Services by United hereunder, the parties agree
promptly and in good faith (i) to renegotiate the compensation
provisions hereof and (ii) to review the adequacy of the Member
Contributions then in effect and to revise the Member Contribution
rates and Target Loss Ratio as reasonably appropriate.
6.9 OWNERSHIP OF FUNDS. AARP Trust shall hold title to all funds held in
AARP Trust accounts.
ARTICLE 7
PROPERTY RIGHTS IN AND CONFIDENTIALITY OF INFORMATION
7.1 MEMBER INFORMATION.
7.1.1 CLAIMS DATABASES. From and after the Commencement Date, United
shall maintain the Claims Databases, which will be transferred
to United as provided in Sections 3.1.4 and 4.4 above. Subject
to the provisions of Section 7.3 hereof, all information
contained in the Claims Databases is and at all times shall
remain the exclusive property of United. Notwithstanding the
foregoing, United and its affiliates may not utilize any
information contained in the Claims Databases except (i) in
connection with provision of the SHIP and the performance of
the Services in the manner contemplated hereby, (ii) for
research, analysis and valuation purposes, (iii) for
incorporation and use in their normative databases, (iv) for
regulatory reporting and reinsurance purposes, (v) as required
by law, (vi) for reporting to management and (vii) in external
or internal audits. Any use of Claims Database information for
the purposes specified in clauses (ii) and (iii) of the
preceding sentence shall not be directly or indirectly
identifiable to AARP, AARP Trust or any AARP member.
7.1.2 OTHER INFORMATION. United and its affiliates will have access,
on terms easonably acceptable to AARP and AARP Trust, to the
SHIP Databases and to such other Records containing AARP member
names and addresses as reasonably required in order to enable
United to communicate information
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concerning the SHIP and related matters to AARP members. In
addition, subject to prior approval by AARP, United may have
access to other Records concerning the AARP membership for the
operation of the SHIP and performance of United's obligations
hereunder. Subject to the provisions of Section 7.2 hereof,
all such Records, including the names and addresses of AARP
members, mailing lists, inquiry lists and buyers lists, are and
at all times shall remain the exclusive property of AARP. At
any time upon request by AARP, United shall return to AARP all
Records pertaining to such information; provided, however, that
United may retain such Records as are necessary for the
continued servicing of the SHIP for as long as reasonably
required for such purpose. The use of all such Records by
United will be restricted exclusively to the provision of the
SHIP and the performance of the Services in the manner
contemplated hereby.
7.2 MEMBER COMMUNICATIONS.
7.2.1 AARP OWNERSHIP. All communications to AARP members pertaining
to the SHIP, including without limitation scripts, solicitation
materials and other written materials mailed on behalf of AARP
to any members, shall be the property of AARP, to the extent
specifically identified by United or AARP, as the case may be,
as developed and used exclusively for the SHIP. AARP shall have
the sole right to copyright all or any of such pieces as it
considers appropriate to the fullest extent permitted by law;
provided, however, that AARP shall not have the right to
copyright the United Marks. United acknowledges that it has no
proprietary or ownership rights in any of such materials except
to the extent that AARP shall authorize United to use them in
connection with assisting AARP in informing the membership of
availability of coverage under the SHIP. AARP acknowledges
that it has no proprietary or ownership rights or copyright
rights with respect to any materials that were developed by
United prior to the date hereof or are hereafter developed by
United other than for use in connection with the SHIP.
7.2.2 AARP APPROVAL. All written communications and all scripted
oral communications specifically directed to AARP members,
whether insured or uninsured members, and all other written
communications sent on behalf of AARP to any of such persons,
shall be submitted by United to AARP for AARP's approval in
advance of dissemination which approval shall not be
unreasonably withheld with respect to any communication
required by Applicable Law.
7.3 RETURN UPON TERMINATION. Upon termination of this Agreement and at
AARP's direction, United shall turn over to AARP and/or to any person
designated by AARP (or
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required by Applicable Law) all records specified in Sections 7.1 and
7.2 hereof then in the possession or control of United or its agents,
and shall retain no such information, other than (i) Records relating
to persons who remain covered by insurance policies issued by United,
if any, (ii) records relating to claims still being processed by United
(which shall be transferred as provided in this Section 7.3 upon the
completion of such processing), (iii) Records utilized for the
purposes described in clauses (ii) through (vii) of the third sentence
of Section 7.1.1 hereof (provided such information is not directly or
indirectly identifiable to AARP, AARP Trust or any AARP member) and
(iv) Records that United is required to maintain pursuant to Applicable
Laws or for reinsurance purposes. Upon AARP's request, United shall
delete from its Records all AARP-specific information, including
without limitation AARP membership names, addresses and numbers, except
to the extent United is required to retain any such Records by
Applicable Law. AARP shall retain inspection rights as reasonably
required to verify the deletions, subject to such limitations as
reasonably required by United to maintain the confidentiality of its
business records.
7.4 UNITED MARKS AND MARKS DEVELOPED FOR THE SHIP.
7.4.1 UNITED MARKS. AARP and AARP Trust acknowledge that many of the
materials to be used in connection with the SHIP may contain
some or all of the trademarks, service marks, logos, slogans
and other intellectual property which are the property of
United and which have been duly registered or identified to
AARP by United for United's exclusive use (collectively, the
"United Marks"). AARP and AARP Trust agree that they do not
have, and by reason of this Agreement will not acquire, any
property right or rights to use such United Marks without
United's prior written consent. In the event of termination of
this Agreement, AARP and AARP Trust will not use such United
Marks without the express written consent of United. AARP, at
United's expense, will reasonably cooperate with United in
protecting, defending and registering the United Marks.
7.4.2 DEVELOPED MARKS. As used herein, "Developed Marks" means
marks, names and/or slogans which are developed by AARP, AARP
Trust and one or more GHIP Vendors to be used in conjunction
with the GHIP which do not include the United name or logo.
The Developed Marks shall be as from time to time set forth in
EXHIBIT 7.4.2 hereto. Either AARP or United may unilaterally
amend EXHIBIT 7.4.2 hereto, upon 30 days' notice to the other,
to include any new Developed Mark. United agrees that it has
no property or other rights in any Developed Mark and in the
event of termination of this Agreement will not use the
Developed Marks without the express written consent of AARP.
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7.5 SECURITY ARRANGEMENTS. United shall not give any lists, information,
data or other materials referred to in Sections 7.1 and 7.2 hereof
(except as expressly permitted thereby or as requested by regulators
pursuant to Applicable Laws) to any person not a party to this
Agreement (other than other GHIP Vendors as contemplated hereby and the
parties referred to in Section 7.6.2(b) hereof) except another GHIP
Vendor and any direct or indirect affiliate or majority-owned
subsidiary of United without the prior written consent of AARP and
without the execution by such other GHIP Vendor or person of a security
and confidentiality agreement, drafted by and/or acceptable to AARP, to
safeguard the confidentiality of such lists, information, data or
other materials and to protect against unauthorized access to data
stores across transmission facilities. United will develop and test on
an ongoing basis disaster recovery and business resumption plans to
maintain both systems and operations to ensure that: (i) if provision
of the Services is interrupted, the Services will be resumed within 48
hours, and (ii) if the Records containing AARP membership lists,
information, data or other materials concerning AARP members that
United has in its possession be destroyed or damaged, such lists,
information and data shall be recovered by United within seven business
days. United will submit both such plans to AARP for its approval
within 90 days of the Commencement Date. United will submit updated
versions of both such plans to AARP for its approval by March 31 of
each year commencing 1998. United will test the disaster recovery plan
annually, and will test the business resumption plan biannually, and
will submit the results of such testing to AARP, commencing with 1998.
7.6 PROPRIETARY INFORMATION.
7.6.1 PROPRIETARY INFORMATION. As used herein, "Proprietary
Information" means information relating to the business or
affairs of any party hereto which has been identified as
confidential, or which from the circumstances in good faith
should be treated as confidential, including, but not limited
to, (a) commercial, technical, contractual and financial
information, (b) descriptions, know-how and marketing plans
with respect to the Services, the GHIP and United, (c)
software, firmware, computer programs and elements of design
relating thereto, and strategic information systems plans and
applications, data and technology architectures related
thereto, (d) information regarding trade secrets, (e) patents,
service marks and trademarks, (f) customer and member
information, (g) procedures, manual and guides, (h) information
regarding the present or future business or products of any
party hereto, charges for services, products and other items
provided by such party to patients, other pricing information
and contract terms between such party and health maintenance
organizations, preferred provider organizations, insurance
companies and other third party payors, (i) this Agreement, the
other Contract Documents and the Associated Agreements and (j)
all notes, analyses, compilations, studies, plans or other
documents prepared by a party which contain or otherwise
directly reflect any
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Proprietary Information. Notwithstanding the above definition
of Proprietary Information, information received from a party
hereto shall not be deemed to be Proprietary Information and
the Recipient shall have no confidentiality obligations with
respect to such information which is: (i) already known to the
Recipient from sources other than the Discloser provided that
such source is not known by the Recipient to be bound by a
confidentiality agreement with the Discloser or otherwise to be
prohibited from disclosing such information to the Recipient by
a contractual, legal or fiduciary obligation; (ii) publicly
known through no wrongful act of the Recipient; (iii) received
by the Recipient from a third party without similar restriction
and without breach of this Agreement; (iv) independently
developed by the Recipient; (v) approved for release to a third
party by written authorization of the Discloser; or (vi)
disclosed pursuant to the lawful requirement of a court of
competent jurisdiction or government or regulatory agency or
authority.
7.6.2 COVENANTS.
(a) Each party hereto acknowledges and agrees that from time
to time in connection with such party's obligations under
this Agreement or the other Contract Documents, such
party will be given or have access to certain Proprietary
Information. All Proprietary Information is and shall
remain exclusively the property of the party disclosing
such Proprietary Information (the "Discloser") and the
Discloser shall retain all right, title and interest
therein. The party hereto receiving such Proprietary
Information (the "Recipient") shall hold in confidence
and safeguard all such Proprietary Information and the
Recipient shall make use of any such Proprietary
Information solely for the purposes of performing its
obligations under the Contract Documents or any
Associated Agreement. Each Recipient shall use all
reasonable efforts not to disclose, reveal or communicate
any Proprietary Information to any other party except
subcontractors, consultants, auditors, reinsurers,
representatives and agents and parents, subsidiaries,
affiliates, successors and assigns, and each of their
respective officers, directors and employees, who need
the information to accomplish purposes permitted by this
Agreement or the other Contract Documents and who have
been properly advised of the obligations of the Recipient
hereunder.
(b) Each party agrees to take all action reasonably necessary
or appropriate to maintain the confidentiality of the
Proprietary Information. Each party shall be responsible
for the compliance by its officers, directors, partners,
employees, consultants, agents and any other individuals
in privity with
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such party with each and every provision of this Agreement
applicable to such party.
(c) No other rights or obligations other than those expressly
recited herein are to be implied by this Agreement with
respect to trademarks, service marks, patents,
inventions, copyrights and other Proprietary Information.
(d) Each party acknowledges and agrees that, except as
expressly recited herein, no license under any patents,
licenses, service marks or trademarks of any party is
granted by this Agreement or by any disclosure of
Proprietary Information hereunder.
(e) Each party agrees that it shall not use (including, but
not limited to, using the Proprietary Information to
replicate the business systems, procedures or processes
used by United or AARP with respect to the GHIP), copy,
reproduce, distribute or disseminate in whole or in part,
any Proprietary Information of another party or GHIP
Vendor other than as contemplated hereunder.
(f) In the event that any Recipient is required to disclose
Proprietary Information under clause (vi) of Section
7.6.1 above, such party shall notify the Discloser of
such Proprietary Information as soon as practicable and
in any event prior to any actual disclosure taking place
so that AARP and/or the Discloser may seek an appropriate
protective order or other appropriate remedy. In the
event that such protective order or other remedy is not
obtained, the Recipient may only furnish that portion
(and only that portion) of the Proprietary Information,
which in the opinion of the Recipient's counsel, the
Recipient is legally compelled to disclose.
7.7 PROPRIETARY AND DEVELOPED SYSTEMS.
7.7.1 PROPRIETARY SYSTEMS. The entire right, title and interest in
all business systems, procedures, processes, inventions,
discoveries, improvements or other technology owned by United
as of the dated hereof or developed solely by or on behalf of
United after the date hereof other than in connection with the
Services and the SHIP (collectively, the "Proprietary Systems")
shall be owned by United.
7.7.2 DEVELOPED SYSTEMS. Subject to such rights set forth herein,
the entire right, title and interest in all business systems,
procedures, processes, inventions, discoveries, improvements or
other technology related to the SHIP or the Services and all
processes or uses relating thereto, whether or not patentable,
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jointly developed by United, its contractors, one or more GHIP
Vendors and/or AARP hereunder or in connection with Services
and the SHIP, including for such purpose any otherwise
Proprietary System which is modified for use in connection with
the SHIP where the cost of such modifications is charged to the
SHIP (collectively, the "Developed Systems") shall be owned as
agreed among the parties developing the same. The Developed
Systems shall be as from time to time set forth on EXHIBIT
7.7.2 hereto. Either AARP or United unilaterally may amend
EXHIBIT 7.7.2 hereto, upon 30 days' notice to the other, to
include any new Developed System. Deletion of any Developed
System from EXHIBIT 7.7.2 hereto shall require the approval of
both AARP and United.
ARTICLE 8
RESERVE REQUIREMENTS;
RATE STABILIZATION FUND
8.1 PURPOSE OF RESERVES. United shall establish and maintain in accordance
with Applicable Laws all reserves which United reasonably determines
are necessary to meet United's obligations under the SHIP, including
but not limited to claim reserves, Loss Adjustment Expense Reserves,
Active Life Reserves, extension-of-benefits reserves and the RSF.
Reserves established by United for the pricing and experience rating of
the SHIP shall be subject to review by an AARP Trust consulting actuary.
8.2 RATE STABILIZATION FUND. To maximize rate stability, to fulfill
risk-sharing objectives and to protect the interests of SHIP Insureds,
a rate stabilization fund (the "RSF") like that referenced in Code
section 807(c)(6) shall be established and maintained in connection
with the SHIP Plans. On or about the Commencement Date, United will
accept transfer from Prudential of the funds comprising the then
existing rate stabilization fund for the health insurance plans under
the Existing Program, which funds will initially comprise the RSF.
United will seek to maintain the RSF Balance Percentage within (***)
of the target RSF Balance Percentage determined pursuant to Section
3.3.7(d) hereof. To the extent that the RSF Balance Percentage
exceeds the applicable target RSF Balance Percentage, United shall be
required to submit to AARP Trust recommendations for reducing the
excess through premium holidays for SHIP Insureds or by other means.
8.3 EXPERIENCE RATING. Periodically, but at least annually after the end
of each Policy Year, United shall determine the retrospective
experience rating for the SHIP (including any SHIP Policy reinsured by
United, in whole or in part) in accordance with this Section 8.3.
8.3.1 EXPERIENCE RATING DEFICIT. A Policy Year results in a deficit
if for such year the SHIP Gross Premiums are less than the sum
of (i) Retention, (ii) Incurred
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
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Claims and (iii) Incurred Premium Refunds. Any such deficit
shall be charged to the RSF; provided, however, that in no
event shall the RSF Balance be less than zero. Any deficit not
chargeable to the RSF shall be treated as a deficit
carryforward (a "Deficit Carryforward") and credited to the
Deficit Carryforward Account.
8.3.2 EXPERIENCE RATING GAIN. A Policy Year results in a gain if for
such year and for such policy, the SHIP Gross Premiums exceed
the sum of (i) Incurred Claims, (ii) Retention and (iii)
Incurred Premium Refunds. Any portion of the gain up to
(***) of the gain shall be applied to reduce the Deficit
Carryforward Account balance (but not below zero). Any
remaining portion of the gain shall be credited to the RSF.
8.4 MONTHLY REVIEW AND INTERIM ADJUSTMENT. Following the end of each
month, United shall estimate, and report to AARP, the retrospective
experience rating for the SHIP Plans reflecting the experience through
the month just ended. United may from time to time make interim Policy
Year adjustments to the RSF following the same principles described in
Section 8.3 hereof.
8.5 ANNUAL REVIEW AND RECONCILIATION. Following the end of each Policy
Year, AARP Trust and United shall perform an annual review and
reconciliation of the RSF. The review process shall determine the
actual experience of the SHIP for the Policy Year. The reconciliation
process shall compare the actual experience for the Policy Year most
recently ended with the target experience for that year, taking into
account any interim policy year RSF adjustments described in Section
8.4 hereof, and make a final adjustment to the RSF in accordance with
the provisions of Section 8.3 hereof. The annual review and
reconciliation shall be completed by June 30 of the year following the
Policy Year.
8.6 DISPOSITION UPON TERMINATION. Upon termination of this Agreement,
United shall dispose of the RSF Balance and other SHIP related reserves
as provided in Section 10.4 or 10.5 hereof, as applicable.
ARTICLE 9
INTERACTION WITH OTHER GHIP VENDORS
9.1 GENERAL. Certain services necessary for the provision of the SHIP will
be provided by the Member Services Vendor and the Sales and Marketing
Vendor. To operate effectively within the GHIP business model, United
shall interact with such other GHIP Vendors, as more fully provided in
this Article 9. United's Representative shall act as the principal
liaison between United and the other GHIP Vendors.
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
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9.2 MEMBER SERVICES VENDOR.
9.2.1 RESPONSIBILITIES. The Member Services Vendor generally will be
responsible for the following four primary functions with
respect to all SHIP Products:
(a) centralized billing and collection support for the
generation of individual and combined billing statements
for all SHIP Products and collection, allocation and
transfer of all funds received;
(b) enrollment processing for all SHIP Products (excluding
eligibility determination, which shall be the
responsibility of United);
(c) fulfillment of AARP requests for information regarding
SHIP Products, transmission of enrollment materials and
printing in support of billing and marketing activities;
(d) maintenance of a member call center to provide
centralized level one support to AARP members for all
SHIP Products; and
(e) a telemarketing program to cover telemarketing activities
for SHIP products.
9.2.2 AGREEMENT. Prior to the Commencement Date, United shall use
commercially reasonable efforts to enter into an agreement with
the Member Services Vendor in a form approved by AARP, which
approval shall not be unreasonably withheld, which shall govern
the relationship between United and the Member Services Vendor.
United shall provide AARP with a copy of the agreement
proposed to be entered into between it and the Member Services
Vendor not less than 20 Business Days prior to its proposed
execution date. AARP shall use commercially reasonable efforts
to provide comments on such proposed agreement to United within
15 Business Days of AARP's receipt thereof. The agreement
shall incorporate performance standards applicable to the
relationship between United and the Member Services Vendor
reasonably acceptable to AARP and United and insurance
requirements comparable to those applicable to United pursuant
to Section 13.6 hereof, and shall be consonant with existing
performance standards among AARP and the several GHIP Vendors.
9.3 SALES AND MARKETING VENDOR.
9.3.1 RESPONSIBILITIES. The Sales and Marketing Vendor generally
will be responsible for the following three primary functions
with respect to all SHIP Products:
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(a) general analysis and planning for marketing;
(b) creative development of multimedia marketing materials; and
(c) production and fulfillment of direct mail marketing
campaigns.
9.3.2 AGREEMENT. Prior to the Commencement Date, United shall use
commercially reasonable efforts to enter into an agreement with
the Sales and Marketing Vendor, in a form approved by AARP,
which shall govern the relationship between United and the
Sales and Marketing Vendor. United shall provide AARP with a
copy of the agreement proposed to be entered into between it
and the Sales and Marketing Vendor not less than 20 Business
Days prior to its proposed execution date. AARP shall use
commercially reasonable efforts to provide comments on such
proposed agreement to United within 15 Business Days of AARP's
receipt thereof. The agreement shall incorporate performance
standards applicable to the relationship between United and the
Sales and Marketing Vendor reasonably acceptable to AARP and
United and insurance requirements comparable to those
applicable to United pursuant to Section 13.6 hereof, and shall
be consonant with existing performance standards among AARP and
the several GHIP Vendors.
9.3.3 AARP APPROVAL RIGHTS. United and the Sales and Marketing
Vendor shall make available to AARP for AARP's review and
approval prior to distribution to AARP members all
communications pertaining to the SHIP. United, AARP and the
Sales and Marketing Vendor will cooperate in coordinating the
review of proposed communication materials so that any
applicable regulatory requirements and agreed-upon release
dates can be met.
9.4 VENDOR INTERACTION.
9.4.1 DEFAULTS BY OTHER GHIP VENDORS. Notwithstanding any other
provision hereof to the contrary, the failure of United timely
to perform any of its obligations hereunder as a result of the
failure or refusal of any other GHIP Vendor to perform its
obligations under any Associated Agreement shall not give rise
to a breach by United of its obligations hereunder and shall
not entitle AARP and AARP Trust to receive any damages from
United hereunder (including any penalty set forth in Section
6.2.5 hereof) or expose United to any financial penalty
hereunder.
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9.4.2 ACCESS TO INFORMATION.
(a) The GHIP Vendors other than United shall have the right
to inspect and audit the Records maintained by United
pertaining to the Services and the SHIP (excluding
information contained in the Claims Databases (other than
paid claim data) which is and shall remain the property
of United as a more fully provided in Article 7 hereof)
which are material to the performance by any GHIP Vendor
of its obligations relating to the GHIP; provided,
however, that the foregoing rights to audit and inspect
shall not apply to any Records relating to the
compensation of United, provided that such Records are
subject to annual independent audit, a copy of which is
timely provided to the other GHIP Vendors.
(b) AARP shall cause the Associated Agreements between it and
each GHIP Vendor to grant United the right to inspect and
audit all Records maintained by any other GHIP Vendor
pertaining to the GHIP which are material to the
performance by United of its obligations hereunder
(including without limitation Records pertaining to
satisfaction of service standards or performance
standards); provided, however, that the foregoing rights
to inspect and audit shall not apply in respect of any
Records relating to the compensation of another GHIP
Vendor, provided that such Records are subject to annual
independent audit, a copy of which audit is timely
provided to United.
(c) The rights to inspect and audit granted to any person
pursuant to clauses (a) or (b) above shall be during
normal business hours, upon reasonable notice and
reasonable in scope, frequency and duration, and shall be
subject to confidentiality requirements comparable to
those of Section 7.6.2 hereof.
9.5 GOVERNANCE OF INTERVENDOR DISPUTES.
9.5.1 GENERAL. The GHIP Vendors shall in good faith attempt to
resolve any dispute or claim arising out of or relating to the
GHIP, including, but not limited to, the interpretation of
agreements between GHIP Vendors (for the purposes of this
section, individually, a "Program Agreement"). In order to
resolve matters that the parties are unable to resolve in the
ordinary course of business, each Program Agreement will
incorporate the provisions of this Section 9.5.
9.5.2 VENDOR REPRESENTATIVES. Resolution of all Program Issues is
the primary responsibility of the GHIP Vendors representatives
appointed from time to time (the "Representatives"). EXHIBIT
9.5.2 hereto, shall identify a Managing
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Representative (the Managing Representative) for each GHIP
Vendor. Each of the foregoing shall have authority to bind his
principal in connection with the resolution of the Program
Issue. EXHIBIT 9.5.2 hereto shall be deemed modified to
reflect any changes in the Managing Representative of any GHIP
Vendor as to which such GHIP Vendor may notify the parties
hereto from time to time.
9.5.3 INFORMAL DISPUTE RESOLUTION. By entering into a Program
Agreement, each GHIP Vendor agrees that all disagreements,
claims, controversies or disputes not resolved in the ordinary
course of business arising in connection with or under the GHIP
or any Associated Agreement (individually, a "Program Issue"
and collectively, "Program Issues") shall be resolved in
accordance with the provisions of this Section 9.5 and subject
to the following principles:
(a) all Program Issues shall be resolved as informally and
expeditiously as possible giving greatest consideration
to the orderly and efficient operation of the GHIP;
(b) to the extent that any Program Issue involves a matter
that may have an adverse effect on the operation of the
SHIP (such portion of the Program Issue being hereinafter
referred to as an "Operational Issue"), each affected
GHIP Vendor shall use its best efforts to remedy the
Operational Issue on a first priority basis in a manner
which preserves the orderly and efficient operation of
the GHIP on an interim and permanent basis; and
(c) each affected GHIP Vendor shall promptly inform AARP,
United and the Member Services Vendor of the existence
and nature of any Program Issue, and shall consult with
AARP, AARP Trust and the Member Services Vendor (unless
the Member Services Vendor is an affected vendor with
respect to the Program Issue) regarding the status of the
Program Issue until the same is resolved.
9.5.4 MEDIATION.
(a) Any GHIP Vendor which determines that a Program Issue
exists shall promptly provide written notice of the
Program Issue to the Managing Representative of each
other GHIP Vendor who is reasonably likely to be affected
by the Program Issue, to AARP and to the Member Services
Vendor. The Representatives of the affected GHIP Vendors
who have experience in the functional area that is the
subject of the Program Issue shall meet promptly and use
commercially reasonable efforts to resolve the Program
Issue.
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(b) Should the Representatives be unable to resolve the
Program Issue within ten days of the date notice is first
sent, the Program Issue shall be referred for resolution
to the Managing Representatives of the affected GHIP
Vendors.
(c) Should the Managing Representatives of the affected GHIP
Vendors be unable to resolve the Program Issue within the
next five days after the Program Issue is referred to
them, then any affected GHIP Vendor may elect by written
notice to each other affected GHIP Vendor to submit the
Program Issue to mediation in Washington, D.C. under the
CPR Model, except as expressly modified by the provisions
hereof. There shall be one mediator, who shall be
jointly selected by all the affected GHIP Vendors. In
the event the affected GHIP Vendors fail to agree on the
mediator within three days after the date notice is given
to all affected GHIP Vendors submitting the Program Issue
to mediation, the mediator shall be appointed by AARP. If
the mediator shall not have been appointed within five
days after the date notice is given to all affected GHIP
Vendors submitting the Program Issue to mediation, the
mediator shall be selected in accordance with the CPR
Model. The mediator shall be disinterested in the
subject matter of the Program Issue, shall have
appropriate qualifications and experience with respect to
mediation of business disputes, and shall possess
relevant industry expertise. The mediator shall attempt
to reconcile and mediate the positions of the affected
GHIP Vendors. If that effort does not result in
resolution of the Program Issue within ten days after the
selection of the mediator, the mediator shall render to
affected GHIP Vendors his written opinion and
recommendation for resolution within five days after the
matter was referred to mediation. If the Program Issue
has not been resolved pursuant to this clause (c) within
five days after receipt of the mediator's opinion and
recommendation, then the affected GHIP Vendors shall
submit the Program Issue to binding arbitration pursuant
to Section 9.5.5 below. Each affected GHIP Vendor shall
bear its own costs and expenses in connection with any
mediation pursuant to this Section 9.5.4. All costs and
attorneys fees incurred by the affected GHIP Vendors in
connection with any such mediation that are not
attributable to each affected GHIP Vendor individually
shall be shared equally by the affected GHIP Vendors, and
shall not be charged to the GHIP.
9.5.5 ARBITRATION.
(a) If the Program Issue has not been resolved in accordance
with Section 9.5.4(c) above within 45 days after the
dispute arises (or such
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longer period as to which the parties to the dispute may
agree), then the Program Issue shall be submitted to
binding arbitration in Washington, D.C. pursuant to the
CPR Rules, except as expressly modified by the
provisions hereof. The arbitration shall be governed by
the United States Arbitration Act, 9 U.S.C. SECTIONS 1-16,
notwithstanding the choice of law provision in Section
14.4 hereof. There shall be one arbitrator, who shall be
jointly selected by all the affected GHIP Vendors. In
the event the affected GHIP Vendors fail to agree on the
arbitrator within ten days after the Program Issue is
submitted to arbitration, the arbitrator shall be
appointed by AARP. If an arbitrator shall not have been
selected within 15 days after the Program Issue is
submitted to arbitration, the arbitrator shall be
selected in accordance with the CPR Rules. The
arbitrator shall be disinterested in the subject matter
of the Program Issue, shall not have been employed or
engaged at any time within the last five years by any
party to the dispute, shall have appropriate
qualifications and experience with respect to arbitration
of business disputes and shall possess relevant industry
expertise. The decision of the arbitrator shall be based
upon Applicable Law, the relevant GHIP contracts and
reliable evidence in the record of the proceedings. The
prevailing GHIP Vendor in the arbitration shall be
entitled to recover all reasonable costs incurred by such
GHIP Vendor in connection with such arbitration
proceeding, including without limitation all reasonable
attorneys' fees. In the event the arbitrator reaches a
split decision, each affected GHIP Vendor shall bear its
own costs and attorneys' fees in connection with such
arbitration, and all costs and attorneys' fees incurred
by the affected GHIP Vendors that are not attributable to
each affected GHIP Vendor shall be shared equally by the
affected GHIP Vendors.
(b) The decision of the arbitrator shall be final, conclusive
and binding upon the GHIP Vendors. Judgment may be
entered on the arbitrator's award in any court of
competent jurisdiction.
(c) The parties recognize that damages at law would not be an
adequate remedy for the breach of many provisions of the
Agreement and that prompt, equitable relief, prohibitory
or mandatory, may be appropriate in many circumstances.
In the event of any arbitration arising out of or
relating to this Agreement or the Contract Documents, the
arbitrator is encouraged to take account of this
recognition and seek to fashion appropriate relief when
the circumstances warrant.
(d) The parties hereto consent to personal jurisdiction over
them in the federal courts of the District of Columbia in
connection with any application to
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compel arbitration pursuant to this Section 9.5.5 or for
the entry of judgment upon any arbitration award.
Service of process upon any party shall be sufficient if
made in accordance with the laws of the District of
Columbia or in accordance with the notice provision of
Section 14.5 hereof.
(e) In no event shall the arbitrators in any arbitration
pursuant to this Section 9.5 be authorized (i) to award
any punitive damages or (ii) to award consequential or
special damages in excess of $35 million in the aggregate
(or such lower amount as to which the parties may agree).
9.5.6 MISCELLANEOUS.
(a) The GHIP Vendors shall continue to perform all of their
respective obligations under this Agreement and the
Program Agreements pending the final resolution of any
Program Issue, including, without limitation, during the
pendency of any mediation pursuant to Section 9.5.4(c)
hereof or any arbitration pursuant to Section 9.5.5
hereof.
(b) By mutual written agreement, the GHIP Vendors may extend
any applicable time period or waive all or any procedures
or proceedings required under Section 9.5.4(c) hereof and
commence arbitration pursuant to Section 9.5.5 hereof.
9.6 TERMINATION OF OTHER GHIP VENDORS. AARP and AARP Trust shall notify
United as soon as reasonably possible of the termination or proposed
termination of any GHIP Vendor other than United. Upon such
termination United may recover its reasonably incurred and documented
costs arising directly from such termination and the substitution of
any successor vendor as Pass-Through Expenses pursuant to the annual
budgeting process as described in Article 3 hereof. In addition, at
the request of United, AARP and AARP Trust will review any performance
standard applicable to United affected by such termination, and will
not unreasonably withhold their consent to any change thereto proposed
by United.
9.7 COMPENSATION OF OTHER GHIP VENDORS.
9.7.1 VENDOR OPERATING EXPENSES. Vendor Operating Expenses shall be
payable out of SHIP Gross Premiums to the parties entitled
thereto during the Policy Year in which such Vendor Operating
Expenses are incurred.
9.7.2 VENDOR PASS-THROUGH EXPENSES. Vendor Pass-Through Expenses
shall be payable out of SHIP Gross Premiums to the parties
entitled thereto; provided,
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however, that if the RSF Balance Percentage equals or exceeds
(***), Vendor Pass-Through Expenses shall be payable during the
Policy Year in which such Vendor Pass-Through Expenses are
incurred. If the RSF Balance Percentage is less than (***) and
the parties agree that charging the Vendor Pass-Through Expenses
in a single Policy Year will have a materially adverse effect on
the SHIP or the RSF, then the specific Vendor Pass-Through
Expenses shall be capitalized over a period of time determined by
the parties. Any such Vendor Pass-Through Expenses together with
interest at the Amortization Interest Rate, shall be charged over
the specified term in equal annual installments.
ARTICLE 10
TERM AND TERMINATION
10.1 TERM. The term of this Agreement shall commence on the date hereof
and shall continue until December 31, 2007. Not later than December
31, 2005, the parties shall notify one another as to whether they
intend to enter into negotiations with a view to extending the term of
this Agreement, entering into a new agreement providing for the
continued provision of the SHIP and related Services by United, or
terminating this Agreement.
10.2 TERMINATION. Anything herein to the contrary notwithstanding, this
Agreement may be terminated prior to the time set forth in Section 10.1
above for any of the following reasons:
(a) by mutual agreement of the parties;
(b) by AARP or AARP Trust with respect to United or by United with
respect to AARP or AARP Trust if the nonterminating party
becomes insolvent, assigns all or any part of its assets for
the benefit of creditors, or upon the filing of any petition in
bankruptcy, voluntarily or involuntarily;
(c) by AARP or AARP Trust with respect to United or by United with
respect to AARP or AARP Trust if the nonterminating party is in
material breach of its obligations under this Agreement and if
such breach continues for more than 90 days following the
breaching party's receipt of a written request for cure from
the nonbreaching party (for purposes of this Section 10.2(c),
United's elimination of any material provision of the SHIP or
the Services or change in any provision of the SHIP or the
Services that materially reduces the appropriateness thereof
for SHIP Insureds shall constitute a material breach, unless
consented to by AARP and AARP Trust, which consent shall not be
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
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unreasonably withheld respecting any matter required by
Applicable Law); provided, however, that if the nonbreaching
party reasonably determines that the breaching party is taking
its best efforts to cure the breach, then the breaching party
shall be entitled to an additional 90 days within which to
effectuate such cure;
(d) by AARP or AARP Trust with respect to United or by United with
respect to AARP or AARP Trust if the nonterminating party is in
material breach of its obligations under any Associated
Agreement to which it is a party and if such breach continues
for more than 90 days following the breaching party's receipt
of a written request for cure from a nonbreaching party to such
Associated Agreement or AARP; provided, however, that if the
nonbreaching party reasonably determines that the breaching
party is taking its best efforts to cure the breach, then the
breaching party shall be entitled to an additional 90 days
within which to effectuate such cure;
(e) by any party pursuant to and as provided in Section 14.1.3
following the occurrence of an Event of Force Majeure;
(f) by AARP or AARP Trust if, in AARP's reasonable judgment, United
(i) acts in a way materially adverse to the preservation and
promotion of goodwill towards AARP and AARP Trust, or (ii)
materially fails to employ such commercial and professional
standards as will assist AARP in its goals of advancing the
education, well being and social welfare of its members and
older persons generally, and such failures continues for more
than 90 days following the receipt by United of a written
request for cure from AARP; provided, however, that if AARP
reasonably determines that United is taking its best efforts to
cure the breach, then United shall be entitled to an additional
90 days within which to effectuate such cure;
(g) by AARP or AARP Trust if United experiences a material adverse
change in its financial condition, which will be deemed to have
occurred if United's rating is downgraded below the minimum
acceptable levels established in EXHIBIT 5.1.9 hereto by both
of the two rating agencies identified therein; provided,
however, that the parties shall work to develop a plan which
satisfactorily addresses any issues related to the downgrade
and United shall have 180 days in which to effect such plan, at
the end of which period if AARP reasonably determines that
United has not satisfactorily effected such plan AARP can
terminate this Agreement upon 90 days' notice to United;
(h) by AARP or AARP Trust if United fails to consent to any
material inter-vendor interaction standards proposed by AARP
under this Agreement (or
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any of the Associated Agreements) and such failures continues
for more than 90 days following United's receipt of a written
request for cure from AARP; and provided, however, that if AARP
reasonably determines that United is taking its best efforts to
cure the breach, then United shall be entitled to an additional
90 days within which to effectuate such cure; and
(i) by United as provided in Section 3.10 hereof, such termination
to be effective on the later of (i) the start of the next
Policy Year, or (ii) 180 days after the final actuarial
determination pursuant to Section 3.10 hereof.
10.3 NOTICES AND EFFORTS TO CURE. Each party shall promptly notify the
other in writing of the occurrence of any of the events described in
Section 10.2 hereof affecting it. Upon any party's receipt of a
request for cure from any other party hereto as provided in Section
10.2 above, the breaching party shall use its best efforts to cure the
breach described in such notification.
10.4 TERMINATION WITH SUCCESSOR CARRIER. The parties shall have the rights
and obligations set forth in this Section 10.4 if this Agreement is
terminated and AARP and AARP Trust elect to continue to make the SHIP
available through a successor carrier.
10.4.1 TRANSFER OF SHIP PLANS. United shall transfer to any successor
carrier the SHIP Plans in effect as of the date of termination
of this Agreement. In connection therewith, United shall enter
into commercially reasonable assumption and/or indemnity
reinsurance agreements and any related administrative
agreements with the successor carrier as reasonably directed by
AARP.
10.4.2 CLAIMS LIABILITY. AARP and AARP Trust will cause any successor
carrier to accept liability (or proportional liability as
applicable) from United for all of its insurance and related
administrative obligations arising out of the SHIP (whether
arising before or after the date of termination) and for
related costs including reasonable legal fees and expenses;
provided, however, that in no event shall the successor carrier
be obligated to assume any extra-contractual liability of
United. AARP and AARP Trust will cause the successor carrier
to administer payment of claims in accordance with standards at
least equal to United's policies and practices then in effect
in administering claims under the SHIP. Notwithstanding the
foregoing, by notice to AARP and AARP Trust, United may elect
to retain liability for and handle any specific claim itself,
in which case AARP and AARP Trust will cause the successor
carrier to transmit to United all information and forms in its
possession pertaining to such claims. United will notify AARP
and AARP Trust of the amount of any payments made by it in
handling and settling any such claim or claims it elects to
handle and AARP and AARP Trust will forthwith cause United to
be reimbursed for the
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amount so paid plus the amount of any expenses reasonably
incurred by United in connection with the payment (including
attorneys' fees and litigation costs). United shall indemnify
and hold AARP, AARP Trust and the successor carrier harmless
from any costs, expenses and liabilities arising out of
United's own handling of any such claims (except for liability
arising, directly or indirectly, out of the gross negligence or
willful misconduct of AARP or AARP Trust or the negligence or
willful misconduct of the successor carrier).
10.4.3 TRANSFER OF RESERVES.
10.4.3.1 TRANSFER OF RESERVES. On the termination date of
this Agreement, United shall transfer to the
successor carrier premium receivables relating to
the SHIP plus cash the sum of which shall be equal
to an estimate of the reserves and liabilities
attributable to the SHIP. Determination of the
premium receivables and the reserves and liabilities
including the RSF Balance shall be on a basis
consistent with the principles and practices used by
United in experience rating of the SHIP.
10.4.3.2 PROVISIONAL SETTLEMENT. On the date 180 days
following the termination date of this Agreement,
United shall prepare a provisional settlement in a
manner consistent with Section 8.5 hereof. The
provisional settlement shall include United's
charges for Termination Costs incurred by United
through the termination date. On the date of the
provisional settlement, (i) if such determination
shows that the reserves and liabilities less premium
receivables are in excess of the cash transferred by
United on the date of termination, United shall
immediately pay the difference to the successor
carrier, or (ii) if such determination shows that
the amount of cash transferred by United on the date
of termination was in excess of the reserves and
liabilities less premium receivables, the successor
carrier shall immediately pay the difference to
United. In either event, any amount so owning to
any party hereto shall include interest on such
amount calculated from the date of termination to
the date of payment at the True-Up Interest Rate.
10.4.3.3 FINAL SETTLEMENT. On the date 18 months after the
termination date of this Agreement, United shall
make a proposed final determination of such premium
receivables reserves and liabilities attributable to
the SHIP as of the date of termination. Such
determination shall be deemed to be final and
conclusive unless
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AARP Trust disputes such determination by giving
United notice of such dispute within 30 days after
AARP Trust receives such determination from United.
If AARP Trust so disputes such determination, and
the parties are unable to resolve such dispute
within 30 days after notice thereof is delivered to
United, the parties will refer such dispute to an
actuarial consulting firm mutually acceptable to the
parties (the "Actuarial Consulting Firm"). Within
such time, the parties will instruct the Actuarial
Consulting Firm to resolve such dispute and provide
AARP and United written findings with respect
thereto not more than 45 days after the Actuarial
Consulting Firm receives such instruction. On the
date the determination referred to in this
subsection becomes final and conclusive (whether
because there was no dispute or because the dispute
was resolved), (i) if such final and conclusive
determination shows that the amount of the reserves
and liabilities less the premium receivables is in
excess of the corresponding amount determined for
the provisional settlement, United shall immediately
pay the difference to the successor carrier, or (ii)
if such final and conclusive determination shows
that the amount of reserves and liabilities less
premium receivables determined for the provisional
settlement was in excess of the amount of the
reserves and liabilities less premium receivables in
the final determination, the successor carrier shall
immediately pay the difference to United. In either
event, any amount so owing to any party hereto shall
include interest on such amount calculated from the
date of termination to the date of payment at the
True-Up Interest Rate.
10.4.3.4 UNSCHEDULED TERMINATION. If this Agreement
terminates on a date other than that set forth in
Section 10.1 hereof, the cash to be transferred by
United on the termination date pursuant to Section
10.4.3.1 hereof shall be adjusted by adding the
difference (whether positive or negative) between
(i) United's realizable fair market value of the
invested assets of the SHIP Portfolio, and (ii)
United's statutory carrying value (determined
without consideration of statutory unrealized
capital gains or losses) of such assets as of the
termination date (such difference is "Portfolio
Capital Gain/Loss"). The determination of amounts
to be paid pursuant to Sections 10.4.3.2 and
10.4.3.3 hereof shall be adjusted by adding to the
amount of reserves less premium receivables
determined on the provisional settlement date and
the final settlement date, respectively, the amount
of the Portfolio Capital Gain/Loss determined on
those respective dates. For this purpose,
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the initial estimate of the Portfolio Capital
Gain/Loss shall be subject to true-up. AARP may
require United to use a different method to effect
the transfer, including a method involving the
transfer of the invested assets of the SHIP
Portfolio to the successor carrier in lieu of cash,
provided that the method results in the transfer of
an equivalent value by United to the successor
carrier.
10.4.3.5 VENDOR EXPENSES. All transfers determined pursuant
to this Section 10.4.3 shall be based on the
presumption that any change in the amount of Vendor
Operating Expenses or Vendor Pass-Through Expenses
from the amount used in determining the transfer
pursuant to Section 10.4.3.1 hereof has been paid
to, or by, United. If such change has not resulted
in a payment to, or by, United, appropriate
adjustments shall be made to the determination of
this Section 10.4.3 hereof properly to reflect the
actual cash flows.
10.4.3.6 BENEFITS EXPECTATION. The determination of reserves
pursuant to this Section 10.4.3 shall be based on
the expected benefits resulting from the use of
United's provider contracts and networks. Any
increase in the expected level of benefits resulting
from the unavailability of those networks to AARP
members due to termination of this Agreement shall
not be considered in the determinations made
pursuant to this Section 10.4.3.
10.4.3.7 REQUIRED RSF BALANCE. Except as otherwise provided
by this Agreement or otherwise agreed to by the
parties, following final settlement pursuant to
Section 10.4.3.3 hereof, United shall have no claim
for any remaining balance in the Deficit
Carryforward Account against AARP, AARP Trust,
AARP's members, any successor to United as
underwriter of the SHIP or any subsidiary or
affiliate of any of the foregoing. (***)
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
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MINIMUM
POLICY YEAR RSF BALANCE
OF TERMINATION REQUIREMENT
-------------- -----------
(***)
10.4.4 PERMITTED PARTIAL TRANSFERS. In no event shall AARP or AARP
Trust effectuate a partial transfer of the SHIP to any
successor carrier if as a result thereof United would be
required to retain a material portion but less than all of the
insured risk within any single product line of the SHIP.
10.4.5 TRANSFER OF DATABASES. United shall transfer to the successor
carrier, at no cost, all Claims Databases then in its
possession or control (scrubbed and cleaned, in
computer-readable format), the documentation related thereto
and specified in Section 3.2.7 (b) above, and all other Records
provided to United pursuant to this Agreement in printed or
computer-readable form; provided, however, that United shall be
entitled to retain such information contained in the Claims
Databases as set forth in Section 7.3 hereof.
10.4.6 TRANSFER OF APPLICATIONS SYSTEMS. United shall transfer to the
successor carrier, at no cost, all applications systems and
related Records pertaining to or used in connection with the
SHIP or the Services, except the Proprietary Systems and those
systems, if any, which AARP has previously agreed in writing as
being excluded systems. United shall grant the successor vendor
a perpetual license, on commercially reasonable terms, to
utilize all Proprietary Software to the extent reasonably
required for the continued performance of the Services,
including the operation of the SHIP Databases and related
applications systems software. United shall cause all
purchased software required for the continued performances of
the Services and provision of the SHIP, including the operation
of the SHIP Databases and related applications systems
software, either to be the licensed to the successor vendor on
a perpetual, royalty-free basis, or will purchase and transfer
to the successor vendor at no cost replacement software
reasonably satisfactory to the successor vendor.
10.4.7 TRANSFER OF DEVELOPED SYSTEMS. United shall transfer to the
successor carrier, at no cost, all of United's right, title and
interest in and to the Developed Systems; provided, however,
that United shall retain a nonexclusive, perpetual,
royalty-free, nonassignable license to use the Developed
Systems.
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
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10.4.8 OBLIGATIONS OF UNITED PRIOR TO TERMINATION. United shall use
its best efforts to assist in the transfer to the successor
carrier contemplated under this Section 10.4 and shall not take
any action inconsistent with its obligations under this Section
10.4 or which could reasonably be expected to hinder or delay
the transfer. In furtherance and not in limitation of the
foregoing, after notice of termination has been received and
prior to the effective date of the termination, United shall
(i) dedicate, without additional compensation, appropriate and
sufficient management and other personnel to assist AARP and
the successor carrier in the transfer (including attending
meetings, providing necessary information and performing other
necessary acts and services), (ii) confer with and provide
access to AARP and the successor carrier in order to permit
such successor carrier to analyze the Services and SHIP and
on-going operations related thereto and to develop procedures
for the transfer of the Services and SHIP as contemplated under
this Section 10.4 and (iii) undertake commercially reasonable
efforts, as promptly as reasonably possible following the
request of AARP, to enter into such other agreements as
contemplated by this Section 10.4 with the successor carrier as
reasonably directed by AARP and reasonably acceptable to United
to authorize the successor carrier to manage the SHIP and
related Services and otherwise to effectuate a smooth transfer
of the SHIP to the successor carrier.
10.4.9 COOPERATION. For a period of 18 months after the termination
of this Agreement, United shall (i) cooperate fully in an
orderly transfer of the SHIP, the Services, the Databases then
in its possession, the application systems related thereto and
all other SHIP-related assets to the successor carrier, (ii)
refer to the successor carrier as promptly as practicable any
telephone calls, letters, orders, notices, requests, inquiries
and other communications relating to the SHIP and (iii) from
time to time, upon AARP's written request, execute, acknowledge
and deliver such further documents, instruments or assurances
and take such other action as AARP may reasonably request to
move, assign, convey and transfer any of the assets,
properties, rights or claims of the assets being transferred to
such successor carrier and assist in the vesting, collection or
reduction to possession of such assets, properties, rights and
claims.
10.4.10 REMOVAL OF CERTAIN UNITED MARKS. At the request of AARP,
United shall remove or cause to removed all United Marks from
all computer systems that cause the United Marks to be printed
or displayed in any medium pertaining to the GHIP.
10.5 TERMINATION WITHOUT SUCCESSOR CARRIER. The parties shall have the
rights and obligations set forth in this Section 10.5 if this Agreement
is terminated and AARP Trust elects not to continue to make the SHIP
available through a successor carrier.
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10.5.1 RSF BALANCE. Following termination hereof pursuant to this
Section 10.5, United shall retain any RSF Balance for use in
connection with providing continued SHIP coverage. AARP, AARP
Trust and their authorized representatives may, for a period of
three years, inspect and audit all information in United's
possession reasonably necessary to ensure United's compliance
under this Section. Such access shall be reasonable in scope
and duration and, to the extent possible, shall be via
electronic data transfer.
10.5.2 PAYMENT. United shall pay AARP, for a period of three years
following the date of termination, an amount equal to three
percent of the gross premium revenues earned by United for each
such year, from persons insured under SHIP Plans as of the date
of termination; provided, however, that any such amount shall
be payable only if the RSF Balance (or successor reserve
account balance) at the end of the relevant year exceeds four
percent of such gross premium revenues for such year, and then
only to the extent that the payment of the royalty to AARP
would not decrease the RSF Balance (or successor reserve
account balance) to less than four percent of such gross
premium revenues for such year.
10.5.3 RATE ACTIVITY. Following termination under this Section 10.5,
United shall continue timely to notify AARP and AARP Trust as
to changes in the premiums for the SHIP Plans and other rate
related activity.
10.5.4 SALE PROHIBITED. Following termination, under this Section
10.5, United shall give AARP 90 days' prior notice of any
proposed transfer of all or any portion of the SHIP business to
another party other than through ordinary course coinsurance,
indemnity reinsurance or stop loss reinsurance arrangements.
Following termination, United may not sell or otherwise
transfer all or any portion of the SHIP business to another
party without the prior approval of AARP (which approval shall
not be unreasonably withheld) except to an insurer whose
ratings equal or exceed the corresponding ratings of United (i)
as of the date hereof set forth in EXHIBIT 5.1.9 hereto or (ii)
as of the date of such transfer, if lower.
10.5.5 PROVISIONAL AND FINAL SETTLEMENT. United shall prepare a final
accounting for the last full Policy Year, and any subsequent
partial Policy Year prior to termination, and shall deliver
such accounting to AARP not less than 18 months following the
termination of this Agreement. A provisional settlement shall
be made by making the requisite calculations under Article 8
hereof for the last Policy Year of this Agreement (or any
extension thereof) within six months after the end of such
Policy Year, and completing the RSF credit or withdrawal, as
the case may be, resulting therefrom. Within 18 months
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following the termination of this Agreement, appropriate
adjustments shall be made to the RSF and a final settlement
made for the last Policy Year of this Agreement (or any
extension hereof).
10.6 RIGHTS AND OBLIGATIONS OF PARTIES UPON TERMINATION. Upon the
termination of this Agreement for any reason, the parties shall have
the rights and obligations set forth in this Section 10.6.
10.6.1 TERMINATION COSTS. United shall be entitled to recover its
Termination Costs as part of the final settlement pursuant to
Section 10.6.2 hereof; provided, however, that United shall not
be entitled to recover its Termination Costs (other than any
losses realized on liquidation of the SHIP Portfolio and any
Taxes payable by United with regard to the SHIP in respect of
the period ending upon the termination date of this Agreement)
if AARP or AARP Trust terminates this Agreement as a result of
a breach by United of its obligations hereunder and an
arbitrator confirms that such termination was permitted by this
Agreement except to the extent that such Costs exceed (***).
10.6.2 POST-TERMINATION REPORTS. Until United has delivered the final
accounting required pursuant to Section 10.6.2 hereof,
completed the processing and disposition of all claims for
which United retains liability following the date of
termination and paid all amounts due to AARP pursuant to
Section 10.5.2 hereof, United shall continue to provide all of
the reports that would be required to be provided pursuant to
Section 3.2.8 hereof, and AARP and AARP Trust shall continue to
have the audit and inspection rights accorded thereto pursuant
to Section 3.2.9 hereof, as if such termination had not
occurred.
10.6.3 DISPOSITION OF EMPLOYEES. United shall be compensated for all
employment related expenses arising from the termination of
this Agreement and the termination of United's employees
engaged primarily in its AARP operations, including but not
limited to COBRA, long term disability, short term disability
and severance; provided, however, that United shall not be
entitled to receive any compensation in respect of any United
employee who is offered employment by any successor employer.
ARTICLE 11
DISPUTE RESOLUTION
11.1 INFORMAL PROCEDURES. United shall follow the procedure described in
this Section 11.1 (the "Resolution Procedure") to remedy any material
failure by United to meet applicable standards set forth in the
Contract Documents or to remedy the objections of AARP or
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
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AARP Trust to United's performance of the Services or provision of the
SHIP. The Resolution Procedure shall include United's design and
implementation of a plan, satisfactory to AARP, to reach a standard or
to remedy an objection, in as timely a manner as possible, and shall
also include the utilization of the resources reasonably needed to meet
the standard or to remedy an objection. United may suggest for
consideration by AARP and/or AARP Trust the amendment of a standard or
a timetable for meeting a standard or remedying an objection. Should
United and AARP or AARP Trust, as applicable, fail to agree on the
course of action necessary to meet or modify a standard or to remedy an
objection, the Resolution Procedure requires the retention by and at
the expense of United of a neutral expert, acceptable to AARP, to
recommend a range of options to achieve the standard or remedy the
objection. Notwithstanding any other provision hereof, the Resolution
Procedure shall not obligate United to (i) assume or undertake any
responsibilities or obligations assigned to any other GHIP Vendor
pursuant to any Associated Agreement or otherwise, (ii) incur
substantial out-of-pocket expenses, (iii) incur substantial
indebtedness or (iv) except as expressly provided herein, institute
litigation or consent generally to service of process in any
jurisdiction.
11.2 FORMAL PROCEDURES. Any dispute arising out of or relating to this
Agreement, any other Contract Document or the GHIP including, but not
limited to, the interpretation, validity or breach thereof that is not
resolved pursuant to the Resolution Procedure shall be resolved in
accordance with the procedures set forth in this Article 11.
11.2.1 MEDIATION. If the parties are unable to resolve a dispute or
claim pursuant to the Resolution Procedure within thirty 30
days after the dispute arises (or such longer period as to
which the parties may agree) the parties shall attempt in good
faith to resolve the dispute by mediation pursuant to the CPR
Model. If the parties are unable to agree on a mediator, the
mediator shall be selected pursuant to the CPR Rules.
11.2.2 ARBITRATION. If the dispute or claim has not been resolved by
mediation within 30 days of the initiation thereof, the dispute
shall be resolved by binding arbitration conducted in
Washington, D.C. by a single arbitrator pursuant to the CPR
Rules or such other rules as mutually agreed upon by the
parties. The arbitrator shall be disinterested in the subject
matter of the dispute, shall not have been employed at any time
within the past five years by AARP, AARP Trust or United, shall
have appropriate qualifications and experience with respect to
arbitration of business disputes and shall possess relevant
industry expertise. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. SECTIONS 1-16.
Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
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11.3 COSTS AND FEES. Each party shall bear its own costs and attorneys'
fees incurred in connection with mediation or arbitration.
11.4 SPECIFIC PERFORMANCE. The parties recognize that damages at law would
not be an adequate remedy for the breach of many provisions of the
Agreement and that prompt, equitable relief, prohibitory or mandatory,
may be appropriate in many circumstances. In the event of any
arbitration arising out of or relating to this Agreement or the
Contract Documents, the arbitrators are encouraged to take account of
this recognition and seek to fashion appropriate relief when the
circumstances warrant. When consistent herewith and in the best
interests of the AARP members and GHIP participants, the arbitrators
may fashion equitable relief in a manner that directly addresses a
breach, but allows for the continuation of this Agreement.
11.5 JURISDICTION. The parties hereto consent to personal jurisdiction over
them in the federal courts of the District of Columbia in connection
with any application to compel arbitration pursuant to this Article 11
or for the entry of judgment upon any arbitration award. Service of
process upon any party shall be sufficient if made in accordance with
the laws of the District of Columbia or in accordance with the notice
provision of Section 14.5 hereof.
11.6 LIABILITY LIMITATION. In no event shall the arbitrators in any
arbitration pursuant to Section 11.2.2 hereof be authorized to award
any punitive damages or to award consequential or special damages in
excess of $35 million in the aggregate.
ARTICLE 12
RELATIONSHIP OF THE PARTIES
12.1 INDEPENDENT CONTRACTORS. The parties hereto are independent
contractors and are not joint venturers or partners. Neither AARP and
AARP Trust nor United are now, nor shall they become or be considered
as, principal or agent of the other in connection with the provisions
of the SHIP or the performance of the related Services by United
hereunder. United does not have, nor will it become or be considered to
have, an ownership interest in AARP or AARP Trust. AARP and AARP Trust
do not, nor will they become or be considered to have, an ownership
interest in the SHIP or United (except that AARP is, and shall be, the
sole and exclusive owner of the AARP Name), and AARP and AARP Trust
shall not be liable or responsible in any such capacity or capacities.
AARP and AARP Trust are not, nor will they become or be considered to
be, providers of insurance services. Accordingly, AARP, AARP Trust and
United shall at no time and in no medium or manner state or imply that
(i) United is the agent of AARP or AARP Trust, (ii) AARP or AARP Trust
is the agent of United, (iii) AARP or AARP Trust has any
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such ownership interest in United or the SHIP or (iv) United has an
ownership interest in AARP or AARP Trust.
12.2 NOT LEGAL REPRESENTATIVES.
12.2.1 UNITED. United is not and shall not be the legal
representative, agent, partner or joint venturer of AARP or
AARP Trust and does not and shall not have any authority to
enter into, amend, modify, terminate, settle, compromise or
otherwise deal with any agreements or disputes on behalf of
AARP or AARP Trust. All agreements, whether written or oral,
express or implied, entered into by United in connection with
performance of the Services and the provision of the SHIP shall
not in any way bind or purport to bind AARP or AARP Trust or
any of their respective properties.
12.2.2 AARP AND AARP TRUST. Neither AARP nor AARP Trust is or shall
be the legal representative, agent, partner or joint venture of
United, and AARP and AARP Trust do not and shall not have any
authority to enter into, amend, modify, terminate, settle,
compromise or otherwise deal with any agreements or disputes on
behalf of United. All agreements, whether written or oral,
express or implied, entered into by AARP and/or AARP Trust in
connection with the GHIP shall not in any way bind or purport
to bind United or any of United's properties.
ARTICLE 13
INDEMNIFICATION
13.1 INDEMNIFICATION BY UNITED. United shall, at its own expense, defend,
hold harmless and indemnify AARP, AARP Trust and each of their
respective parents, subsidiaries, affiliates, officers, directors,
trustees, employees, members, independent contractors and agents
(provided they are acting in the course of their duties with respect to
the foregoing) (each an "AARP Indemnified Party") from and against any
claims, damages (including consequential and punitive damages),
judgments, awards, settlements (consented to by United), costs and
expenses (including reasonable fees and expenses of counsel, subject to
the procedures and limitations contained in Sections 13.3 and 13.4
hereof), arising, directly or indirectly, from (i) the misuse by United
or any of its parents, subsidiaries, affiliates, officers, directors,
employees or agents of information provided by AARP or AARP Trust to
United, including but not limited to information concerning AARP
members and marketing and advertising materials concerning the SHIP,
(ii) the breach, negligence or willful misconduct by United with
respect to its obligations under this Agreement and the other Contract
Documents or under any Associated Agreement to which United is a party,
(iii) United's subcontracting any part
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or all of the Services or the SHIP under Section 3.5.2 hereof, or
arising out of any other agreement between United and any other party
relating to the Services or the SHIP, (iv) any claim pertaining to the
terms of employment and benefits which are offered by United to any
person pursuant to Section 3.1.3(b)-(c) hereof, and (v) any other
matter arising out of the performance by United of the Services or
provision of the SHIP hereunder; except in each of the cases referred
to in the preceding clauses (i) through (v) to the extent that
liability therefor arises out of the negligence or willful misconduct
of an AARP Indemnified Party or (B) the action or inaction of United
(other than as relates to any insurance regulatory matter) taken at the
express direction of AARP or AARP Trust. Notwithstanding the foregoing,
to the extent United becomes subject to an indemnification obligation
under clause (i) or (v) above other than as a result of the negligence
or willful misconduct of a United Indemnified Party, its resulting
indemnification costs (including reasonable fees and expenses of
counsel) may be reimbursed through a charge made in the retrospective
experience rating for the SHIP pursuant to Section 8.3 hereof for the
Policy Year in which the obligation is incurred. Furthermore, if a
claim is asserted against United of the nature subject to
indemnification under the preceding clause (iv) for which United is
adjudicated not to be liable, then United may be reimbursed for its
costs of defending such claim (including reasonable fees and expenses
of counsel) through a charge made in the retrospective experience
rating for the SHIP pursuant to Section 8.3 hereof for the Policy Year
in which the obligation is incurred.
13.2 INDEMNIFICATION BY AARP. AARP shall, at its own expense, defend, hold
harmless and indemnify United and each of its parents, subsidiaries,
affiliates, officers, directors, employees and agents (provided they
are acting in the course of their duties to the foregoing) (each a
"United Indemnified Party") from and against any claims, damages
(including consequential and punitive damages), judgments, awards,
settlements (consented to by AARP), costs and expenses (including
reasonable fees and expenses of counsel subject to the procedures and
limitations contained in Sections 13.3 and 13.4 hereof), arising,
directly or indirectly, from (i) the misuse by AARP or AARP Trust or
any of their respective parents, subsidiaries, affiliates, officers,
directors, employees or agents of information provided by United to
AARP or AARP Trust, including but not limited to marketing and
advertising materials relating to the SHIP for purposes other than as
contemplated by this Agreement or any contract document, and (ii) the
breach, gross negligence or willful misconduct by AARP or AARP Trust
with respect to their respective obligations under this Agreement and
the other Contract Documents; except in each of the preceding clauses
(i) and (ii) to the extent that liability therefor arises out of (A)
the negligence or willful misconduct of a United Indemnified Party or
(B) the action or inaction of AARP or AARP Trust taken at the express
direction of United.
13.3 NOTICE; DEFENSE OF CLAIM. An indemnified party shall promptly notify
the indemnifying party in writing following the time the indemnified
party shall receive notice of any
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claims occurring for which indemnification is sought. The indemnifying
party shall assume on behalf of the indemnified party and conduct with
due diligence and in good faith the defense thereof with counsel
reasonably satisfactory to the indemnified party; provided, that the
indemnified party shall have the right to be represented therein by
counsel of its own selection and at its own expense; and provided
further, that if the defendants in any such action include both the
indemnifying party and the indemnified party and the indemnified party
shall have reasonably concluded that there may be legal defenses
available to it which are different from or additional to, or
inconsistent with, those available to the indemnifying party, the
indemnified party shall have the right to select separate counsel to
participate in the defense of such action on its own behalf at the
indemnifying party's expense. The indemnifying party shall not agree
to settle any matter without the prior written consent of the
indemnified party, which consent shall not be unreasonably withheld.
13.4 FAILURE TO DEFEND ACTION. If any claim, action, proceeding or
investigation arises s to which the indemnity provided for in Sections
13.1 or 13.2 hereof may apply, nd the indemnifying party fails to
assume the defense of such claims within 30 days, hen the indemnified
party may at the indemnifying party's expense contest such laim;
provided, that no such contest need be made and settlement in full
payment of ny such claim may be made without the indemnifying party's
consent (with the ndemnifying party remaining obligated to indemnify
the indemnified party under ection 13.1 or 13.2 hereof) if, in the
written opinion of the indemnified party's utside counsel, such claim
is meritorious.
13.5 SURVIVAL OF INDEMNITIES. The obligations of the parties to indemnify
each other and other persons identified in this Agreement shall survive
the termination of this Agreement for a period of two years.
13.6 INSURANCE.
(a) United shall maintain professional (errors and omissions)
liability insurance, standard commercial general liability
insurance (or a combination of commercial general liability
insurance and excess liability insurance) including contractual
liability, and crime/fidelity insurance, with insurance
companies rated at least A-1X by A.M. Best. Such insurance
shall contain at least the minimum limits and deductibles or
retentions as reasonably necessary for United to meet the most
stringent coverage requirements applicable to it under any
Associated Agreement to which it is a party. Except as
expressly provided in paragraph (b) below, the premiums for all
such insurance coverage shall constitute Pass-Through Expenses.
(b) United shall be able to charge as Pass-Through Expenses any
unreimbursed expenses which are within the deductibles or
retention of either its insurance
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policies delineated in Section 13.6(a) above or those of any
other GHIP Vendor, subject to a maximum to be agreed by United,
AARP, AARP Trust, the Member Services Vendor and the Sales and
Marketing Vendor, provided, however, that United shall not be
able to charge as a Pass-Through Expense any (i) liabilities
for which United provides indemnification under Section 13.1
hereof, or (ii) insurance premiums for insurance pertaining to
such liabilities as referred to in the preceding (i), all of
which shall be at the sole cost of United. Upon termination of
this Agreement, no such costs shall be recoverable as
Pass-Through Expenses to the extent that the expense would
cause the RSF Balance to fall below the minimum RSF Balance
requirement identified in Section 10.4.3.7 hereof.
ARTICLE 14
GENERAL PROVISIONS
14.1 FORCE MAJEURE.
14.1.1 EVENTS. Any delay in or failure of performance by any party
hereto, other than the obligations to pay monies hereunder
shall not constitute a default hereunder and shall not give
rise to an entitlement to monetary damages or equitable relief
hereunder, if and to the extent such delays or failures of
performance are caused by occurrences which are beyond the
control of and the effects of which in the exercise of
reasonable care could not have been prevented by the affected
party, including, but not limited to: expropriation or
confiscation of facilities; act of public enemy; act of war;
rebellion or sabotage or damage resulting therefrom; flood;
fire; lightning; riots or strikes; Change of Law having a
material adverse effect on any party's ability to perform its
obligations under the Contract Documents; order of a court,
arbitrator or governmental authority; or any causes other than
those specified above which are not within the control of, and
which are without fault or negligence on the part of a party,
and which by the exercise of due diligence the affected Party
is unable to overcome (each an "Event of Force Majeure").
14.1.2 NOTICE AND CURE. Any party claiming that an Event of Force
Majeure has arisen shall immediately notify the other party of
the same and shall act diligently to overcome and remove the
effects of the Event of Force Majeure, shall notify the other
party on a continuing basis of its efforts to overcome the
Event of Force Majeure and shall notify the other party
immediately when said condition has ceased.
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14.1.3 TERMINATION. If an Event of Force Majeure continues for more
than three months after notice of the Event of Force Majeure is
given under Section 14.1.2 above, and the parties are unable to
agree upon other remedies, then either AARP or United may
terminate this Agreement, in its sole discretion, at any time
thereafter prior to any remedying of the adverse effect of the
Event of Force Majeure, by giving at least seven calendar days'
prior written notice to the other.
14.2 FURTHER ASSURANCES. The parties shall keep each other informed about
legal or any other developments affecting the Services and the GHIP,
shall cooperate with one another to carry out and implement the terms
and objectives of this Agreement and the Exhibits hereto, and shall
perform such further acts, execute such further documents and enter
into such further agreements as may be necessary or appropriate to
these ends.
14.3 NO THIRD PARTY BENEFICIARIES. This Agreement confers no rights
whatsoever upon any person (including without limitation any AARP
members or employees of Prudential or of United) other than the parties
hereto.
14.4 GOVERNING LAW. The Agreement shall be governed by and interpreted in
accordance with the laws of the District of Columbia applicable to
agreements made and to be performed wholly within the District of
Columbia.
14.5 NOTICES. Notices required or appropriate to be given under the
Agreement shall be given by hand delivery or facsimile and by certified
mail return receipt requested, as follows or in such other manner as
shall be agreed to in writing by the parties:
To AARP:
American Association of Retired Persons
601 E Street, N.W.
Washington, DC 20049
Attention: Executive Director
Facsimile Number: (202) 434-2320
With copies to both:
The Director, Membership Division
Facsimile Number: (202) 434-3443
The General Counsel
Facsimile Number: (202) 434-2339
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To AARP Trust:
Trustees of the AARP Insurance Plan
American Association of Retired Persons
601 E Street, N.W.
Washington, DC 20049
Attention: Executive Director
Facsimile Number: (202) 434-2320
With copy to:
The General Counsel
Facsimile Number: (202) 434-2339
To United:
United HealthCare Insurance Company
300 Opus Center
9900 Bren Road East
Minnetonka, MN 55343
Attention: Chief Executive Officer, AARP Operations
Facsimile Number: (612) 936-1396
With copies to:
The General Counsel, United HealthCare Insurance Company
Facsimile Number: (612) 936-0044
14.6 NO WAIVER, ETC. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
the applicable law set forth in Section 14.4 hereof, but if any
provision of this Agreement shall be held to be prohibited or invalid
under such applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this
Agreement. No failure on the part of any party to exercise, and no
delay in exercising, any right hereunder shall operate as waiver
thereof, nor shall any single or partial exercise of any right
hereunder by any party preclude any other or further exercise of any
other right and no waiver whatever shall be valid unless in a signed
writing, and then only to the extent specifically set forth in such
writing. No waiver of any right hereunder shall operate as a waiver of
any other or of the same or similar right on another occasion.
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14.7 AMENDMENT.
14.7.1 GENERAL. Except as expressly provided in Sections 2.90, 4.2.1,
7.4.2, 7.7.2 and 9.5.2 hereof with respect to the amendment of
EXHIBIT 2.90, EXHIBIT 4.2.1, EXHIBIT 7.4.2, EXHIBIT 7.7.2 and
EXHIBIT 9.5.2 hereto, respectively, this Agreement may not be
amended except in a writing executed on behalf of each of the
parties hereto.
14.7.2 ANCILLARY AGREEMENTS. The parties are currently negotiating
with Prudential and other GHIP Vendors the Transfer Agreement,
the Reinsurance Agreement and other agreements related to the
GHIP. The parties will negotiate in good faith with a view to
amending this Agreement as appropriate to incorporate any
changes necessitated by such agreements, amendments thereto or
agreements ancillary thereto.
14.7.3 RENEGOTIATION. If prior to the Commencement Date there occurs
any unanticipated fact or circumstance that has a material
consequence for the rights and obligations of the parties
hereunder, then the parties will negotiate with a view to amend
the Contract Documents so as to maintain their respective
rights and obligations as presently envisioned.
14.7.4 CONFLICTS AMONG AGREEMENTS. In the event of any conflict
between the terms of the Contract Documents and the Transfer
Agreement or the Reinsurance Agreement, the terms of the
Transfer Agreement or the Reinsurance Agreement, as applicable,
shall be controlling. In the event of any conflict between the
terms of the Contract Documents and any Associated Agreement,
the terms of the Contract Documents shall be controlling.
14.8 EXPERIENCE/RESERVE ACCOUNTING. The parties acknowledge and agree that
United will account for the SHIP experience rating and the reserves on
a policy-by-policy basis. All accounting provided by United pursuant
to this Agreement, however, will be on an aggregate basis for the
entire SHIP.
14.9 HEADINGS. The Section headings contained in this Agreement are not
part of this Agreement, are for the convenience of reference only and
shall not affect the meaning, construction or interpretation of this
Agreement.
14.10 BINDING EFFECT. This Agreement shall be binding upon and shall inure
to the benefit of each of the parties hereto and their respective
successors and assigns.
14.11 ASSIGNMENT. This Agreement may not be assigned by any party hereto
without the prior written permission of the other parties hereto.
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14.12 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original.
14.13 CERTAIN CALCULATIONS. In the event that a SHIP Insured shall no longer
be a member of AARP, unless and until coverage is terminated, his or
her premium and loss experience shall be included in all computations
required to be made hereunder, as if he or she had continued to be an
AARP member.
14.14 ACKNOWLEDGEMENT. The parties acknowledge that United is not licensed
to conduct insurance business in the State of New York and that it
intends to use its affiliate, United Healthcare Insurance Company of
New York, as underwriter of the SHIP in the State of New York. The
parties shall cooperate and adjust the provisions of this Agreement and
the Associated Agreements, as appropriate, to accommodate United's use
of this affiliate to underwrite the SHIP in the State of New York and
otherwise to effect the purposes and objectives of this Agreement and
any Associated Agreement.
14.15 RELATED PLANS. The parties will take reasonable steps and conform this
Agreement or execute additional agreements to address the terms of
United's undertaking of any Related Plan.
[SIGNATURES ON THE FOLLOWING PAGE]
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` IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the date first written above.
AMERICAN ASSOCIATION OF RETIRED PERSONS
By: /s/ Margaret A. Dixon
------------------------------------------
Print Name: Margaret A. Dixon, Ed.D.
----------------------------------
Print Title: President
---------------------------------
TRUSTEES OF THE AARP INSURANCE PLAN
By: /s/ C. Keith Campbell
------------------------------------------
Print Name: C. Keith Campbell
----------------------------------
Print Title: Chair
---------------------------------
UNITED HEALTHCARE INSURANCE COMPANY
By: /s/ William W. McGuire
------------------------------------------
Print Name: William W. McGuire
----------------------------------
Print Title: President
---------------------------------
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EXECUTION COPY
EXHIBIT 2.89
UNITED'S START-UP PERSONNEL
The following are the United employees whose time may be charged as
Start-Up Costs and their respective PER DIEM rates. This list may be amended
from time to time by United.
NAME
DEDICATED START-UP PERSONNEL
Alicki, Joe
Anthony, Bill
Brenn, Janine
Hatting, Kit
King, Robert
Landau, Peter
Metz, Carol
Tersteeg, Terri
Zienta, Yvonne
PARTIALLY DEDICATED START-UP PERSONNEL
Burton, Tom
Enderle, John 0.
Farr, Al
Flottemesch, Dianne
Friedman, Matt
Hoff, Nancy
Longworth, Kate
McMahon, P. Al
McMillan, Sheila
Quam, Lois
Smith, Dave
Spitz, Mike
Taylor, Ken
Weiss, Al
WORKGROUP PARTICIPATION
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Anderson, Irene May, Maryann
Astalos, Darlene Miller, Dave
Baker, Sandra Mitchell Craig
Bermosky, Barbara Murphy Cecil
Berry, Patrick Murrah, Nancy
Brendly, Diana O'Connor, Tom
Casper, Paul Ogilvie, Steve
Cavacas, John Parent, Randy
Chilton, Tina Parker, Bob
Cook, Wayne Patmore, Becky
Craig, Rich Peters, Larry
Fabrizio, Mario Pitruzzello, MaryAnn
Feitelson, Jeff Prince, Bob
Fisher, Judy Rantala, Cheryl
Gionfriddo, Joan Rath, Marilyn
Graham, Nancy Ronning, Glenn
Greer, Mark Rosenburg, Jeff
Hamman, Diane Sawyer, Russ
Hanson, Mary Schmidt, Jon
Iannone, Gary Schoolnik, Wynn
Joyce, Mike Shaw, Carolyn
Kendall, Karl Skinner, Todd
Kirkpatrick, Bill Star, Jacquelyn
Kollar, Mary Sullivan, Gina
Kozak, Jan Thomas, Woody
Lanpher, Dick Travers, Bob
Larson, Cindy Vancara, Ken
Leonard, Bob Waid, Ron
Linders, Larry Walsh, Janice
Maillet, Sue Wytas, Mike
Matus, Lynn Young, George
Zaleski, Wayne
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EXECUTION COPY
EXHIBIT 3.1.3
DEDICATED UNITED PERSONNEL
Lois Quam - Chief Executive Officer
Al Farr - President
Kate Longworth - Chief Operating Officer
Terry Tersteeg - Vice President, Human Resources
David Smith - Vice President, Market Analysis and Pricing
Tom Burton - Chief Actuary
Al McMahon - Deputy General Counsel
Peter Landau - Vice President, Member Services Liaison
Bill Anthony - Vice President, Claims
Bob King - Vice President, Systems
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EXECUTION COPY
EXHIBIT 3.1.5
SOFTWARE ACCEPTANCE TEST STANDARDS
DATA CONVERSION AND SYSTEM TESTING
SEPTEMBER 1997
General requirements:
- - All claims programs and command language sets (JCL) must be properly loaded
to United's system.
- - A test environment specifically for the testing of the claims system, both
batch and on line, must be created.
- - All production data files must be loaded correctly and completely onto the
test system.
- - Sufficient production and test data space needs to be allocated.
- - Sufficient test and production library space needs to be allocated.
- - Installation change management procedures and standards must be used.
- - Roll-back procedures must be in place in the event of difficulties.
Data conversion requirements for claims,
actuarial, underwriting and finance databases:
- - Conversion method must be defined.
- - Resources required for the conversion must be defined.
- - Selection criteria, purge criteria, creation and translation rules must be
defined.
- - Strategy for reconciling converted data must be developed.
- - All data must be loaded and accounted for.
For system testing of claims system:
- - Identify system functions for testing.
- - All functional processing capabilities need to be exercised.
- - Test objectives must be defined.
- - Validity of all program to program interfaces must be established.
- - Validity of all subsystem data interfaces must be established by testing
user and automated procedures.
- - End-of-month and beginning-of-month processing needs to be included.
- - Accuracy and efficiency of all command language sets (JCL) must be
established.
- Accuracy of data entry, transaction processing and run-to-run controls must
be tested.
- - Security backup and recovery procedures must be exercised and validated.
- - Volume stress test must be performed.
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- - Effects on hardware and runtimes of running new system concurrently with
United's existing system need to be minimal.
- - All test results must be documented and reported to AARP.
NOVEMBER 1997
The above data conversion, if any, and system testing will need to be performed
to include all updated data and programs.
A parallel test will also need to be performed which should include the
following:
- - Duplicate run of Prudential's system using all input files for the test
period.
- - All permanent files need to be compared with no unexplained differences
found.
- - Any and all differences need to be documented.
- - This test will need to take place over 7 days (3 days before month end,
month end, and 3 days after month end).
- - All permanent files will need to be compared after every run to
Prudential's files.
- - Any differences must be documented.
END OF DECEMBER 1997
The above data conversion, if any, and system testing will need to be performed
to include all updated data and programs.
A parallel test using the above criteria will be run starting from the day the
data and system implementation is complete until January 1, 1998.
BUSINESS PARTNERS LINKAGES
United will be responsible for following all requirements and standards created
for the Business Partners Linkages to ensure system functionality. United must
also participate in a full system test of the Business Partners Linkages planned
by all business partners executed by the Member Services Vendor.
OUTSOURCING
If United outsources any of the above data conversion and system testing
obligations to the Member Services Vendor, it shall take commercially reasonable
efforts to assist the Member Services Vendor in performing such services but
shall have no further obligations in respect thereof.
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EXECUTION COPY
EXHIBIT 3.2.4
FUTURE PRODUCTS
From and after the Commencement Date, United, in consultation with AARP and
consistent with the social welfare purposes of the AARP, shall undertake product
development activities as described in the Agreement with respect to additional
health care insurance products, including without limitation the following:
- - 50 to 64 Group Health Insurance
Comprehensive insurance coverage for AARP members and their dependent
children to provide a seamless transition after the loss of job or a career
change.
- - Grandchildren's Health Insurance
Comprehensive health insurance coverage specially designed for dependent
grandchildren of AARP members, including indemnity, Preferred Provider
Organization (PPO), and Health Maintenance Organization (HMO) options.
- - EverCare
Medical care to frail, elderly residents of nursing homes.
- - Medicare Select
PPO benefits to Medicare eligible to AARP members.
- - Medical Equipment Service Vendor Arrangements
Access to vendors, selected by United, who will deliver discounted, high
quality services and durable medical equipment.
- - AARP CareLine
A telephonic service tailored to the health care information needs of two
groups of older Americans:
- Persons newly diagnosed with one of 10 serious or chronic medical
conditions; and
- Caregivers including spouses, children, and other loved ones who are
responsible for the care of a seriously ill or disabled person.
- - Foreign Travelers Services
Instant access to help and advice for policyholders who experience a
serious health problem while traveling abroad.
- - "Ask the Expert" Health Care Information Services
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The latest clinical guidelines for serious and chronic medical conditions,
to be presented in clear and understandable language. This service
potentially will be available to all AARP policyholders and members. This
service will be available in both print and Internet form.
- - Transplant Centers of Excellence
Information and services will be offered to policyholders who need an organ
or tissue transplant.
United's product development activities with respect to those additional
products noted above shall be consistent with the commitment made by it in its
Supplemental Health Products Proposal to AARP dated May 15, 1996.
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EXECUTION COPY
EXHIBIT 3.2.5
ADMINISTRATIVE SERVICES PERFORMANCE STANDARDS
GENERAL
Results will be reported monthly, but the standards and penalties are based on a
yearly result for all areas. All penalties and the proportion of the
Administrative Service Fee will be measured from the dates indicated below,
unless early transfer occurs in which case measurement will begin January 1,
1998.
1. CLAIMS MEMBER SERVICE FUNCTIONS
AVERAGE SPEED OF ANSWER: At least 90% of all calls by members will be
answered within 30 seconds.
Measurement: This will apply to calls transferred from the Member Services
Vendor. The Measurement period will be from the call initiation by the
Member Services Vendor until to the time a call is answered by a United
Customer Service Representative. The member will not be able to access the
IVR during this transfer. This standard will become effective on July 1,
1998.
PENALTY: (***) of the Administrative Service Fee if United fails to meet
this standard on an annualized calendar year basis.
CALL ABANDONMENT RATE: No more than 3% of calls from members.
Measurement: This will apply to calls transferred from the Member Services
Vendor. Abandoned calls are calls in which a member hangs-up before
connecting with a United Customer Service Representative.
This standard will become effective on July 1, 1998.
PENALTY: (***) of the Administrative Service Fee if United fails to meet
this standard on an annualize lender year basis.
CALL RESOLUTION: At least: (i) 50% of member calls will be finalized on
the first call, (ii) 85% of call backs will be completed within 48 hours;
and (iii) 100% of call backs will be completed within 72 hours.
Note: The manner in which United will "operationalize" AARP's new business
model results in only member calls that need access to detailed claim
information being referred
*** Denotes confidential information that has been omitted from the exhibit
and filed with the SEC pursuant to Rule 24b-2 of the Exchange Act.
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to United. The majority of these calls will require accessing microfilmed
information rather than information available on line. It will be necessary
to request microfilm from the Member Services Vendor that will require a 48
hour turn around time.
Measurement: A log of calls will be maintained indicating the outcome of
all transferred calls (I.E., whether resolved during call or follow-up call
placed). If United fails to meet any one of the three call resolution
standards, the penalty will be payable. This standard will become
effective on April 1, 1998.
PENALTY: (***) of the Administrative Service Fee if United fails to meet
this standard on an annualized calendar year basis.
CORRESPONDENCE: 100% of written correspondence will be replied to within 5
business days.
Measurement: A written item will be date-stamped received and measurement
will commence from the date stamped by United when it is received by
United. The elapsed time is measured as date of the response minus the
date of receipt, counting only business days. This standard will become
effective on April 1, 1998.
PENALTY: (***) of the Administrative Service Fee if United fails to meet
this standard on an annualized calendar year basis.
2. UNDERWRITING AND ISSUE FUNCTIONS
APPEALS: 100% of appeals will be resolved within 10 Business Days.
Measurement: Written and telephonic referrals will be date stamped when
received by United from the Member Services Vendor. The difference
between the receipt date and the response date (counting only Business
Days) will be the elapsed time. If a member subsequently reinquires about
the same application, that inquiry will constitute a new appeal and
measurement will be from the date of the new inquiry. This standard will
become effective on April 1, 1998.
PENALTY: (***) of the Administrative Service Fee if United fails to meet
this standard on an annualized calendar year basis.
3. CLAIMS PROCESSING FUNCTIONS
NON-ELECTRONIC CLAIM TURNAROUND TIME: At least 90% of non-electronic
claims will be processed within 10 business days of receipt by United.
Measurement: All claims will be date-stamped by United upon receipt.
Turnaround time is measured as the time elapsed from when a claim is
received until it is processed. A
*** Denotes confidential information that has been omitted from the exhibit
and filed with the SEC pursuant to Rule 24b-2 of the Exchange Act.
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non-electronic claim is considered processed when a request for an EOB,
payment or response is generated to the Member Services Vendor. This
standard will become effective on April 1, 1998.
PENALTY: (***) of the Administrative Service Fee if United fails to meet
this standard on an annualized calendar year basis.
ELECTRONIC CLAIM TURNAROUND TIME: At least 99.5% of "clean" electronic
claims will be processed within 48 hours of receipt. 100% of "clean"
electronic claims will be processed within 72 hours of receipt.
Measurement: Turnaround time is measured as the time elapsed from when a
claim is received until it is processed. An electronic claim is considered
processed when a request for an EOB, payment or response is generated to
the Member Services Vendor. An electronic claim is considered "clean" when
information is complete and received in a readable, electronic format.
This standard will become effective on April 1, 1998.
PENALTY: (***) of the Administrative Service Fee if United fails to meet
this standard on an annualized calendar year basis.
FINANCIAL ACCURACY: 99%
Measurement: Financial accuracy will be measured on a random sample basis.
The absolute value of over and under payments will be added to calculate
total financial errors and the result will be divided by the total audited
supplemental benefits paid to derive the error rate. An audit of the
results will be conducted by a separate group to verify the randomness of
the sample, the methodology used and the result reported. AARP may
commission its own sample audit for the purposes of validating United's
measurement. If the results of AARP's audit are less than 99%, United will
develop an action plan with AARP to correct any process, procedures, or
training deficiencies. Activation of this standard will become effective
on April 1, 1998.
PENALTY: (***) of the Administrative Service Fee if United fails to meet
this standard on an annualized calendar year basis.
4. MEMBERSHIP
The membership category will be measured in terms of customer satisfaction
and Medicare supplemental membership growth as follows:
Customer Satisfaction
Customer satisfaction will be based on a regular survey of
members who have had contacts with United (either by telephone or
claims
*** Denotes confidential information that has been omitted from the exhibit
and filed with the SEC pursuant to Rule 24b-2 of the Exchange Act.
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submissions). The survey instrument will be developed by United
and AARP. At least 85% of members will respond "satisfied" or
"very satisfied." A penalty of 1% of the Administrative Service
Fee will apply if the foregoing standard is not satisfied.
Medicare Supplemental Membership Growth
A Medicare Supplemental Membership Growth Incentive for each
Policy Year will be based on the Growth Factor for such Policy
Year in accordance with the following table:
GROWTH FACTOR GROWTH INCENTIVE
LESS THAN 3% (***)
3-4% (***)
4-5% (***)
5-6% (***)
6%+ (***)
The Growth Incentive percentage shall be applied to the
Administrative Service Fee.
*** Denotes confidential information that has been omitted from the exhibit
and filed with the SEC pursuant to Rule 24b-2 of the Exchange Act.
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EXECUTION COPY
EXHIBIT 3.2.8(a)
REPORTING STANDARDS
- - United shall maintain an on-line computer system capable of collecting and
storing, for documentation purposes, the changes and approvals of the SHIP.
- - United shall maintain an on-line communications source (which source must
be approved by AARP in its reasonable discretion) which provides AARP with
immediate, read-only access to claim history data.
- - United shall develop, if necessary, and maintain research data and a member
profiling process which matches product design to AARP member interests.
- - United's computer system shall compile reports containing the following
data: results of operation for claim, actuarial and underwriting business
functions.
- - United shall have the ability and capacity to transmit electronically the
following information to AARP and the Member Services Vendor: timing,
product features and claim information. United will also provide access
rules (create, read, update or delete) for its data files and access paths.
United shall also develop and maintain the ability to query AARP member
information data and information regarding AARP member inquiries to assist
in campaign design.
- - United shall develop and maintain (i) Claims Databases which capture claim
payment and history and (ii) access functions to AARP member profiles,
coverage's and claim history. All claims shall be tied into the Member
Services Member's databases.
-12-
<PAGE>
EXHIBIT 4.2.1 - AARP MARKS
-- AARP (acronym)
--American Association of Retired Persons (name)
-- TRADEMARK
SERVICE MARK
PRINCIPAL REGISTER
AARP
AMERICAN ASSOCIATION OF RETIRED FIRST USE 9-15-1984; IN
PERSONS (D.C. NOT-PROFIT COMMERCE 9-15-1984.
CORPORATION) FOR: TRAVEL AGENCY SERVICES IN
1909 K ST., NW CLASS 39 (U.S. CL. 105).
WASHINGTON, DC 20049 FIRST USE 9-15-1984 IN
COMMERCE 9-15-1984.
FOR: MAGAZINES, NEWSLETTERS FOR: CONDUCTING SEMINARS AND
AND CATALOGS. PERTAINING TO EDUCATIONAL PROGRAMS ON A
RETIREMENT AND THE CONCERNS OF VARIETY OF SUBJECTS THAT
OLDER PERSONS. IN CLASS 16 (U.S. CL. CONCERN RETIRED PERSONS. IN
38). CLASS 41 (U.S. CL. 107).
FIRST USE 8-22-1984; IN COMMERCE FIRST USE 9-15-1984; IN
8-22-1984. COMMERCE 9-15-1984.
FOR: INCOME TAX PREPARATION FOR: RETAIL STORE AND MAIL
SERVICES: AND ARRANGING ORDER PHARMACY SERVICES. IN
THROUGH THIRD PARTY PROVIDERS. CLASS 42 (U.S. CL. 101).
INVESTMENT IN MONEY MARKET FIRST USE 9-15-1984; IN
INSTRUMENTS AND MUTUAL FUNDS. COMMERCE 9-15-1984.
IN CLASS 35 (U.S. CLS. 101 AND 102). OWNER OF U.S. REG. NOS.
FIRST USE 9-15-1984; IN COMMERCE 741,334, 1,296,948 AND OTHERS.
9-15-1984.
FOR: MONEY MANAGEMENT AND SER. NO. 505,904,
INVESTMENT ADVISORY SERVICES; FILED 10-29-1984.
AND ADMINISTERING AUTOMOBILE.
GROUP HEALTH AND HOMEOWNER'S JOHN P. RYNKIEWICZ. EXAMINING
INSURANCE PROGRAMS. IN CLASS 36 ATTORNEY
(U.S. CL. 102)
-13-
<PAGE>
EXECUTION COPY
EXHIBIT 5.1.9
AGENCY RATINGS OF UNITED
Minimum Required
Rating Agency Current Rating Ratings*
- ------------- -------------- ----------------
A.M. Best A B
Standard & Poor's BBB BBB
__________________
* Minimum rating required for purposes of Section 10.2(g).
-14-
<PAGE>
EXECUTION COPY
EXHIBIT 5.2
AARP/AARP TRUST DISCLOSURE SCHEDULE
The Internal Revenue Service is conducting an ongoing review of the
activities of AARP and AARP Trust.
-15-
<PAGE>
EXHIBIT 6.2.1(b) - Structure for Analyzing and Committing to Administrative Fees
- ----------------
<TABLE>
<CAPTION>
1997 1998 1999 2000
<S> <C> <C> <C> <C>
Average Insured Members X,XXX,XXX X,XXX,XXX X,XXX,XXX X,XXX,XXX
Paid Claim Volume XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX
Claims/Member/Year XX.X XX.X XX.X XX.X
Medicare Crossover Rate XX.X% XX.X% XX.X% XX.X%
December Census X,XXX X,XXX X,XXX X,XXX
Claim Department XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX
Central Departments XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX
Corporate Overhead Allocations 0 XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX
(***)
Total Included in PMPM
Guarantee XXX,XXX,XXX XXX,XXX,XXX XXX,XXX,XXX XXX,XXX,XXX
PMPM $X.XX $X.XX $X.XX $X.XX
Pass Throughs
- -------------
Postage XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX
Cross Over Claim XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX
Severance 0 X,XXX,XXX X,XXX,XXX X,XXX,XXX
Other 0 X,XXX,XXX X,XXX,XXX X,XXX,XXX
Total Pass Throughs XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX
Grand Total Included in
Retention XXX,XXX,XXX XXX,XXX,XXX XXX,XXX,XXX XXX,XXX,XXX
Claim Department: Claim Processing Staff, Fraud, Recovery and
associated expenses.
Central Departments: AARP CEO,Underwriting,Actuarial, Legal, Product
Development,Finance and other staff dedicated to
AARP.
Corporate Overhead Alloc.: Allocation of United's Corporate Overhead which
includes HR, Central Finance, Facilities and Other
Adjustments to PMPM in Future Years
- -----------------------------------
For every (***) that average monthly membership is above X,XXX,XXX the PMPM will decrease by $.0X
For every (***) that average monthly membership is above X,XXX,XXX the PMPM will increase by $.0X
For every (***) that average claims per member per year is above XX.X the PMPM will increase $.0X
For every (***) that average claims per member per year is below XX.X the PMPM will decrase $.0X
For every percentage point that CPI is above (***) the PMPM will increase $.0X
For every percentage point that CPI is below (***) the PMPM will decrease $.0X
</TABLE>
*** Denotes confidential information that has been omitted from the exhibit
and filed separately accompanied by a confidential treatment request with
the SEC pursuant to Rule 24b-2 of the Exchange Act.
-16-
<PAGE>
EXECUTION COPY
EXHIBIT 6.5
TAX TIMING EXPENSE
1. DEFERRED ACQUISITION COST TAX. The charge relating to deferred acquisition
costs shall be the amount of SHIP Member Contributions subject to the DAC
Tax, multiplied by the percentage of such SHIP Member Contributions by
which United's current deductions are reduced (currently 7.7 percent),
multiplied by United's Tax Rate, multiplied by an annuity factor reflecting
the schedule for recovery of the deferred deductions, United's Tax Rate and
the Investment Income Credit Rate.
2. DISCOUNTING OF CLAIM RESERVES. The charge relating to the discounting of
claim reserves shall be the amount of claim reserves reflected in the
rating as of the end of the rating period, multiplied by a factor
representing the discount prescribed under Code section 846, multiplied by
United's Tax Rate, multiplied by the Investment Income Credit Rate.
3. TAX BASIS OF ACTIVE LIFE RESERVES. The charge relating to the tax basis of
the Active Life Reserves shall be the amount of Active Life Reserves
established in the rating as of the end of the rating period, reduced by
the amount of such reserves adjusted to the basis permitted by Code section
807, such difference to be multiplied by United's Tax Rate, and then
multiplied by the Investment Income Credit Rate.
4. NONDEDUCTIBILITY OF THE RSF. The charge relating to nondeductibility of
the RSF shall be the amount of the nondeductible RSF reflected in the
rating as of the end of the rating period, multiplied by United's Tax Rate,
multiplied by the Investment Income Credit Rate.
5. PARTIAL DEDUCTIBILITY OF RESERVES FOR EXPERIENCE RATING REFUNDS. The
charge relating to the partial deductibility of reserves for experience
rating refunds shall be the amount of such reserves reflected in the rating
as of the end of the rating period, multiplied by the percentage of such
reserves by which United's current deductions are reduced under Code
section 832, multiplied by United's Tax Rate, multiplied by the Investment
Income Credit Rate.
6. PARTIAL DEDUCTIBILITY OF RESERVES FOR UNEARNED PREMIUM. The charge
relating to the partial deductibility of reserves for unearned premium
shall be the amount of such reserves reflected in the ratings as of the end
of the rating
-17-
<PAGE>
EXECUTION COPY
EXHIBIT 7.4.2
DEVELOPED MARKS
-18-
<PAGE>
EXECUTION COPY
EXHIBIT 7.7.2
DEVELOPED SYSTEMS
-19-
<PAGE>
EXECUTION COPY
EXHIBIT 9.5.2
VENDOR MANAGING REPRESENTATIVES
GHIP VENDOR MANAGING REPRESENTATIVE
Hartford Fire Insurance Company John Minniti
Metropolitan Life Insurance Company Joyce Ruddock
Seabury & Smith, Inc. Rick Sobel
(Marsh & McLennan)
United HealthCare Insurance Company Lois Quam
-20-
<PAGE>
EXHIBIT 11
UNITED HEALTHCARE CORPORATION
STATEMENT RE COMPUTATION OF PER COMMON SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1996 1995 1994
----------- ----------- ----------
(in thousands, except per share data)
PRIMARY:
- --------
<S> <C> <C> <C>
NET EARNINGS BEFORE EXTRAORDINARY GAIN $355,637 (1) $285,964 (2) $ 288,139 (3)
EXTRAORDINARY GAIN ON SALE OF SUBSIDIARY -- -- 1,377,075
LESS CONVERTIBLE PREFERRED STOCK DIVIDENDS 28,752 7,188 --
----------------------------------------
NET EARNINGS APPLICABLE TO COMMON
SHAREHOLDERS $326,885 $278,776 $1,665,214
----------------------------------------
----------------------------------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Weighted average number of common shares
outstanding 181,601 173,587 170,711
Additional equivalent shares issuable from assumed
exercise of stock options 4,244 3,856 4,498
----------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 185,845 177,443 175,209
----------------------------------------
----------------------------------------
NET EARNINGS PER COMMON SHARE BEFORE
EXTRAORDINARY GAIN $ 1.76 (1) $ 1.57 (2) $ 1.64 (3)
EXTRAORDINARY GAIN PER COMMON SHARE -- -- 7.86
----------------------------------------
NET EARNINGS PER COMMON SHARE $ 1.76 $ 1.57 $ 9.50
----------------------------------------
----------------------------------------
FULLY DILUTED:
- --------------
NET EARNINGS BEFORE EXTRAORDINARY GAIN $355,637 $285,964 $ 288,139
EXTRAORDINARY GAIN ON SALE OF SUBSIDIARY -- -- 1,377,075
----------------------------------------
NET EARNINGS APPLICABLE TO COMMON
SHAREHOLDERS $355,637 $285,964 $1,665,214
----------------------------------------
----------------------------------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Weighted average number of common shares
outstanding 181,601 173,587 170,711
Additional equivalent shares issuable from assumed
exercise of stock options 4,232 5,132 4,506
Assumed conversion of convertible preferred stock 10,106 2,547 --
----------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 195,939 181,266 175,217
----------------------------------------
----------------------------------------
NET EARNINGS PER COMMON SHARE BEFORE
EXTRAORDINARY GAIN $ 1.82 $ 1.58 $ 1.64
EXTRAORDINARY GAIN PER COMMON SHARE -- -- 7.86
----------------------------------------
NET EARNINGS PER COMMON SHARE $ 1.82 (4) $ 1.58 (4) $ 9.50 (5)
----------------------------------------
----------------------------------------
</TABLE>
<PAGE>
(1) Excluding the non-operating merger costs associated with the acquisition
of HealthWise of America, Inc. of $14.9 million ($9.1 million after tax,
or $0.05 per common share) and the provision for future losses on two
multi-year contracts of $45.0 ($27.4 million after tax, or $0.15 per
common share), 1996 net earnings would have been $392.2 million, or $1.96
per common share.
(2) Excluding restructuring charges of $153.8 million ($96.9 million after
tax, or $0.55 per common share) associated with the acquisition of The
MetraHealth Companies, Inc., 1995 net earnings would have been $382.9
million, or $2.12 per common share.
(3) Excluding the non-operating merger costs of $35.9 million ($22.3 million
after tax, or $0.13 per common share) incurred in connection with the
acquisitions of Complete Health Services, Inc. and Ramsay-HMO, Inc., 1994
net earnings before extraordinary gain would have been $310.4 million, or
$1.77 per common share.
(4) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
(5) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING RESULTS
Revenues $10,073,790 $5,670,878 $3,768,882 $3,115,202 $2,200,636
Earnings from Operations $ 596,410(1) $ 460,785(2) $ 506,047 $ 336,351 $ 207,306
- ------------------------------------------------------------------------------------------------------------------
Net Earnings Before
Extraordinary Gain $ 355,637(1) $ 285,964(2) $ 288,139(3) $ 212,078 $ 130,591
Extraordinary Gain on Sale of
Subsidiary, net -- -- 1,377,075 -- --
- ------------------------------------------------------------------------------------------------------------------
Net Earnings $ 355,637(1) $ 285,964(2) $1,665,214 $ 212,078 $ 130,591
Convertible Preferred Stock Dividends 28,752 7,188 -- -- --
- ------------------------------------------------------------------------------------------------------------------
Net Earnings Applicable to
Common Shareholders $ 326,885 $ 278,776 $1,665,214 $ 212,078 $ 130,591
- ------------------------------------------------------------------------------------------------------------------
Net Earnings Per Common Share
Net Earnings Before
Extraordinary Gain $ 1.76(1) $ 1.57(2) $ 1.64(3) $ 1.23 $ 0.79
Extraordinary Gain -- -- 7.86 -- --
- ------------------------------------------------------------------------------------------------------------------
Net Earnings $ 1.76(1) $ 1.57(2) $ 9.50 $ 1.23 $ 0.79
- ------------------------------------------------------------------------------------------------------------------
Dividends Per Share
Common Stock $ 0.03 $ 0.03 $ 0.03 $ 0.015 $ 0.0075
Convertible Preferred Stock $ 57.50 $ 14.38 -- -- --
Weighted-average Number of
Common Shares Outstanding 185,845 177,443 175,209 171,739 166,091
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL POSITION (AT YEAR END)
Cash and Investments $3,452,261 $3,078,395 $2,769,390 $1,169,433 $ 923,576
Total Assets $6,996,630 $6,160,986 $3,489,479 $1,787,354 $1,321,174
Long-term Obligations $ 29,443 $ 31,152 $ 24,275 $ 39,099 $ 24,132
Shareholders' Equity $3,823,087 $3,188,020 $2,795,456 $1,085,410 $ 822,903
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Financial Highlights should be read in conjunction with Financial Review
and Consolidated Financial Statements and notes thereto included in this
Annual Report.
1 Excluding the non-operating merger costs associated with the acquisition of
HealthWise of America, Inc. of $14.9 million ($9.1 million after tax, or
$0.05 per common share) and the provision for future losses on two
multi-year contracts of $45.0 million ($27.4 million after tax, or $0.15 per
common share), 1996 earnings from operations and net earnings would have
been $641.4 million and $392.2 million, or $1.96 per common share.
2 Excluding restructuring charges of $153.8 million ($96.9 million after tax,
or $0.55 per common share) associated with the acquisition of The
MetraHealth Companies, Inc., 1995 earnings from operations and net earnings
would have been $614.6 million and $382.9 million, or $2.12 per common
share.
3 Excluding the non-operating merger costs of $35.9 million ($22.3 million
after income taxes, or $0.13 per common share) incurred in connection with
the acquisitions of Complete Health Services, Inc. and Ramsay-HMO, Inc.,
1994 net earnings before extraordinary gain would have been $310.4 million,
or $1.77 per common share.
________________________________________________________________________________
18 United HealthCare - 1996 Annual Report
<PAGE>
FINANCIAL REVIEW
The Company has completed several recent transactions which affect the
year-to-year comparability of its consolidated financial position and results
of operations. The most significant of these transactions was the Company's
October 2, 1995, acquisition of The MetraHealth Companies, Inc.
(MetraHealth). MetraHealth was formed in January 1995 by combining the group
health care operations of Metropolitan Life Insurance Company and The
Travelers Insurance Group. At the time of acquisition, MetraHealth served
over 10 million individuals, including 5.9 million in network-based care
programs, 469,000 of whom were health plan members.
In addition to MetraHealth, the Company acquired four other companies during
1996 and 1995 with health plan operations. On April 12, 1996, the Company
acquired HealthWise of America, Inc. (HealthWise), a health care management
company that owned or operated health plans in Maryland, Kentucky, Tennessee and
Arkansas serving 154,000 members at the time of acquisition.
On March 29, 1996, the Company acquired PHP, Inc. (PHP), a health plan based
in Greensboro, North Carolina, serving 132,000 members at the time of
acquisition. On February 28, 1995, the Company acquired Group Sales and Services
of Puerto Rico, Inc. (Group Sales), a health plan based in San Juan, Puerto
Rico, serving 135,000 members at the time of acquisition. On January 3, 1995,
the Company acquired GenCare Health Systems, Inc. (GenCare), a health plan based
in St. Louis, Missouri, serving 230,000 members at the time of acquisition.
The acquisition of HealthWise was accounted for as a pooling of interests;
however, the Company's consolidated financial results were not restated because
the effects of the acquisition on the Company's consolidated financial
statements were not material. The MetraHealth, PHP, Group Sales and GenCare
acquisitions were accounted for as purchase transactions. Accordingly, only the
post-acquisition results of all of these acquired companies are included in the
Company's consolidated financial statements.
This Financial Review should be read in conjunction with the accompanying
Consolidated Financial Statements and notes thereto.
SUMMARY OPERATING INFORMATION
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------------------------------
AMOUNT OR PERCENT Amount or Percent Amount or
PERCENT INCREASE (DECREASE) Percent Increase Percent
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 10,073,790(1) 78% $5,670,878(2) 51% $3,768,882(3)
Net Operating Earnings $ 392,217(1) 2% $ 382,864(2) 23% $ 310,439(3)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Medical Costs to Premium Revenues 84.0%(1) 79.7% 78.3%
SG&A Expenses to Total Revenues 21.5% 18.2%(2) 14.7%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Enrollment (at year end)
Health Plan Products
Commercial 4,100(4) 36% 3,005(4) 68% 1,791(4)
Medicaid 525 49% 352 24% 285
Medicare 230 55% 148 36% 109
- ---------------------------------------------------------------------------------------------------------------------
Total Health Plan Products 4,855 39% 3,505 60% 2,185
Other Network-Based Products 5,674(4) (1)% 5,738(4) -- 67(4)
Indemnity Products 3,249(4) (26)% 4,367(4) -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Enrollment 13,778 1% 13,610 504% 2,252
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Amounts include post-acquisition operating results of PHP, Inc. acquired on
March 29, 1996, and HealthWise of America, Inc. acquired on April 12, 1996.
Amounts exclude merger costs of $14.9 million ($9.1 million after tax)
associated with the acquisition of HealthWise and the provision for future
losses on two multi-year contracts of $45.0 million ($27.4 million after
tax).
2 Amounts include post-acquisition operating results of GenCare Health
Systems, Inc., acquired on January 3, 1995; Group Sales and Services of
Puerto Rico, Inc., acquired on February 28, 1995; and The MetraHealth
Companies, Inc., acquired on October 2, 1995. Amounts exclude restructuring
charges of $153.8 million ($96.9 million after tax) associated with the
MetraHealth acquisition.
3 Amounts exclude merger costs of $35.9 million ($22.3 million after tax)
associated with the May 1994 acquisitions of Complete Health Services, Inc.
and Ramsay-HMO, Inc. The results of Complete Health and Ramsay are included
for the full year in accordance with pooling-of-interests accounting.
4 Amounts include both fully insured and self-funded enrollment. End of year
self-funded enrollment was as follows: Commercial HealthPlan
Products--313,000 in 1996, 243,000 in 1995, and 123,000 in 1994. Other
Network-Based Products--4,955,000 in 1996, 5,038,000 in 1995, and 67,000 in
1994; Indemnity Products--2,664,000 in 1996 and 3,385,000 in 1995.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 19
<PAGE>
RESULTS OF OPERATIONS
REVENUES -- Premium revenues in 1996 of $8.50 billion increased $3.57
billion, or 72%, compared to 1995. Excluding the effects of the Company's
acquisitions of MetraHealth, HealthWise and PHP, the increase in 1996 premium
revenues over 1995 was 28%, reflecting year-over-year total health plan
enrollment growth of 30% and an average year-over-year premium rate increase
on renewing commercial groups of approximately 1% to 2%.
Premium revenues in 1995 were $4.93 billion, a 46% increase over 1994.
Excluding the effects of the Company's 1995 acquisitions of MetraHealth,
Group Sales and GenCare, the increase in 1995 premium revenues over 1994 was
19%, reflecting year-over-year health plan enrollment growth of 21% and an
average premium rate increase on renewing commercial groups of approximately
1% to 2%.
The effect of year-over-year enrollment growth (excluding acquisitions) and
average premium rate increases was not fully realized in the corresponding
increases in 1996 and 1995 premium revenues due to changes in customer mix. Much
of the enrollment growth in 1996 and 1995 had been in health plan small group
products which generally are characterized as having lower benefits (and
therefore lower premiums) than the Company's other commercial health plan
products.
New and renewal commercial health plan premium rates generally are
established by the Company based on anticipated health care costs. Over the past
several years, the Company had been able to effectively manage health care costs
and maintain the rate at which its health care costs had grown within the
commercial health plan line of business to low single-digit percentage
increases. Commercial health plan premium rates were set accordingly. However, a
number of factors contributed to an adverse relationship between the Company's
1996 commercial health plan premium rate increases and the corresponding
increase in health care costs. Competition for commercial enrollment in certain
of the Company's health plan markets had increased in recent years, particularly
related to calendar year 1995 and January 1996 renewal business. The January
renewal period is significant for the Company as approximately 45% of its
existing commercial health plan enrollment renews in that month. In addition,
when establishing premium rates for late 1995 and January 1996 new and renewing
commercial health plan business, the Company believed that its commercial health
plan health care cost trend for 1996 would be 1% to 2%, similar to the
corresponding health care cost trend experienced in 1995.
However, the Company now believes the current year-over-year health care
cost trend experienced by its commercial health plan business in 1996 was 3% to
4%. Lastly, anticipated health care provider contract savings associated with
the MetraHealth health plan products had not been realized in time to match the
pricing decisions made for these products in late 1995 and into 1996. These
products comprised approximately 15% of MetraHealth's total revenues in 1995. As
a result of all of these factors, the health plan premium rates achieved by the
Company during late 1995 and January 1996 were less than the corresponding
increase in health care costs.
The Company currently believes that the competitive premium environment has
improved since January 1996. As a result, the Company has been able to realize
4% to 5% renewal rate increases in its commercial health plan business from
February 1996 through January 1997, which more closely reflects the higher
health care cost trend experienced by the Company for these products during
1996. New group pricing has been similarly increased. Depending on the level of
future competition, customer acceptance of the Company's premium increases, or
other factors, there can be no assurance that the Company's recent commercial
health plan enrollment growth trends will continue or that the Company will be
able to price its commercial health plan products consistent with the
corresponding health care cost trends.
As a result of its acquisition of MetraHealth, the Company had approximately
585,000 enrollees at December 31, 1996, in fully insured non-network-based
indemnity products, primarily from small group employers. These products do not
use health care cost containment measures similar to the Company's network-based
products and, accordingly, are priced differently. In response to increased
medical costs associated with these products, the Company instituted rate
increases averaging from 10% to 20% during the second half of 1995 and all of
1996. These rating actions appear to have been sufficient to cover the
corresponding increases in medical costs. As a result of these pricing decisions
and other factors, the Company has seen enrollment decreases in the non-network
based indemnity products and expects these decreases to continue throughout
1997. To the extent practicable, the Company will attempt to convert these
enrollees to its network-based managed care products. While these recent rate
increases were based on the Company's estimate of health care cost trends within
the non-network-based products, there can be no assurance that these rate
increases will be consistent with the related future health care cost
experience.
________________________________________________________________________________
20 United HealthCare - 1996 Annual Report
<PAGE>
Management services and fee revenues in 1996 of $1.40 billion were two times
more than the comparable 1995 revenues. Prior to the MetraHealth acquisition,
these revenues were primarily comprised of administrative fees relating to
services performed on behalf of the Company's managed health plans and fees
generated by the Company's specialty managed care services. Excluding the effect
of the Company's acquisitions of MetraHealth, HealthWise and PHP, the Company
recorded management services and fee revenues in 1996 of $409.1 million, a 42%
increase over 1995. The increase in management services and fee revenues can be
attributed primarily to enrollment growth within the managed health plans and an
increase in lives served by the specialty managed care services operations, most
notably in the behavioral health and demand management businesses.
The Company had approximately 7.9 million enrollees in self-funded products
at December 31, 1996, most of which related to the former MetraHealth business.
Under these funding arrangements, the Company receives a fee for the provision
of administrative services and generally assumes no financial responsibility for
health care costs associated with these products. The Company recorded
management services and fee revenues related to the former MetraHealth
self-funded products of $821.9 million in 1996, and $216.2 million in the fourth
quarter of 1995.
OPERATING EXPENSES -- The combination of the Company's pricing strategy
and its medical management efforts are reflected in its medical expense ratio
(the percent of premium revenues expensed as medical costs). The medical
expense ratio increased from 78.3% in 1994 to 79.7% in 1995, and then to
84.6% in 1996. A portion of the sequential year-over-year increases in the
medical expense ratio generally is attributable to the former MetraHealth
products (included in 1996 results, but only in one quarter of 1995) which
historically have had a higher medical expense ratio as compared to the
Company's previous products. Had the MetraHealth products been included in
the Company's financial results for all of 1995, the medical expense ratio
would have been approximately 81%. The 1996 medical expense ratio also
reflects the increasing health care cost trend of 3% to 4% as previously
discussed. In particular, the Company experienced increases in some health
care cost components within its health plan commercial products, led by
outpatient services, physician utilization and prescription drugs. Decreases
in inpatient hospital utilization in the health plans did not fully offset
the increases in these other health care services. In addition, in the second
quarter of 1996 the Company recorded a provision to cover the estimated
losses expected to be incurred through the remaining term of two large,
multi-year contracts in its St. Louis health plan of $45.0 million. These
contracts cover approximately 23% of the health plan's total commercial
insured enrollment and run through 1998. Excluding the contract loss
provision, the 1996 medical expense ratio was 84.0%.
The Company typically experiences a favorable downward seasonal trend in
health care utilization in the fourth quarter of any given year. However,
this favorable trend was not as pronounced in the fourth quarter of 1996. The
Company believes that this higher-than-expected health care utilization is
attributable to regional outbreaks of influenza observed in certain health
plans. As a result, the medical expense ratio in the fourth quarter of 1996
was 84.0%, comparable to the full year 1996 medical expense ratio, but
slightly better than the 84.4% reported in the third quarter of 1996.
Selling, general and administrative expenses as a percent of total revenues
(the SG&A ratio) increased from 14.7% in 1994, to 18.2% in 1995, and then to
21.5% in 1996. As expected, the MetraHealth acquisition had a significant impact
on the Company's selling, general and administrative expenses (in total dollars
as well as a percentage of revenue) because a greater proportion of the former
MetraHealth business consists of fee-based, self-funded products rather than
products which generate full premium revenue. Since the MetraHealth acquisition
at the beginning of the fourth quarter of 1995, the Company has successfully
achieved selling, general and administrative efficiencies resulting in a
decrease in the SG&A ratio from 24.2% in the fourth quarter of 1995 to 21.5% in
1996.
Depreciation and amortization was $133.2 million in 1996, $94.5 million
in 1995, and $64.1 million in 1994. Depreciation and amortization increased
each year due to higher levels of capital expenditures in support of the
growth in business and the amortization of goodwill and other intangible
assets related to the recent acquisitions of MetraHealth, PHP, Group Sales
and GenCare.
In connection with its acquisition of MetraHealth, the Company developed a
comprehensive plan to integrate the business activities of the combined
companies. The plan encompassed, among other matters, the disposition,
discontinuance and restructuring of certain businesses and product lines, and
the recognition of certain asset impairments. In the fourth quarter of 1995, the
Company recorded $153.8 million in restructuring charges associated with the
plan. The restructuring charges did not cover certain aspects of the plan,
including new information systems, anticipated operating losses from businesses
to be discontinued, employee relocation, and training. These costs are being
recognized in future periods as incurred.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 21
<PAGE>
MERGER COSTS -- In connection with its April 1996 acquisition of
HealthWise, the Company recorded non-operating merger costs of $14.9 million,
consisting primarily of professional fees and other direct costs associated
with the acquisition.
EXTRAORDINARY GAIN ON SALE OF SUBSIDIARY -- On May 27, 1994, the Company
sold Diversified Pharmaceutical Services, Inc., then a wholly owned
subsidiary, to SmithKline Beecham Corporation for $2.30 billion in cash. In
connection with this transaction, the Company recognized an extraordinary
gain after transaction costs and income tax effects of $1.38 billion.
GOVERNMENT REGULATION
The Company's primary business, offering health care coverage and health
care management services, is heavily regulated at both the federal and state
levels. The Company believes that it is in compliance in all material respects
with the various federal and state regulations applicable to its current
operations. To maintain such compliance, it may be necessary for the Company or
one of its subsidiaries to make changes from time to time in its services,
products, marketing methods, or organizational or capital structure.
Government regulation of health care coverage products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Changes in
applicable laws and regulations are continually being considered and the
interpretation of existing laws and rules also may change from time to time.
Regulatory agencies generally have broad discretion in promulgating regulations
and in interpreting and enforcing laws and rules.
While the Company is unable to predict what regulatory changes may occur or
the impact on the Company of any particular change, the Company's operations and
financial results could be negatively affected by regulatory revisions. Certain
proposed changes in Medicare and Medicaid programs may increase the
opportunities for the Company to enroll people under products developed for the
Medicare-and Medicaid-eligible populations. Other proposed changes also may
limit the reimbursement available to the Company and increase competition in
those programs, which could adversely affect the Company's financial results.
The continued consideration and enactment of "anti-managed care" laws and
regulations, such as "any willing provider" laws and limits on utilization
management, by federal and state bodies may make it more difficult for the
Company to control medical costs and may adversely affect financial results.
A number of jurisdictions have enacted small group insurance and rating
reforms, which generally limit the ability of insurers and health plans to use
risk selection as a method of controlling medical costs for small group
business. These laws generally may limit or eliminate use of preexisting
conditions exclusions, experience rating and industry class rating, and may
limit the amount of rate increases from year to year. Under these laws, medical
cost control through provider contracting and managing care may become more
important, and the Company currently believes its experience in these areas will
allow it to compete effectively.
In addition to changes in applicable laws and rules, the Company is
potentially subject to governmental investigations and enforcement actions.
These include possible government actions relating to the federal Employee
Retirement Income Security Act (ERISA), which regulates insured and
self-insured health coverage plans offered by employers, and the Company's
employers, the Federal Employees Health Benefit Plan (FEHBP), federal and
state fraud and abuse laws, and laws relating to utilization management and
the delivery of health care. Any such government action could result in
assessment of damages, civil or criminal fines or penalties, or other
sanctions, including exclusion from participation in government programs.
Although the Company is currently involved in various government audits, such
as under the FEHBP or relating to services for ERISA plans, the Company
currently does not believe the results of such audits will have a material
adverse effect on the Company's financial position or results of operations.
INFLATION
Although the general rate of inflation has remained relatively stable and
health care cost inflation has declined in recent years, the national health
care cost inflation rate still exceeds the general inflation rate. As mentioned
previously, the Company believes the 1996 year-over-year health care cost trend
experienced in its commercial health plan business was 3% to 4%.
The Company uses various strategies to mitigate the negative effects of
health care cost inflation, including setting commercial premiums based on its
anticipated health care costs, risk-sharing arrangements with the Company's
various health care providers, and other health care cost containment measures.
Specifically, the Company's health plans attempt to control medical and hospital
costs through contractual arrangements primarily with independent providers of
health care services. Cost-effective delivery of health care services by such
health care providers is achieved by emphasizing preventive health services,
appropriate use of specialty referral services, and the reduction of unnecessary
hospitalizations.
________________________________________________________________________________
22 United HealthCare - 1996 Annual Report
<PAGE>
While the Company currently believes its strategies to mitigate health
care cost inflation will continue to be successful, competitive pressures,
new health care product introductions, demands from providers and customers,
applicable regulations or other factors may adversely affect the Company's
ability to control the impact of health care cost increases. In addition,
certain non-network-based products of the former MetraHealth business do not
have similar health care cost containment measures as the Company's
network-based managed care products. As a result, the Company is subject to
more health care cost inflation risk with these products.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash and investments increased from $3.08 billion at
December 31, 1995, to $3.45 billion at December 31, 1996. The increase in
cash and investments is primarily the result of cash generated from
operations of $562.3 million, offset by net purchases of property and
equipment of $165.2 million and cash used to settle certain purchase
considerations associated with the Company's acquisition of MetraHealth.
Under the terms of the acquisition, the former owners of MetraHealth were
eligible to receive up to an additional $350.0 million if MetraHealth
achieved certain 1995 operating results, as defined. During 1996, the Company
paid $105.4 million in cash, including interest, as full settlement of the
1995 earnout.
In addition, certain former owners of MetraHealth will be eligible to
receive up to an additional $175.0 million in cash for each of 1996 and 1997
if the Company's post-acquisition combined net earnings for each of those
years reaches certain specified levels. Based on combined 1996 operating
results, the Company does not expect to make any such payment related to the
1996 earnout.
Under applicable state regulations, several of the Company's subsidiaries
are required to maintain specified capital levels to support their operations.
After giving effect to these regulations and certain business considerations,
the Company had approximately $848.6 million in cash and investments available
for general corporate use at December 31, 1996.
As described more fully in Note 3 to the consolidated financial statements,
the Company acquired in separate transactions, HealthWise and PHP. These
transactions were completed through the exchange of shares of the Company's
common stock for all the outstanding shares of HealthWise and PHP, with the
exception of transaction costs, did not require the use of cash.
The Company continues to focus on expanding its health care programs to
the Medicare population. In the past 12 months, the number of sites offering
a Medicare health plan product increased from 8 to 19 sites. Over the same
period, health plan Medicare enrollment grew 55%. The Company continues to
invest in new markets and expects to have approximately 30 sites offering
Medicare programs by year-end 1997. Significant expenditures must be incurred
in connection with the introduction of a Medicare health plan product in a
particular site. These start-up expenditures include a lengthy and detailed
regulatory approval process, product-specific provider contracting and
network configuration, high up-front sales and marketing costs, and staffing
of service areas in advance of product sales. The Company expects to incur
operating losses from its Medicare products in these start-up markets usually
for the first 12 to 18 months until Medicare enrollment is sufficient to
cover the corresponding administrative cost structure in each site.
In February 1997, the Company completed a contract to deliver Medicare
supplement insurance and develop an array of new products for the American
Association of Retired Persons (AARP) beginning in January 1998. Under the terms
of the 10-year contract, the Company's portion of the AARP insurance offerings
represents approximately $4.0 billion in annual premium revenue from over 5
million policyholders (based on year-end 1996 figures).
The Company currently believes its available cash resources will be
sufficient to meet its current operating requirements and internal development
and integration initiatives. In addition, the Company believes that, based on
its current financial condition and results of operations, it would be able to
finance additional cash requirements in the public or private markets, if
necessary.
There currently are no other material definitive commitments for future use
of the Company's available cash resources; however, management continually
evaluates opportunities to expand its operations, which includes internal
development of new products and programs and may include additional
acquisitions.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 23
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $ 8,490,304 $ 4,931,355 $ 3,376,238
Management Services and Fees 1,398,217 579,707 274,616
Investment and Other Income 185,269 159,816 118,028
- ------------------------------------------------------------------------------------------------------------------
Total Revenues 10,073,790 5,670,878 3,768,882
- ------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Medical Costs 7,179,679 3,930,933 2,643,107
Selling, General and Administrative Costs 2,164,535 1,030,906 555,649
Depreciation and Amortization 133,166 94,458 64,079
Restructuring Charges -- 153,796 --
- ------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 9,477,380 5,210,093 3,262,835
- ------------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 596,410 460,785 506,047
Interest Expense (592) (771) (2,163)
Merger Costs (14,968) -- (35,940)
- ------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES, MINORITY INTERESTS AND
EXTRAORDINARY GAIN 580,850 460,014 467,944
Provision for Income Taxes (224,598) (170,205) (177,822)
Minority Interests in Net Earnings of Consolidated Subsidiaries (615) (3,845) (1,983)
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS BEFORE EXTRAORDINARY GAIN 355,637 285,964 288,139
EXTRAORDINARY GAIN ON SALE OF SUBSIDIARY,
NET OF INCOME TAXES OF $808,758 -- -- 1,377,075
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS 355,637 285,964 1,665,214
CONVERTIBLE PREFERRED STOCK DIVIDENDS 28,752 7,188 --
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS $ 326,885 $ 278,776 $ 1,665,214
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY GAIN $ 1.76 $ 1.57 $ 1.64
EXTRAORDINARY GAIN PER COMMON SHARE -- -- 7.86
- ------------------------------------------------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE $ 1.76 $ 1.57 $ 9.50
- ------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 185,845 177,443 175,209
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
________________________________________________________________________________
24 United HealthCare - 1996 Annual Report
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,036,716 $ 940,110
Short-term investments 610,572 863,815
Accounts receivable, net of allowances of $46,322 and $27,184 605,801 550,313
Assets under management 155,090 309,170
Other 331,485 203,713
- ------------------------------------------------------------------------------------------------------------------
Total Current Assets 2,739,664 2,867,121
Long-term Investments 1,804,973 1,274,470
Property and Equipment, net of accumulated depreciation
of $275,355 and $149,514 312,984 267,652
Goodwill and Other Intangible Assets, net of accumulated
amortization of $136,700 and $76,203 2,139,009 1,751,743
- ------------------------------------------------------------------------------------------------------------------
Total Assets $ 6,996,630 $ 6,160,986
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical costs payable $ 1,516,111 $ 1,201,421
Other policy liabilities 334,039 412,528
Accounts payable 73,077 79,796
Accrued expenses 491,297 566,770
Unearned premiums 228,258 173,481
- ------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,642,782 2,433,996
Long-term Obligations and Minority Interests 30,761 38,970
Convertible Preferred Stock 500,000 500,000
Commitments and Contingencies (Note 10)
- ------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.01 par value -- 500,000,000 shares authorized;
184,865,000 and 175,215,000 issued and outstanding 1,849 1,752
Additional paid-in capital 1,148,039 822,429
Retained earnings 2,680,191 2,358,640
Net unrealized holding gains (losses) on investments available
for sale, net of income tax effects (6,992) 5,199
- ------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 3,823,087 3,188,020
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 6,996,630 $ 6,160,986
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
________________________________________________________________________________
United HealthCare - 1996 Annual Report 25
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
HOLDING GAINS
COMMON STOCK ADDITIONAL (LOSSES)
---------------------- PAID IN RETAINED ON INVESTMENTS
SHARES AMOUNT CAPITAL EARNINGS AVAILABLE FOR SALE TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 169,100 $ 1,691 $ 659,359 $ 424,360 $ -- $1,085,410
Issuance of Common Stock
Stock Plans and Related Tax Benefits 3,731 37 93,113 -- -- 93,150
Change in Net Unrealized Holding
Losses on Investments Available
for Sale, net of income tax effects -- -- -- -- (43,765) (43,765)
Amortization of Deferred Compensation -- -- -- 73 -- 73
Cash Dividend
Common Stock ($0.03 per share) -- -- -- (4,626) -- (4,626)
Net Earnings -- -- -- 1,665,214 -- 1,665,214
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 172,831 1,728 752,472 2,085,021 (43,765) 2,795,456
Issuance of Common Stock
Stock Plans and Related Tax Benefits 2,384 24 69,957 -- -- 69,981
Change in Net Unrealized Holding
Gains on Investments Available
for Sale, net of income tax effects -- -- -- -- 48,964 48,964
Amortization of Deferred Compensation -- -- -- 35 -- 35
Cash Dividends
Common Stock ($0.03 per share) -- -- -- (5,192) -- (5,192)
Convertible Preferred Stock
($14.38 per share) -- -- -- (7,188) -- (7,188)
Net Earnings -- -- -- 285,964 -- 285,964
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 175,215 1,752 822,429 2,358,640 5,199 3,188,020
Issuance of Common Stock
Stock Plans and Related Tax Benefits 1,721 17 56,351 -- -- 56,368
1996 Acquisitions 7,929 80 269,259 -- -- 269,339
Change in Net Unrealized Holding
Losses on Investments Available
for Sale, net of income tax effects -- -- -- -- (12,191) (12,191)
Cash Dividends
Common Stock ($0.03 per share) -- -- -- (5,334) -- (5,334)
Convertible Preferred Stock
($57.50 per share) -- -- -- (28,752) -- (28,752)
Net Earnings -- -- -- 355,637 -- 355,637
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 184,865 $ 1,849 $1,148,039 $2,680,191 $ (6,992) $3,823,087
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
________________________________________________________________________________
26 United HealthCare - 1996 Annual Report
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 355,637 $ 285,964 $ 1,665,214
Non-cash Items
Depreciation and amortization 133,166 94,458 64,079
Non-cash restructuring charges -- 141,137 --
Gain on sales of subsidiaries, net -- -- (1,377,075)
Provision for future losses 45,000 -- --
Other (7,920) (5,724) (4,267)
Net Change in Other Operating Items, net of effects from
acquisitions and sales of subsidiaries
Accounts receivable and other current assets (137,431) (25,079) (24,486)
Medical costs payable 321,336 143,231 (17,931)
Accounts payable (10,659) (25,854) (84,324)
Accrued expenses and other current liabilities (190,557) (189,163) 105,757
Unearned premiums 53,687 15,305 (710)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities 562,259 434,275 326,257
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash Paid for Acquisitions, net of cash assumed and other effects (51,864) (969,392) (51,442)
Cash Received from Sales of Subsidiaries, net of cash
surrendered and other effects -- -- 2,298,819
Cash Paid for Income Taxes and Transaction Costs Related
to Sale of Subsidiary -- -- (836,253)
Net Purchases of Property and Equipment (165,223) (109,230) (79,609)
Purchases of Investments Available for Sale (4,976,898) (3,268,664) (1,334,654)
Maturities/Sales of Investments Available for Sale 4,727,448 3,306,140 956,808
Purchases of Investments Held to Maturity (31,950) (20,522) (20,205)
Maturities of Investments Held to Maturity 27,481 14,957 8,005
Other (1,504) 961 (2,373)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from (Used for) Investing Activities (472,510) (1,045,750) 939,096
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Proceeds from Stock Option Exercises 41,563 41,374 48,609
Payment of Long-term Obligations (620) (3,646) (18,547)
Dividends Paid
Convertible Preferred Stock (28,752) -- --
Common Stock (5,334) (5,192) (4,626)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities 6,857 32,536 25,436
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 96,606 (578,939) 1,290,789
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 940,110 1,519,049 228,260
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,036,716 $ 940,110 $ 1,519,049
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
________________________________________________________________________________
United HealthCare - 1996 Annual Report 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 DESCRIPTION OF BUSINESS
United HealthCare Corporation (the Company) is a national leader in offering
health care coverage and related services through a broad continuum of products
and services in all 50 states and Puerto Rico. The Company's products and
services reflect a number of core capabilities, including medical information
management, health benefit administration, risk assessment and pricing, health
benefit design, and provider contracting and risk sharing. With these
capabilities, the Company is able to provide comprehensive managed care
services, such as health maintenance organizations, insurance and self-funded
health care coverage products. The Company also offers unbundled health care
management and cost containment products such as mental health and substance
abuse services, utilization review services, specialized provider networks, and
employee assistance programs.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
These consolidated financial statements include some amounts that are based
on management's best estimates and judgments. The most significant estimates
relate to medical costs payable and other policy liabilities, intangible asset
valuations and integration reserves relating to the Company's recent
acquisitions. These estimates are subject to adjustment as more accurate
information becomes available and any such adjustment could be significant.
REVENUE RECOGNITION -- Premium revenues are recognized in the period in
which enrolled members are entitled to receive health care services. Premiums
received prior to such period are recorded as unearned premiums. Management
services and fee revenues are recognized in the period the related services
are performed.
Premium revenues related to Medicare and Medicaid programs as a percentage
of total premium revenues were 19% in 1996, 22% in 1995, and 26% in 1994.
MEDICAL COSTS -- Medical costs include claims paid, claims in process and
pending, and estimated unreported claims and charges by physicians, hospitals
and other health care providers for services rendered to enrolled members during
the period. Medical cost adjustments to prior period estimates are reflected in
the current period.
CASH AND CASH EQUIVALENTS AND INVESTMENTS -- Cash and cash equivalents are
highly liquid investments with an original maturity of three months or less. The
fair value of cash and cash equivalents approximates carrying value because of
the short maturity of the instruments. Investments with a maturity of less than
one year are classified as short-term.
Investments held by trustees or agencies pursuant to state regulatory
requirements are classified as held to maturity based on the Company's ability
and intent to hold these investments to maturity. Such investments are presented
at amortized cost. All other investments are classified as available for sale
and are reported at fair value based on quoted market prices, with unrealized
gains and losses excluded from earnings and reported as a separate component of
shareholders' equity, net of income tax effects. For purposes of calculating
realized gains and losses on the sale of investments available for sale, the
amortized cost of each investment sold is used. The Company has no investments
it classifies as trading securities.
ASSETS UNDER MANAGEMENT -- In connection with its 1995 acquisition of The
MetraHealth Companies, Inc. (MetraHealth) (see Note 3), the Company is
administering certain aspects of the health care operations of MetraHealth's
predecessor companies related to business expected to be conveyed to the
Company pursuant to agreements effected in conjunction with the initial
formation of MetraHealth. Upon conveyance to the Company, the associated
assets will be invested in marketable securities in accordance with the
Company's investment policy.
________________________________________________________________________________
28 United HealthCare - 1996 Annual Report
<PAGE>
OTHER POLICY LIABILITIES -- Other policy liabilities principally relate
to experience-rated indemnity products written by MetraHealth or its
predecessor companies and are comprised primarily of retrospective rate
credit reserves and customer balances.
Retrospective rate credit reserves represent premiums received in excess
of claims and expenses charged under eligible contracts. Reserves established
for closed policy years are based on actual experience, while reserves for
open years are based on estimates of premiums, claims and expenses incurred.
Customer balances consist principally of deposit accounts and reserves
that have accumulated under certain experience-rated contracts. At the
customer's option, these balances may be returned to the customer or may be
used to pay future premiums or claims under certain eligible contracts.
LONG-LIVED ASSETS -- Effective December 31, 1995, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS No. 121). Following the criteria set forth in SFAS No. 121, long-lived
assets to be held are reviewed by the Company for events or changes in
circumstances which would indicate that the carrying value may not be
recoverable. In making this determination, the Company considers a number of
factors, including estimated future undiscounted cash flows associated with
the long-lived asset. Assets held for sale are recorded at the lower of the
carrying amount or fair value, less any costs associated with its disposition.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful life of the respective assets ranging from 3 years to 30 years.
GOODWILL AND OTHER INTANGIBLE ASSETS -- Goodwill and other intangible
assets primarily relate to the Company's acquisition activities in 1996 and
1995 (see Note 3). Goodwill represents the purchase price and costs
associated with the acquisitions in excess of the estimated fair value of net
assets acquired. To the extent practicable, a portion of the excess purchase
price and acquisition costs has been assigned to certain identifiable
intangible assets, primarily employer group contracts. Goodwill and other
intangible assets are being amortized on a straight-line basis over useful
lives ranging from 3 years to 40 years.
The useful lives of goodwill and other intangible assets have been
assigned by management based on their best current judgment. The Company
periodically evaluates whether events and circumstances have occurred which
may affect the estimated useful lives or the recoverability of the
unamortized balance of goodwill or other intangible assets.
Goodwill of $1.15 billion in 1996 and $760.4 million in 1995 and employer
group contracts of $938.8 million in 1996 and $966.6 million in 1995, net of
accumulated amortization, comprise the most significant components of
goodwill and other intangible assets.
INCOME TAXES -- Deferred income tax assets and liabilities are recognized
for the differences between financial and income tax reporting basis of
assets and liabilities based on enacted tax rates and laws. The deferred
income tax provision or benefit generally reflects the net change in deferred
income tax assets and liabilities during the year. The current income tax
provision reflects the tax consequences of revenues and expenses currently
taxable or deductible on the Company's various income tax returns for the
year reported.
STOCK-BASED COMPENSATION -- The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) which establishes a fair
value-based method of accounting for employee stock-based compensation.
However, it also allows companies to continue to apply the intrinsic
value-based method prescribed under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," (APB No. 25), provided
certain pro forma disclosures are made (see Note 8). The Company follows APB
No. 25 for stock-based compensation using the intrinsic value method for
stock-based compensation.
NET EARNINGS PER COMMON SHARE -- Net earnings per common share is
determined using the weighted average number of common shares outstanding
during the period, adjusted for the dilutive effect of outstanding options.
The convertible preferred stock is not considered a common stock equivalent
for the purposes of determining primary earnings per share.
RECLASSIFICATIONS -- Certain 1995 and 1994 amounts in the consolidated
financial statements have been reclassified to conform with the 1996
presentation. These reclassifications had no effect on net earnings or
shareholders' equity as previously reported.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 29
<PAGE>
3 ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS -- On April 12, 1996, the Company completed its acquisition
of HealthWise of America, Inc. (HealthWise), a health care management company
based in Nashville, Tennessee. HealthWise owned or operated health plans in
Maryland, Kentucky, Tennessee and Arkansas, that served 154,000 members at
the time of acquisition. The Company issued approximately 4.3 million shares
of common stock in exchange for all the outstanding shares of HealthWise. The
acquisition was accounted for as a pooling of interests; however, the
historical consolidated financial results of the Company were not restated
because the effects of this acquisition on the Company's consolidated
financial statements were not material. In connection with the HealthWise
acquisition, the Company incurred non-operating merger costs of $14.9 million.
On March 29, 1996, the Company completed its acquisition of PHP, Inc.
(PHP), a health plan based in Greensboro, North Carolina, which served
132,000 members at the time of acquisition. The Company issued approximately
2.3 million shares of common stock, with a fair value of $140.0 million, in
exchange for all the outstanding shares of PHP. The acquisition was accounted
for using the purchase method of accounting, whereby the purchase price has
been allocated to assets and liabilities based on their estimated fair values
at the date of acquisition. The purchase price and costs associated with the
acquisition exceeded the estimated fair value of net assets acquired by
$115.4 million and has been assigned to goodwill. The pro forma effects of
the PHP acquisition on the Company's consolidated financial statements were
not material.
The Company acquired MetraHealth on October 2, 1995. MetraHealth was
formed in January 1995 by combining the group health care operations of
Metropolitan Life Insurance Company and The Travelers Insurance Group. At the
time of acquisition, MetraHealth served over 10 million individuals,
including 5.9 million in network-based care programs, 469,000 of whom were
health plan members. The acquisition was accounted for using the purchase
method of accounting. Based on estimates made at the date of acquisition, the
purchase price and costs associated with the acquisition exceeded the
estimated fair value of net assets acquired by $992.2 million.
The total purchase price of the acquisition was $1.09 billion in cash and
$500.0 million of convertible preferred stock, for a total consideration at
closing of $1.59 billion. In addition, the former owners of MetraHealth were
eligible to receive up to an additional $350.0 million if MetraHealth
achieved certain 1995 operating results, as defined. In 1996, the Company
paid $105.4 million in cash, including interest, as full settlement of the
1995 earnout. This earnout payment has been reflected in the accompanying
consolidated financial statements as additional goodwill. With the settlement
of the 1995 earnout and certain revisions to estimates made in connection
with the acquisition, goodwill and other intangible assets associated with
the MetraHealth acquisition totaled $1.19 billion.
In addition, certain of MetraHealth's former owners will be eligible to
receive up to an additional $175.0 million in cash for each of 1996 and 1997
if the Company's post-acquisition combined net earnings for each of those
years reaches certain specified levels. Based on combined 1996 operating
results, the Company does not expect to make any such payment related to the
1996 earnout. Any additional consideration that might be paid pursuant to
these arrangements will be reflected as additional goodwill.
On January 3, 1995, the Company completed its acquisition of GenCare
Health Systems, Inc. (GenCare), a health plan based in St. Louis, Missouri,
which served 230,000 members at the time of acquisition. The total purchase
price of the acquisition was $515.4 million in cash. The acquisition was
accounted for using the purchase method of accounting. The purchase price and
costs associated with the acquisition exceeded the estimated fair value of
net assets acquired by $476.0 million and has been assigned to goodwill.
Had the MetraHealth and GenCare acquisitions occurred on January 1, 1994,
combined unaudited pro forma results for the years ended December 31, 1995
and 1994, would have been: revenues -- $8.71 and $8.21 billion; net earnings
before restructuring charges and extraordinary gain -- $449.6 and $399.9
million; and net earnings per common share before restructuring charges and
extraordinary gain -- $2.53 and $2.28. After giving effect to 1995
restructuring charges and 1994 merger costs, net earnings before
extraordinary gain would have been $352.7 million in 1995 ($1.98 per common
share) and $377.6 million in 1994 ($2.15 per common share).
On May 31, 1994, the Company's acquisition of Complete Health Services, Inc.
(Complete Health) was completed. Complete Health, based in Birmingham, Alabama,
owned or operated health plans in Alabama, Louisiana, Tennessee, Arkansas,
Georgia, Mississippi and Florida, that served 272,000 members at the time of
acquisition. In connection with the transaction, the Company issued 5.0 million
shares of common stock in exchange for all the outstanding common and preferred
shares of Complete Health.
________________________________________________________________________________
30 United HealthCare - 1996 Annual Report
<PAGE>
Also on May 31, 1994, the Company's acquisition of Ramsay-HMO, Inc. (Ramsay)
was completed. Ramsay, based in Coral Gables, Florida, owned and operated a
predominantly staff model health plan that served 177,000 members in South and
Central Florida at the time of acquisition. In connection with the transaction,
the Company issued 11.2 million shares of common stock in exchange for all the
outstanding shares of Ramsay.
In connection with the Complete Health and Ramsay acquisitions, the Company
incurred non-operating merger costs of $35.9 million. Each acquisition was
accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements and notes thereto include the results of
Complete Health and Ramsay for all periods presented.
DISPOSITIONS -- On May 27, 1994, the Company completed the sale of 100%
of the outstanding common stock of Diversified Pharmaceutical Services, Inc.
(Diversified), then a wholly owned subsidiary of the Company, to SmithKline
Beecham Corporation (SmithKline), the U.S. operating subsidiary of
London-based SmithKline Beecham plc., a pharmaceutical manufacturer. In
connection with the sale, the Company received $2.30 billion in cash and
recognized a $1.38 billion extraordinary gain after transaction costs and
income taxes.
Under a six-year management services agreement, SmithKline will pay the
Company a management fee for certain administrative and management services
to be provided by the Company to Diversified and for exclusive rights among
pharmaceutical and medical diagnostic companies to access certain data used
in Diversified's ongoing business. During the same six-year period,
Diversified and SmithKline also will provide the Company, subject to
competitive cost and quality considerations, the Diversified drug benefit
management services that the Company requires in its health plan and other
operations.
Had the Diversified sale occurred on January 1, 1994, combined unaudited
pro forma results for the year ended December 31, 1994, excluding the
extraordinary gain on such sale, would have been: revenues -- $3.74 billion;
net earnings $275.5 million; net earnings per common share -- $1.57. These
pro forma results include the estimated effects on the Company's operations
of the management services agreement between the Company and SmithKline, but
do not take into consideration any reinvestment of the net proceeds from the
sale. These pro forma results also include non-operating merger costs related
to the Complete Health and Ramsay acquisitions.
4 RESTRUCTURING CHARGES
In connection with its acquisition of MetraHealth, the Company developed a
comprehensive plan to integrate the business activities of the combined
companies (the Plan). The Plan encompassed, among other matters, the
disposition, discontinuance and restructuring of certain businesses and product
lines, and the recognition of certain asset impairments. In the fourth quarter
of 1995, the Company recorded $153.8 million in restructuring charges associated
with the Plan. The restructuring charges include $102.3 million for activities
under the Plan which were expected to be completed through 1996, and $51.5
million for asset impairment.
In conjunction with its ongoing integration efforts, the Company modified
the Plan during 1996. The restructuring reserves established pursuant to the
original Plan were an accurate estimation of the costs incurred in 1996 related
to the Company's restructuring initiatives; however, reallocation of the reserve
estimates among the restructuring activities was required in response to changes
in the original Plan.
The original charges included $24.0 million for severance and
outplacement costs which were based on the projected impact of the Plan on
employment levels. In developing the Plan, the Company expected approximately
800 positions to be eliminated through December 31, 1996, under the
restructuring efforts. As of December 31, 1996, the elimination of
approximately 375 positions has required severance and outplacement payments
of $14.0 million. Severance and outplacement costs were less than originally
estimated as the outsourcing of certain information technology services (see
Note 10) and general attrition resulted in the planned elimination of certain
positions without any cost to the Company.
In addition, the restructuring charges included a $58.1 million provision
for costs associated with the termination of certain contracts and the
elimination of certain products, networks and systems related to changes in
strategies resulting from the MetraHealth acquisition. Expenditures related to
these activities of $61.2 million were incurred through December 31, 1996.
The restructuring charges also included a $20.2 million provision for
property and lease discontinuances at certain office locations, resulting
primarily from various exit strategies and payment of portions of
non-cancelable lease obligations. As of December 31, 1996, the Company had
paid $14.5 million related to the closing of 24 office locations. The Company
had remaining reserves of $12.6 million at December 31, 1996, which
represents its future lease obligations associated with these closed office
locations.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 31
<PAGE>
5 PROVISION FOR FUTURE LOSSES
PROVISION FOR FUTURE LOSSES -- In the second quarter of 1996, the
Company recorded a charge to medical costs of $45.0 million, or $0.15 per
common share, to provide for the future estimated losses expected to be
incurred through the remaining term of two multi-year contracts in its St.
Louis health plan. These contracts cover approximately 23% of the health
plan's total commercial enrollment and run through 1998.
6 CASH AND INVESTMENTS
As of December 31, 1996 and 1995, the amortized cost, gross unrealized
holding gains and losses, and fair value of the Company's cash and
investments were as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1996 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS $1,036,716 $ -- $ -- $ 1,036,716
- ----------------------------------------------------------------------------------------------
INVESTMENTS AVAILABLE FOR SALE
U.S. Government and Agencies 825,281 1,255 (14,267) 812,269
State and State Agencies 471,047 2,253 (425) 472,875
Municipalities and Local Agencies 473,661 2,300 (984) 474,977
Corporate 415,744 715 (2,209) 414,250
Other 179,298 20 (120) 179,198
- ----------------------------------------------------------------------------------------------
Total Investments Available for Sale 2,365,031 6,543 (18,005) 2,353,569
- ----------------------------------------------------------------------------------------------
INVESTMENTS HELD TO MATURITY
U.S. Government and Agencies 36,086 113 (118) 36,081
State and State Agencies 4,938 44 (1) 4,981
Municipalities and Local Agencies 1,454 84 -- 1,538
Corporate 16,603 -- (2) 16,601
Other 2,895 -- -- 2,895
- ----------------------------------------------------------------------------------------------
Total Investments Held to Maturity 61,976 241 (121) 62,096
- ----------------------------------------------------------------------------------------------
Total Cash and Investments $3,463,723 $ 6,784 $(18,126) $3,452,381
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1995 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ 940,110 $ -- $ -- $ 940,110
- ----------------------------------------------------------------------------------------------
INVESTMENTS AVAILABLE FOR SALE
U.S. Government and Agencies 665,904 6,187 (11,465) 660,626
State and State Agencies 263,922 3,310 (82) 267,150
Municipalities and Local Agencies 251,631 3,077 (213) 254,495
Corporate 868,855 8,839 (1,400) 876,294
Other 35,111 -- -- 35,111
- ----------------------------------------------------------------------------------------------
Total Investments Available for Sale 2,085,423 21,413 (13,160) 2,093,676
- ----------------------------------------------------------------------------------------------
INVESTMENTS HELD TO MATURITY
U.S. Government and Agencies 26,030 357 (43) 26,344
State and State Agencies 5,991 90 -- 6,081
Municipalities and Local Agencies 1,258 98 -- 1,356
Corporate 9,273 -- (7) 9,266
Other 2,057 76 -- 2,133
- ----------------------------------------------------------------------------------------------
Total Investments Held to Maturity 44,609 621 (50) 45,180
- ----------------------------------------------------------------------------------------------
Total Cash and Investments $3,070,142 $22,034 $(13,210) $3,078,966
- ----------------------------------------------------------------------------------------------
</TABLE>
________________________________________________________________________________
32 United HealthCare - 1996 Annual Report
<PAGE>
As of December 31, 1996, the contractual maturities of the Company's cash
and investments were as follows (in thousands):
<TABLE>
Caption
Less Than One to Over Five to Over Ten
YEARS TO MATURITY One Year Five Years Ten Years Years
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At Amortized Cost:
Cash and Cash Equivalents $1,036,716 $ -- $ -- $ --
Investments Available for Sale 625,926 1,398,884 229,766 110,289
Investments Held to Maturity 32,048 29,487 350 91
- ----------------------------------------------------------------------------------------------
Total Cash and Investments $1,694,690 $1,428,371 $230,116 $ 110,380
- ----------------------------------------------------------------------------------------------
At Fair Value:
Cash and Cash Equivalents $1,036,716 $ -- $ -- $ --
Investments Available for Sale 626,493 1,396,554 228,487 102,035
Investments Held to Maturity 32,097 29,550 371 78
- ----------------------------------------------------------------------------------------------
Total Cash and Investments $1,695,306 $1,426,104 $228,858 $ 102,113
- ----------------------------------------------------------------------------------------------
</TABLE>
Mortgage-backed securities that do not have a single maturity date have been
presented in the above tables based on their estimated maturity dates.
Under applicable state regulations, several of the Company's subsidiaries
are required to maintain specified capital levels to support their
operations. In addition, investments of $62.0 million at December 31, 1996,
were held by trustees or state regulatory agencies to ensure adequate
financial reserves exist as required by state regulatory agencies. After
giving effect to these regulations and certain business considerations, the
Company had approximately $848.6 million in cash and investments available
for general corporate use at December 31, 1996. Investment income earned on
all investments accrues to the Company.
7 CONVERTIBLE PREFERRED STOCK
The Company has 10,000,000 shares of $0.001 par value preferred stock
authorized for issuance. In conjunction with its acquisition of MetraHealth,
the Company designated a series of 500,000 shares as 5.75% Series A
Convertible Preferred Stock (Preferred Stock). This Preferred Stock was
issued to certain former shareholders of MetraHealth as a portion of the
total consideration of the MetraHealth acquisition (see Note 3).
Preferred Stock dividends are fully cumulative and are payable quarterly
at the rate of 5.75% per annum from available funds.
At the option of the shareholders, the Preferred Stock may be redeemed
anytime after October 1, 1998, at certain defined redemption rates. Each
shareholder has the right to convert the Preferred Stock into shares of the
Company's common stock at predetermined conversion prices at any time. The
Preferred Stock is subject to mandatory redemption no later than October 1,
2005.
8 SHAREHOLDERS' EQUITY
DIVIDENDS -- On February 13, 1997, the Company's Board of Directors
approved an annual dividend for 1997 of $0.03 per share to holders of the
Company's common stock. Dividends will be paid on April 15, 1997, to
shareholders of record at the close of business on April 3, 1997.
REGULATORY REQUIREMENTS -- The Company's regulated subsidiaries must
comply with certain minimum capital or tangible net equity requirements in
each of the states in which they operate. As of December 31, 1996, all of the
Company's regulated subsidiaries were in compliance in all material respects
with these requirements.
STOCK-BASED COMPENSATION PLANS -- The Company has stock and incentive
plans (Stock Plans) for the benefit of eligible employees of the Company and
its subsidiaries. As of December 31, 1996, the Stock Plans allow for the
future granting of up to 1,168,000 shares as incentive or non-qualified stock
options, stock appreciation rights, restricted stock awards and performance
awards to employees of the Company.
In 1995 the Company adopted the Non-Employee Director Stock Option Plan
(the 1995 Plan) to benefit individuals on the Company's Board of Directors
who are not employees of the Company. Up to 350,000 shares of the Company's
common stock may be issued under the terms of the 1995 Plan. As of December
31, 1996, up to 172,000 non-qualified stock options were available for future
grants under the 1995 Plan.
Options generally are granted at an exercise price not less than the fair
market value of the common stock at the date of grant and are exercisable
over varying periods up to 10 years from the date of grant.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 33
<PAGE>
A summary of the status of the Company's Stock Plans and the 1995 Plan at
December 31, 1996, 1995 and 1994 and changes during the years then ended
is presented in the table below (shares in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 14,927 $28 11,509 $22 12,692 $15
Granted 4,125 33 6,792 35 3,392 39
Exercised (1,336) 19 (2,168) 16 (3,509) 11
Forfeited (822) 33 (1,206) 31 (1,066) 25
- ----------------------------------------------------------------------------------------------------------
Outstanding at end of year 16,894 $29 14,927 $28 11,509 $22
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Exercisable at end of year 6,914 4,542 3,554
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at December 31, 1996 Option Term Exercise Price at December 31, 1996 Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0 -- $22 5,341 5.3 $13 3,876 $12
$23 -- $35 6,654 8.7 33 1,194 29
$36 -- $46 3,635 7.9 40 1,345 40
$47 -- $63 1,264 8.6 50 499 51
- ----------------------------------------------------------------------------------------------------------------------
$ 0 -- $63 16,894 7.4 $29 6,914 $23
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company recorded $14.8 million, $28.6 million and $44.5 million in
1996, 1995 and 1994, respectively, to additional paid-in capital to reflect
the tax benefit received by the Company upon the exercise of non-qualified
stock options and the vesting of restricted stock.
The Company follows APB No. 25, under which no compensation cost has been
recognized in connection with stock option grants pursuant to the Stock
Plans. Had compensation cost been determined consistent with SFAS No. 123,
the Company's net earnings and net earnings per common share would have been
reduced to the following pro forma amounts (in thousands):
1996 1995
- ----------------------------------------------------------------
Net Earnings:
As reported $355,637 $285,964
Pro Forma $331,651 $265,527
Net Earnings Per Common Share:
As reported $ 1.76 $ 1.57
Pro Forma $ 1.63 $ 1.46
- ----------------------------------------------------------------
In determining compensation cost pursuant to SFAS No. 123, the fair value
of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: Risk-free
interest rates of 6.6% and 6.4%; expected dividend yields of approximately
zero percent; expected stock option lives of 5.0 years and 5.2 years;
expected market price volatility of 57% and 55%. The weighted-average fair
value of options granted, determined using the Black-Scholes model, was $23
in 1996 and $24 in 1995.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
EMPLOYEE STOCK OWNERSHIP PLAN -- The Company has an unleveraged Employee
Stock Ownership Plan (ESOP) for the benefit of all eligible employees of the
Company and its subsidiaries. Company contributions to the ESOP are made at
the discretion of the Board of Directors. Contributions of $3.0 million, $1.3
million and $2.0 million in the years ended December 31, 1996, 1995 and 1994,
respectively, have been made to the ESOP.
________________________________________________________________________________
34 United HealthCare - 1996 Annual Report
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN -- The Company's Employee Stock Purchase
Plan (ESPP) enables all eligible employees of the Company to subscribe for
shares of common stock on semiannual offering dates at a purchase price which
is the lesser of 85% of the fair market value of the shares on the first day
or the last day of the semiannual period. Employee contributions to the ESPP
were $16.1 million, $7.0 million and $5.8 million for 1996, 1995 and 1994.
Pursuant to the ESPP, 392,000, 216,000 and 145,000 shares were issued to
employees during 1996, 1995 and 1994. As of December 31, 1996, 3,648,000
shares are available for future issuances.
9 INCOME TAXES
COMPONENTS OF THE PROVISION FOR INCOME TAXES
Year Ended December 31,
--------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
(in thousands)
Current
Federal $159,336 $182,483 $166,893
State 17,764 26,724 22,495
- -------------------------------------------------------------------------------
Total Current 177,100 209,207 189,388
Deferred 47,498 (39,002) (11,566)
- -------------------------------------------------------------------------------
Total Provision $224,598 $170,205 $177,822
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
RECONCILIATION OF STATUTORY TO EFFECTIVE INCOME TAX RATE
Year Ended December 31,
--------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Federal statutory rate 35.0% 34.9% 35.0%
State income taxes,
net of federal benefit 2.4 3.0 3.1
Tax-exempt
investment income (2.0) (2.6) (2.2)
Intangible Amortization 3.1 2.0 1.2
Other, net 0.2 (0.3) 0.9
- -------------------------------------------------------------------------------
Effective Income Tax Rate 38.7% 37.0% 38.0%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
COMPONENTS OF DEFERRED INCOME TAX ASSETS AND LIABILITIES
December 31,
------------------------------
1996 1995
- -------------------------------------------------------------------------------
Deferred Income Tax Assets:
Medical costs payable $31,085 $16,702
Facility consolidation reserves 23,690 16,562
Loss reserve discounting 20,729 7,411
Severance and deferred
compensation 18,865 24,743
Unearned premiums 12,395 10,771
Bad debt allowance 10,403 4,433
Other restructuring reserves 10,203 7,565
Impaired assets reserves 9,182 23,099
Intangible amortization 5,759 6,501
Unrealized losses on investments
available for sale 4,405 --
Accrued expenses 3,559 4,238
Self insurance 2,577 4,170
Depreciation 1,194 8,930
Development costs 733 18,455
Other -- 2,667
Federal tax carryovers -- 1,130
- -------------------------------------------------------------------------------
Total Deferred Income Tax Assets 154,779 157,377
- -------------------------------------------------------------------------------
Valuation Allowance -- (1,130)
- -------------------------------------------------------------------------------
Deferred Income Tax Liabilities:
Other (1,053) --
Unrealized gains on investments
available for sale -- (3,055)
- -------------------------------------------------------------------------------
Total Deferred Income Tax Liabilities (1,053) (3,055)
- -------------------------------------------------------------------------------
Net Deferred Income Tax Assets $153,726 $153,192
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Deferred income tax assets, net of the valuation allowance, are included
in other current assets and deferred income tax liabilities are included in
long-term obligations in the accompanying consolidated balance sheets. The
change in net deferred income taxes is primarily the result of the deferred
income tax benefit for the year ended December 31, 1996, the income tax
effects of net unrealized holding gains on investments available for sale and
net deferred income taxes assumed with the Company's 1996 acquisitions.
Income taxes paid were $96.0 million, $189.7 million, and $935.0 million
($801.7 million attributable to the sale of Diversified), in 1996, 1995 and
1994.
The Company's consolidated income tax returns for fiscal years 1995 and
1994 are currently under examination by the Internal Revenue Service. The
Company believes any adjustments which may result from this examination would
not have a significant impact on its consolidated operating results or
financial position.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 35
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
LEASES -- The Company leases facilities, computer hardware and other
equipment under long-term operating leases which are non-cancelable and
expire on various dates through 2011. Rent expense under all operating leases
was $113.5 million, $61.0 million and $41.4 million for 1996, 1995 and 1994.
At December 31, 1996, future minimum annual lease payments under all
non-cancelable operating leases are as follows (in thousands):
1997 1998 1999 2000 2001 Thereafter
-----------------------------------------------------------------
$85,549 $68,433 $54,380 $33,825 $23,992 $16,395
-----------------------------------------------------------------
-----------------------------------------------------------------
SERVICE AGREEMENTS -- On June 1, 1996, and November 16, 1995, the Company
entered into separate 10-year contracts with non-affiliated third parties for
information technology services. Under the terms of the contracts, the third
parties assumed responsibility for certain data center operations and
support. On September 19, 1996, the Company entered into a 10-year contract
with a third party for certain data network and voice communication services.
Future payments under all of these contracts are estimated to be $950.0
million; however, the actual timing and amount of payments will vary based on
usage. Expenses incurred in connection with these agreements were $69.6
million in 1996 and $5.9 million in 1995.
LEGAL PROCEEDINGS -- The Company is involved in legal actions which arise
in the ordinary course of its business. Although the outcomes of any such
legal actions cannot be predicted, in the opinion of management, the
resolution of any currently pending or threatened actions will not have a
material adverse effect upon the consolidated financial position or results
of operations of the Company.
BUSINESS RISKS -- Certain factors relating to the industry in which the
Company operates and the Company's business should be carefully considered.
The Company's primary business, offering health care coverage and health care
management services, is heavily regulated at both the federal and state
levels. While the Company is unable to predict what regulatory changes may
occur or the impact on the Company of any particular change, the Company's
operations and financial results could be negatively affected.
After several years of moderate increases in health care costs and
utilization, the industry experienced a more pronounced increase during 1996.
There can be no assurance that health care costs and utilization will not
again increase at a more rapid pace. If they do begin to increase more
rapidly, there can be no assurance that the Company will be able to meet its
goal of maintaining price increases at least sufficient to cover increases in
health care costs.
Also, the Company operates in a highly competitive industry which has
seen significant consolidation over the past few years. The current
competitive markets in certain areas may limit the company's ability to price
its products at levels the Company believes appropriate. These competitive
factors could adversely affect the Company's consolidated financial results.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of
investments in marketable securities and commercial premiums receivable. The
Company's investments in marketable securities are managed by professional
investment managers within guidelines established by the Board of Directors
which, as a matter of policy, limit the amounts which may be invested in any
one issuer. Concentrations of credit risk with respect to commercial premiums
receivable are limited due to the large number of employer groups comprising
the Company's customer base. As of December 31, 1996, the Company had no
significant concentrations of credit risk.
________________________________________________________________________________
36 United HealthCare - 1996 Annual Report
<PAGE>
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
(in thousands, except per share data) for the years ended December 31, 1996
and 1995:
<TABLE>
<CAPTION>
QUARTERS ENDED
- -----------------------------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Revenues $2,318,110 $2,492,183 $2,587,358 $2,676,139
Operating Expenses 2,124,504 2,394,708 2,437,959 2,520,208
Net Earnings 118,946 50,320(1) 91,227 95,144
Net Earnings Applicable to Common Shareholders 111,758 43,132 84,039 87,956
Net Earnings Per Common Share $ 0.62 $ 0.23(1) $ 0.45 $ 0.47
Weighted-average Number of Common Shares Outstanding 180,470 186,657 187,130 187,964
- -----------------------------------------------------------------------------------------------------------
1995
Revenues $1,103,835 $1,157,945 $1,215,536 $2,193,562
Operating Expenses 960,744 1,014,064 1,064,968 2,170,317(2)
Net Earnings 89,432 89,879 93,670 12,983(2)
Net Earnings Applicable to Common Shareholders 89,432 89,879 93,670 5,795
Net Earnings Per Common Share $ 0.51 $ 0.51 $ 0.53 $ 0.03(2)
Weighted-average Number of Common Shares Outstanding 176,403 176,304 177,070 179,478
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excluding the non-operating merger costs associated with the acquisition of
HealthWise of America, Inc. of $14.9 million ($9.1 million after tax, or
$0.05 per common share) and the provisions for future losses on two
multi-year contracts of $45.0 million ($27.4 million after tax, or $0.15 per
common share) net earnings would have been $79.7 million, or $0.43 per
common share.
(2) Excluding fourth quarter restructuring charges of $153.8 million ($96.9
million after tax, or $0.54 per common share) associated with The
MetraHealth Companies, Inc. acquisition, net earnings for the three-month
period ending December 31, 1995, would have been $109.9 million, or $0.57
per common share.
________________________________________________________________________________
United HealthCare - 1996 Annual Report 37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND DIRECTORS OF
UNITED HEALTHCARE CORPORATION:
We have audited the accompanying consolidated balance sheets of United
HealthCare Corporation (a Minnesota Corporation) and Subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of United HealthCare
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 28, 1997
REPORT OF MANAGEMENT
The management of United HealthCare Corporation is responsible for the
integrity and objectivity of the consolidated financial statements and other
financial information contained in this annual report. The consolidated
financial statements and related information were prepared in accordance with
generally accepted accounting principles and include some amounts that are
based on management's best estimates and judgments.
To meet its responsibility, management depends on its accounting systems
and related internal accounting controls. These systems are designed to
provide reasonable assurance, at an appropriate cost, that financial records
are reliable for use in preparing financial statements and that assets are
safe-guarded. Qualified personnel throughout the organization maintain and
monitor these internal accounting controls on an ongoing basis. Internal
auditors review the accounting practices, systems of internal control, and
compliance therewith.
The Audit Committee of the Board of Directors, composed entirely of
directors who are not employees of the Company, meets periodically and
privately with the Company's independent public accountants and its internal
auditors, as well as management, to review accounting, auditing, internal
control, financial reporting and other matters.
WILLIAM W. MCGUIRE, M.D.
President, Chairman and Chief Executive Officer
DAVID P. KOPPE
Chief Financial Officer
________________________________________________________________________________
38 United HealthCare - 1996 Annual Report
<PAGE>
BUSINESS MANAGEMENT
FIELD OPERATIONS SPECIALTY SERVICES
DAVID G. DEVEREAUX WILLIAM J. BANNON
Western Operations Government Operations
FRED C. DUNLAP R. EDWARD BERGMARK, PH.D.
Florida Operations Optum
LEON KAPLAN JAMES T. BRAUN
Mid-Atlantic Operations MetraComp, ProAmerica
HENRY R. LOUBET ROBERT P. BROOK
Pacific Operations United HealthCare Administrators
MARSHALL V. ROZZI SAUL FELDMAN, D.P.A.
North Central Operations United Behavioral Health
ROBERT J. SHEEHY BRIAN S. GOULD, M.D.
Midwest Operations International Division
BLAIR R. SUELLENTROP STEPHEN H. MATHESON
Southeast Operations Developing Markets Group
R. CHANNING WHEELER DAVID J. MCLEAN, PH.D.
Northeast Operations United Resource Networks
RICHARD C. ZORETIC LOIS QUAM
Sales and Marketing AARP Division
KEVIN H. ROCHE
Applied HealthCare Informatics
MARCIA SMITH
EverCare
HEALTH PLAN CEOS
A. KELLEY ATKINSON WILLIAM E. MARTIN
Atlanta Columbia
DAVID S. BARKER FRANK R. MASCIA
Syracuse Greensboro
JOHN M. BRAASCH JANICE D. MESSEROFF
Omaha Richmond
KENNETH A. BURDICK RICHARD J. MIGLIORI, M.D.
Austin Providence
C. RICHARD COOK MICHAEL A. MUCHNICKI
Dallas Cleveland
PAUL P. COOPER, III TERRY L. NIMNICHT
Houston Denver
CHARLES EMERY DAMERON CHARLES C. PITTS
San Francisco Jackson, Miss.
THOMAS A. DAVIS LARRY A. RAMBO
Salt Lake City Milwaukee
OLGA DAZZO JOHN G. RUTHER
Lansing Chicago
ANTONIO FERNANDEZ HANITA SCHREIBER
Puerto Rico Washington, D.C.
ELWOOD FISHER, JR. GARY L. SCHULTZ
Lexington Miami
RONALD S. FRANZESE SUSAN K. SHARKEY
Muskegon Jackson, Mich.
GEORGE S. GOLDSTEIN, PH.D. G. DAVID SHAFER
Los Angeles Dayton
GLEN J. GOLEMI C. BRIAN SHIPP
Baton Rouge Nashville
W. BRADLEY GREEN JACK D. TOWSLEY, JR.
Mobile Phoenix
ALLEN E. HANSSEN VICTOR TURVEY
Charlotte St. Louis
V. ROB HERNDON, III KATHY WALSTEAD-PLUMB
Little Rock South Africa
JOHN A. JOINER JOHN A. WICKENS
Tampa Cincinnati
MICHAEL J. KOEHLER ROBERT A. YUNGK
Kalamazoo Birmingham
________________________________________________________________________________
United HealthCare - 1996 Annual Report 39
<PAGE>
CORPORATE OFFICERS
WILLIAM W. MCGUIRE, M.D. DAVID J. LUBBEN
President, Chairman Corporate Secretary
and Chief Executive Officer and General Counsel
TRAVERS H. WILLS ELIZABETH A. MALKERSON
Chief Operating Officer Vice President and Senior
Communications Officer
DAVID P. KOPPE
Chief Financial Officer BERNARD F. MCDONAGH
Vice President,
ROBERT J. BACKES Investor Relations
Senior Vice President, and Business Research
Human Resources
THOMAS P. MCDONOUGH
JAMES G. CARLSON Executive Vice President,
Executive Vice President, Customer Services Group
Field Operations
MICHAEL A. MOONEY
JAMES A. CONTO Executive Vice President,
Senior Vice President, Underwriting and Pricing
Mergers and Acquisitions
LEE N. NEWCOMER, M.D.
DAVID A. GEORGE Chief Medical Officer
Executive Vice President,
Strategic Services Group JEANNINE M. RIVET
Executive Vice President,
SHEILA T. LEATHERMAN Health Care Services
Executive Vice President,
Public Policy and JOSEPH D. SAVONA
Government Affairs Vice President,
Internal Audit
PAUL F. LEFORT
Chief Information Officer
BOARD OF DIRECTORS
WILLIAM C. BALLARD, JR. AUDIT COMMITTEE
Of Counsel, Greenbaum,
Doll & McDonald JAMES A. JOHNSON
Louisville, Kentucky, law firm
DOUGLAS W. LEATHERDALE
RICHARD T. BURKE
Retired ELIZABETH J. MCCORMACK
JAMES A. JOHNSON GAIL R. WILENSKY
Chairman and
Chief Executive Officer
Fannie Mae COMPENSATION AND STOCK
Diversified financial services OPTION COMMITTEE
company
WILLIAM C. BALLARD, JR.
THOMAS H. KEAN
President THOMAS H. KEAN
Drew University
ROBERT L. RYAN
DOUGLAS W. LEATHERDALE
Chairman and WILLIAM G. SPEARS
Chief Executive Officer
The St. Paul Companies, Inc.
Insurance and related services EXECUTIVE COMMITTEE
ELIZABETH J. MCCORMACK
Chair WILLIAM C. BALLARD, JR.
John D. and Catherine T.
MacArthur Foundation DOUGLAS W. LEATHERDALE
WILLIAM W. MCGUIRE, M.D. WILLIAM W. MCGUIRE, M.D.
President, Chairman and
Chief Executive Officer KENNETT L. SIMMONS
United HealthCare
WILLIAM G. SPEARS
ROBERT L. RYAN
Senior Vice President and NOMINATING COMMITTEE
Chief Financial Officer
Medtronic, Inc. WILLIAM C. BALLARD, JR.
Medical devices company
DOUGLAS W. LEATHERDALE
KENNETT L. SIMMONS
Retired WILLIAM W. MCGUIRE, M.D.
WILLIAM G. SPEARS WILLIAM G. SPEARS
Chairman of the Board
Spears, Benzak, Salomon
& Farrell, Inc.
New York City-based investment
counseling and management firm
GAIL R. WILENSKY
Senior Fellow
Project HOPE
International health foundation
________________________________________________________________________________
40 United HealthCare - 1996 Annual Report
<PAGE>
INVESTOR INFORMATION
CORPORATE HEADQUARTERS
United HealthCare Corporation
300 Opus Center
9900 Bren Road East
Minnetonka, Minnesota 55343
(612) 936-1300
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
Minneapolis, Minnesota
CORPORATE COUNSEL
Dorsey & Whitney LLP
Minneapolis, Minnesota
TRUSTEE, TRANSFER AGENT & REGISTRAR
Norwest Bank Minnesota, N.A.
Minneapolis, Minnesota
FORM 10-K
The Company has filed an annual report with the Securities and Exchange
Commission on Form 10-K. Shareholders may obtain a copy of this report,
without charge, by writing:
Investor Relations
United HealthCare
P.O. Box 1459, Route MN08-W213
Minneapolis, Minnesota 55440-1459
ANNUAL MEETING
The annual meeting of shareholders will be held at the Lutheran Brotherhood
Building, 625 Fourth Avenue South, Minneapolis, Minnesota, on Wednesday,
May 14, 1997, at 10 a.m.
STOCK LISTING
United HealthCare's common stock is traded on the New York Stock Exchange
under the symbol UNH.
[LOGO]
The following table shows the range of high and low sales prices for the
Company's common stock as reported on the New York Stock Exchange Composite
Tape for the calendar periods indicated through February 28, 1997. These
do not include commissions and/or fees associated with the purchase or sale
of this security.
High Low
- ---------------------------------------------------------------
1996
First Quarter $69.00 $56.125
Second Quarter 64.25 47.875
Third Quarter 51.125 30.00
Fourth Quarter 49.00 35.125
First Quarter 1997
through February 28, 1997 54.50 42.625
- ---------------------------------------------------------------
1995
First Quarter $50.00 $41.75
Second Quarter 46.375 34.125
Third Quarter 49.25 40.00
Fourth Quarter 65.625 47.375
- ---------------------------------------------------------------
As of February 28, 1997, the Company had 14,938 shareholders of record.
DIVIDEND POLICY
The Company's dividend policy, established by its board of directors in
August 1990, requires the board to review the Company's audited consolidated
financial statements following the end of each fiscal year and make a
determination as to the advisability of declaring a dividend on the
corporation's outstanding shares of common stock.
Shareholders of record on April 3, 1995, received an annual dividend for 1995
of $0.03 per share, and shareholders of record on April 3, 1996, received an
annual dividend for 1996 of $0.03 per share. On February 13, 1997, the
Company's board of directors approved an annual dividend for 1997 of $0.03
per share to holders of the Company's common stock. This dividend will be
paid on April 15, 1997, to shareholders of record at the close of business on
April 3, 1997.
INTERNET ADDRESS
To access information about United HealthCare, including news releases and
product and service information, visit our home page via the Internet. Our
address is www.unitedhealthcare.com.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
SUBSIDIARIES OF UNITED HEALTHCARE CORPORATION STATE OF
INCORPORATION
NAME OR ORGANIZATION
- ---- ---------------
United HealthCare Services, Inc. (1) Minnesota
United Health and Life Insurance Company (2) Minnesota
United Behavioral Systems, Inc. (3) Minnesota
United Behavioral Systems, Inc. Iowa
United Behavioral Health of New York, I.P.A. Inc. New York
United HealthCare of Georgia, Inc. Georgia
United HealthCare of Utah Utah
PrimeCare Health Plan, Inc. Wisconsin
United HealthCare of Ohio, Inc. Ohio
United HealthCare Insurance Company of Ohio Ohio
United HealthCare of New England, Inc. Rhode Island
United HealthCare of the Midlands, Inc. Nebraska
United HealthCare of Illinois, Inc. (4) Delaware
United HealthCare Insurance Company of Illinois Illinois
United HealthCare South, Inc. Alabama
United HealthCare of Florida, Inc. Florida
United HealthCare of Alabama-FQ, Inc. Alabama
United HealthCare Network, Inc. Alabama
United HealthCare of Arkansas, Inc. Arkansas
United HealthCare of Mississippi, Inc. Mississippi
United HealthCare of Tennessee, Inc. Tennessee
United HealthCare of Alabama, Inc. Alabama
United HealthCare of Louisiana, Inc. Louisiana
United HealthCare of the Midwest, Inc. Missouri
United HealthCare Plans of Puerto Rico, Inc. Puerto Rico
UHC Overseas R.S.A., Inc. Delaware
UHC International Holdings, Inc. Delaware
UHC Holdings R.S.A., L.L.C. Delaware
The MetraHealth Insurance Company Connecticut
MetraHealth Care Management Corporation Delaware
United HealthCare Insurance Company of New York New York
The MetraHealth Employee Benefits Company, Inc. Connecticut
ProAmerica Managed Care, Inc. Texas
The MetraHealth Care Network, Inc. Delaware
U.S. Behavioral Health California
United HealthCare of Upstate New York, Inc. New York
United HealthCare of Texas, Inc. Texas
U.S. Behavioral Health Plan, California California
United HealthCare Service Corp. New York
United HealthCare Administrators, Inc. Connecticut
United HealthCare of Arizona, Inc. Arizona
United HealthCare of California, Inc. California
United HealthCare of Colorado, Inc. Colorado
MetraHealth Care Plan of Kansas City, Inc. Missouri
United HealthCare of New Jersey, Inc. New Jersey
<PAGE>
SUBSIDIARIES OF UNITED HEALTHCARE CORPORATION STATE OF
INCORPORATION
NAME OR ORGANIZATION
- ---- ---------------
United HealthCare of New York, Inc. New York
Applied HealthCare Informatics, Inc. Delaware
United HealthCare of Virginia, Inc. Virginia
PHP, Inc. North Carolina
Optum Services, Inc. Ontario, Canada
United HealthCare (Deutschland) GmbH Germany
HealthWise of America, Inc. Delaware
United HealthCare of the MidAtlantic, Inc. Maryland
HealthWise of Kentucky, Ltd. Kentucky
_______________________________________________________________________________
1. Also doing business as United HealthCare Services of Minnesota, Inc.
Previously doing business as "UHC Management Company, Inc.",
"Charter Med, Incorporated", "Charter HealthCare, Inc.", Charter Med,
Inc. of Minnesota" and "Charter Med, Incorporated of Minnesota." Also
doing business as "United HealthCare Services of Minnesota, Inc.,
"Healthmarc", "EverCare", "Employee Performance Design", "HealthCare
Evaluation Services", "Managed Care for the Aged", "United HealthCare",
"United HealthCare Corporation", "United HealthCare Management Company,
Inc.", "United HealthCare Management", "UMC Management Company, Inc.",
"Personal Decision Services", "UHC Management and Administrators",
"United Resource Networks", "Health Pro", "Institute for Human
Resources", "The Long Term Care Group" and "Health Professionals
Review", "United HealthCare of Illinois, Inc." and "UHC of Illinois,
Inc."
2. Also doing business as "UHC Insurance Company."
3. Also doing business as "United Behavioral Clinics" and "Positive Focus
Professional Counseling Associates."
4. Also doing business as "Chicago HMO Ltd."
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated February 28, 1997 incorporated by reference in this Form
10-K, into the Company's previously filed Registration Statement Nos.
2-95342, 33-3558, 33-22310, 33-27208, 33-36579, 33-50282, 33-67918, 33-68300,
33-75846, 33-79632, 33-79634, 33-79636, 33-79638, 33-59083, 33-59623,
33-63885, 333-01517, 333-01915, 333-02525, 333-04875, 333-04401, 333-05717,
333-05291 and 333-06533.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota
March 28, 1997
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints each of William W. McGuire, M.D. and David J.
Lubben, each with full power to act without the other, his or her true and
lawful attorney-in-fact and agent with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K for the fiscal year ended December 31,
1996 of United HealthCare Corporation, and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto each such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
such attorney-in-fact and agent, or his or her substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on the
21st day of March, 1997, by the following person.
/s/ Thomas H. Kean
- ----------------------------------
Thomas H. Kean
1
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints each of David P. Koppe and David J. Lubben,
each with full power to act without the other, his or her true and lawful
attorney-in-fact and agent with full power of substitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign
the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 of
United HealthCare Corporation, and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto each
such attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that each such
attorney-in-fact and agent, or his or her substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on the 20th day
of March, 1997, by the following person.
/s/ William W. McGuire, M.D.
- ----------------------------------
William W. McGuire, M.D.
2
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints each of William W. McGuire, M.D. and David J.
Lubben, each with full power to act without the other, his or her true and
lawful attorney-in-fact and agent with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K for the fiscal year ended December 31,
1996 of United HealthCare Corporation, and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto each such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
such attorney-in-fact and agent, or his or her substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on the 17th day
of March, 1997, by the following person.
/s/ Douglas W. Leatherdale
- ----------------------------------
Douglas W. Leatherdale
3
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints each of William W. McGuire, M.D. and David J.
Lubben, each with full power to act without the other, his or her true and
lawful attorney-in-fact and agent with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K for the fiscal year ended December 31,
1996 of United HealthCare Corporation, and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto each such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
such attorney-in-fact and agent, or his or her substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on the 18th day
of March, 1997, by the following person.
/s/William C. Ballard, Jr.
- ----------------------------------
William C. Ballard, Jr.
4
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints each of William W. McGuire, M.D. and David J.
Lubben, each with full power to act without the other, his or her true and
lawful attorney-in-fact and agent with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K for the fiscal year ended December 31,
1996 of United HealthCare Corporation, and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto each such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
such attorney-in-fact and agent, or his or her substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on the ___ day
of March, 1997, by the following person.
- ----------------------------------
Elizabeth J. McCormack
5
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints each of William W. McGuire, M.D. and David J.
Lubben, each with full power to act without the other, his or her true and
lawful attorney-in-fact and agent with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K for the fiscal year ended December 31,
1996 of United HealthCare Corporation, and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto each such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
such attorney-in-fact and agent, or his or her substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on the 17th day
of March, 1997, by the following person.
/s/ Richard T. Burke
- ----------------------------------
Richard T. Burke
6
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints each of William W. McGuire, M.D. and David J.
Lubben, each with full power to act without the other, his or her true and
lawful attorney-in-fact and agent with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K for the fiscal year ended December 31,
1996 of United HealthCare Corporation, and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto each such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
such attorney-in-fact and agent, or his or her substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on the 17th day
of March, 1997, by the following person.
/s/ Robert L. Ryan
- ----------------------------------
Robert L. Ryan
7
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints each of William W. McGuire, M.D. and David J.
Lubben, each with full power to act without the other, his or her true and
lawful attorney-in-fact and agent with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K for the fiscal year ended December 31,
1996 of United HealthCare Corporation, and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto each such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
such attorney-in-fact and agent, or his or her substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on the 17th day
of March, 1997, by the following person.
/s/ Kennett L. Simmons
- ----------------------------------
Kennett L. Simmons
8
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints each of William W. McGuire, M.D. and David J.
Lubben, each with full power to act without the other, his or her true and
lawful attorney-in-fact and agent with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K for the fiscal year ended December 31,
1996 of United HealthCare Corporation, and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto each such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
such attorney-in-fact and agent, or his or her substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on the 18th day
of March, 1997, by the following person.
/s/ William G. Spears
- ----------------------------------
William G. Spears
9
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints each of William W. McGuire, M.D. and David J.
Lubben, each with full power to act without the other, his or her true and
lawful attorney-in-fact and agent with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K for the fiscal year ended December 31,
1996 of United HealthCare Corporation, and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto each such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
such attorney-in-fact and agent, or his or her substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on the 17th day
of March, 1997, by the following person.
/s/ James A. Johnson
- ----------------------------------
James A. Johnson
10
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints each of William W. McGuire, M.D. and David J.
Lubben, each with full power to act without the other, his or her true and
lawful attorney-in-fact and agent with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K for the fiscal year ended December 31,
1996 of United HealthCare Corporation, and any and all amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto each such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
such attorney-in-fact and agent, or his or her substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on the 18th day
of March, 1997, by the following person.
/s/ Gail R. Wilensky
- ----------------------------------
Gail R. Wilensky
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNITED
HEALTHCARE CORPORATION FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,036,716
<SECURITIES> 2,415,545
<RECEIVABLES> 652,123
<ALLOWANCES> 46,322
<INVENTORY> 0
<CURRENT-ASSETS> 2,739,664
<PP&E> 588,339
<DEPRECIATION> 275,355
<TOTAL-ASSETS> 6,996,630
<CURRENT-LIABILITIES> 2,642,782
<BONDS> 0
500,000
0
<COMMON> 1,849
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<SALES> 9,888,521
<TOTAL-REVENUES> 10,073,790
<CGS> 9,344,214
<TOTAL-COSTS> 9,477,380
<OTHER-EXPENSES> 133,166
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 592
<INCOME-PRETAX> 580,850
<INCOME-TAX> 224,598
<INCOME-CONTINUING> 355,637
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 355,637
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.76
</TABLE>
