<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
---------------
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 1-10864
------------------------
UNITED HEALTHCARE CORPORATION
State of Incorporation: MINNESOTA
I.R.S. Employer Identification No: 41-1321939
Principal Executive Offices:
300 OPUS CENTER
9900 BREN ROAD EAST
MINNETONKA MN, 55343
Telephone Number: (612) 936-1300
------------------------
Indicate by check mark (x) 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 periods 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 / /
The number of shares of Common Stock, par value $.01 per share, outstanding
on August 9, 1999, was 173,353,248.
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<PAGE>
UNITEDHEALTH GROUP
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets at June 30, 1999 and December
31, 1998............................................................. 3
Condensed Consolidated Statements of Operations for the three and six
month periods ended June 30, 1999 and 1998........................... 4
Condensed Consolidated Statements of Cash Flows for the six month
periods ended June 30, 1999 and 1998................................. 5
Notes to Condensed Consolidated Financial Statements.................. 6
Report of Independent Public Accountants.............................. 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 28
ITEM 6. EXHIBITS....................................................... 29
Signatures................................................................ 30
</TABLE>
2
<PAGE>
UNITEDHEALTH GROUP
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
UNITEDHEALTH GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents.............................................................. $ 1,230 $ 1,644
Short-Term Investments................................................................. 173 170
Accounts Receivable, net............................................................... 975 965
Assets Under Management................................................................ 1,199 1,155
Other Current Assets................................................................... 71 320
----------- ------
Total Current Assets................................................................. 3,648 4,254
Long-Term Investments.................................................................. 3,205 2,610
Property and Equipment, net............................................................ 280 294
Goodwill and Other Intangible Assets, net.............................................. 2,621 2,517
----------- ------
TOTAL ASSETS........................................................................... $ 9,754 $ 9,675
----------- ------
----------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical Costs Payable.................................................................. $ 2,982 $ 2,780
Other Policy Liabilities............................................................... 710 714
Accounts Payable and Accrued Liabilities............................................... 774 713
Short-Term Debt........................................................................ 400 459
Accrued Operational Realignment and Other Charges...................................... 168 236
Unearned Premiums...................................................................... 226 414
----------- ------
Total Current Liabilities............................................................ 5,260 5,316
Long-Term Debt......................................................................... 249 249
Deferred Income Taxes and Other Liabilities............................................ 87 72
----------- ------
Shareholders' Equity
Common Stock, $.01 par value; 500,000,000 shares authorized; 173,954,000 and
183,930,000 issued and outstanding................................................... 2 2
Additional Paid-in Capital............................................................. 591 1,107
Retained Earnings...................................................................... 3,146 2,885
Accumulated Other Comprehensive Income:
Net Unrealized Holding Gains on Investments Available for Sale, net of income tax
effects............................................................................ 419 44
----------- ------
Total Shareholders' Equity........................................................... 4,158 4,038
----------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................. $ 9,754 $ 9,675
----------- ------
----------- ------
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
UNITEDHEALTH GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Premiums.............................................. $ 4,372 $ 3,773 $ 8,690 $ 7,455
Management Services and Fees.......................... 433 402 867 773
Investment and Other Income........................... 53 60 110 122
--------- --------- --------- ---------
Total Revenues...................................... 4,858 4,235 9,667 8,350
--------- --------- --------- ---------
OPERATING EXPENSES
Medical Costs......................................... 3,746 3,435 7,466 6,587
Selling, General and Administrative Expenses.......... 832 706 1,645 1,418
Depreciation and Amortization......................... 55 48 110 90
Operational Realignment and Other Charges............. -- 725 -- 725
--------- --------- --------- ---------
Total Operating Expenses............................ 4,633 4,914 9,221 8,820
--------- --------- --------- ---------
EARNINGS (LOSS) FROM OPERATIONS......................... 225 (679) 446 (470)
Interest Expense...................................... (11) -- (22) --
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES..................... 214 (679) 424 (470)
(Provision) Benefit for Income Taxes.................. (79) 114 (157) 37
--------- --------- --------- ---------
NET EARNINGS (LOSS)..................................... 135 (565) 267 (433)
CONVERTIBLE PREFERRED STOCK DIVIDENDS................... -- (7) -- (15)
--------- --------- --------- ---------
NET EARNINGS (LOSS) APPLICABLE TO COMMON SHAREHOLDERS... $ 135 $ (572) $ 267 $ (448)
--------- --------- --------- ---------
--------- --------- --------- ---------
BASIC NET EARNINGS (LOSS) PER COMMON SHARE.............. $ 0.78 $ (2.96) $ 1.51 $ (2.33)
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED NET EARNINGS (LOSS) PER COMMON SHARE............ $ 0.76 $ (2.96) $ 1.48 $ (2.33)
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.... 174 193 177 192
DILUTIVE EFFECT OF OUTSTANDING STOCK OPTIONS............ 4 -- 3 --
--------- --------- --------- ---------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING,
ASSUMING DILUTION..................................... 178 193 180 192
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
UNITEDHEALTH GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings (Loss)..................................................... $ 267 $ (433)
Noncash Items:
Depreciation and Amortization......................................... 110 90
Deferred Income Taxes................................................. 63 (214)
Asset Impairments..................................................... -- 451
Net Change in Other Operating Items:
Accounts Receivable and Other Current Assets.......................... 19 (118)
Medical Costs Payable................................................. 155 200
Accounts Payable and Accrued Liabilities.............................. 37 109
Accrued Operational Realignment and Other Charges..................... (68) 274
Unearned Premiums..................................................... (195) (142)
--------- ---------
Cash Flows From Operating Activities................................ 388 217
--------- ---------
INVESTING ACTIVITIES
Cash Paid for Acquisitions, net of cash assumed and other effects....... (104) (86)
Proceeds from Disposal of Business...................................... 5 --
Purchases of Property and Equipment and Capitalized Software, net....... (97) (90)
Purchases of Investments................................................ (943) (1,976)
Maturities/Sales of Investments......................................... 937 1,867
--------- ---------
Cash Flows Used for Investing Activities............................ (202) (285)
--------- ---------
FINANCING ACTIVITIES
Proceeds from Stock Option Exercises.................................... 68 73
Common Stock Repurchases................................................ (603) (72)
Payments of Short-term Borrowings....................................... (60) --
Dividends Paid.......................................................... (5) (20)
--------- ---------
Cash Flows Used for Financing Activities............................ (600) (19)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS................................... (414) (87)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................... 1,644 750
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................ $ 1,230 $ 663
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Unless the context otherwise requires, the use of the terms the "Company,"
"we," "us," and "our" in the following refers to UnitedHealth Group and its
subsidiaries.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments, consisting solely of normal recurring adjustments,
needed to present the financial results for these interim periods fairly. These
financial statements include certain amounts that are based on our best
estimates and judgments. The most significant estimates relate to medical costs,
medical costs payable and other policy liabilities, intangible asset valuations
and integration reserves relating to acquisitions, and liabilities and asset
impairments relating to our operational realignment activities. These estimates
may be adjusted as more current information becomes available, and any
adjustment could be significant.
Following the rules and regulations of the Securities and Exchange
Commission, we have omitted footnote disclosures that would substantially
duplicate the disclosures contained in our annual audited financial statements.
Read together with the disclosures below, we believe the interim financial
statements are presented fairly. However, these unaudited condensed consolidated
financial statements should be read together with the consolidated financial
statements and the notes included in our Annual Report on Form 10-K, as amended
by our Form 10-K/A, for the year ended December 31, 1998.
2. RECLASSIFICATIONS
Certain 1998 amounts in the condensed consolidated financial statements have
been reclassified to conform to the 1999 presentation. These reclassifications
have no effect on net earnings (loss) or shareholders' equity as previously
reported.
3. OPERATIONAL REALIGNMENT AND OTHER CHARGES
In conjunction with our operational realignment initiatives, we developed
and, in the second quarter of 1998, approved a comprehensive plan (the Plan) to
implement our operational realignment. We recognized corresponding charges to
operations of $725 million in the second quarter of 1998, which reflected the
estimated costs to be incurred under the Plan. The charges included costs
associated with asset impairments; employee terminations; disposing of or
discontinuing business units, product lines, and contracts; and consolidating
and eliminating certain claims processing operations and associated real estate
obligations.
The asset impairments consisted principally of purchased in-process research
and development associated with our acquisition of Medicode, Inc. and goodwill
and other long-lived assets including fixed assets, computer hardware and
software and leasehold improvements associated with businesses we intend to
dispose of or markets where we plan to curtail our operations or change our
operating presence, and other realignment initiatives.
During the second quarter of 1999, we revised our estimates for severance
and outplacement costs, non-cancelable lease obligations, and losses on
businesses held for disposal. The total of our operational realignment and other
charges did not change.
After eliminating approximately 2,800 positions, we now estimate total
severance and outplacement costs will be approximately $100 million. The
decrease of $22 million from our original estimate is primarily attributable to
lower than anticipated costs per employee and a substantially higher rate of
6
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. OPERATIONAL REALIGNMENT AND OTHER CHARGES (CONTINUED)
position reductions accomplished through attrition among affected employee
groups. We currently estimate that final execution of the Plan will result in
the reduction of approximately 5,200 positions, affecting approximately 6,400
people in various locations.
In June 1999, we completed the sale of our medical provider clinics. As a
result of differences between our original estimate and the final terms of the
sale agreement, we increased our accrual by $9 million to reflect the actual
losses incurred on the disposition of this business. During the second quarter
of 1999, we also completed the disposition of our behavioral health provider
clinics. The balances accrued in our operational realignment charge were
sufficient to cover actual costs associated with this disposition.
Another business we intend to dispose of is our managed workers'
compensation business. We have completed negotiations with a prospective buyer
and expect to close on the sale of this business in August 1999. The balances
accrued in our operational realignment charge will be sufficient to cover actual
losses on the disposition of this business.
Remaining markets where we plan to curtail or make changes to our operating
presence include two health plan markets that are in non-strategic markets. With
regard to these markets, we have revised our plan of disposition in response to
current market conditions. In one market, we currently expect to sell or
commence formal liquidation of this business prior to December 31, 1999. In the
other non-strategic health plan market, we have revised our original plan of
reconfiguration to a complete market exit. As a result, we have increased our
estimate of noncancelable lease obligations by $13 million to include the
incremental costs to be incurred in the exit of this market.
We have completed the reconfiguration of our small group insurance business
and a third non-strategic health plan market. Our original operational
realignment charge covered asset impairments and other costs incurred in the
reconfiguration of these businesses.
The following is a roll-forward of accrued operational realignment and other
charges through June 30, 1999 (in millions):
<TABLE>
<CAPTION>
SEVERANCE AND NONCANCELABLE DISPOSITION OF
ASSET OUTPLACEMENT LEASE BUSINESSES AND
IMPAIRMENTS COSTS OBLIGATIONS OTHER COSTS TOTAL
------------- --------------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997.......................... $ -- $ -- $ -- $ -- $ --
Provision for Operational Realignment and Other
Charges............................................. 430 142 82 71 725
Additional Charges/(Credits).......................... 21 (20) (9) 8 --
Cash Payments......................................... -- (19) (6) (13) (38)
Non-cash Charges...................................... (451) -- -- -- (451)
----- ----- ----- ----- ---------
Balance at December 31, 1998.......................... -- 103 67 66 236
Cash Payments......................................... -- (9) (2) (14) (25)
----- ----- ----- ----- ---------
Balance at March 31, 1999............................. -- 94 65 52 211
Additional Charges/(Credits).......................... -- (22) 13 9 --
Cash Payments......................................... -- (15) (6) (22) (43)
----- ----- ----- ----- ---------
Balance at June 30, 1999.............................. $ -- $ 57 $ 72 $ 39 $ 168
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
</TABLE>
7
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. OPERATIONAL REALIGNMENT AND OTHER CHARGES (CONTINUED)
Our accompanying financial statements include the operating results of
businesses and markets to be disposed of or discontinued in connection with the
operational realignment. The carrying value of the net assets held for sale or
disposal is approximately $25 million as of June 30, 1999. Our accompanying
Consolidated Statements of Operations include revenues and operating losses from
businesses disposed of or to be disposed, and markets we plan to exit, for the
three and six month periods ended June 30 as follows (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................. $ 199 $ 242 $ 432 $ 475
Operating income (loss) before income
taxes.............................. $ (9) $ (7) $ (24) $ (23)
</TABLE>
The table above does not include operating results from the counties where
we will be withdrawing our Medicare product offerings, effective January 1,
2000. Annual revenues for 1999 from the Medicare markets we are exiting are
expected to be approximately $230 million.
In regard to the purchased research and development, as of the date of our
December 1997 acquisition, Medicode had invested approximately $8.5 million in
in-process research and development projects. An additional $4.5 million was
expended through June 30, 1999, with another $0.3 million expected to be spent
over the next three months to complete these research and development projects.
The operational realignment and other charges do not cover certain aspects
of the Plan, including new information systems, data conversions, process
re-engineering, and employee relocation and training. These costs will be
charged to expense as incurred or capitalized, as appropriate. During the three
and six month periods ended June 30, 1999, we incurred expenses of approximately
$19 million and $34 million, respectively, related to these activities.
The original operational realignment plan provided for substantial
completion in 1999. We continue to implement our original realignment plan,
however, certain divestitures and market realignment activities are requiring
additional time to complete, and accordingly, will extend into the third and
fourth quarters of 1999. Other initiatives, including the consolidation of
certain claims and administrative processing operations, are requiring
additional time to fully implement and will continue into the year 2000. Based
on current facts and circumstances, we believe the remaining realignment reserve
is adequate to cover the costs to be incurred in executing the remainder of the
Plan. However, as we proceed with the execution of the Plan and more current
information becomes available, it may be necessary to adjust our estimates for
severance, lease obligations on exited facilities, and losses on businesses held
for disposal.
8
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. CASH AND INVESTMENTS
As of June 30, 1999, the amortized cost, gross unrealized holding gains and
losses and fair value of cash and investments were as follows (in millions):
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
--------------- ------------------- ------------------- -----------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents......................... $ 1,230 $ -- $ -- $ 1,230
Debt Securities--Investments Available for Sale... 2,532 14 (32) 2,514
Equity Securities--Investments Available for
Sale............................................ 91 685 -- 776
Debt Securities--Held to Maturity................. 88 -- -- 88
------ ----- ----- -----------
Total Cash and Investments...................... $ 3,941 $ 699 $ (32) $ 4,608
------ ----- ----- -----------
------ ----- ----- -----------
</TABLE>
Gross realized gains of $3 million and $7 million, and gross realized losses
of $2 million and $1 million were recognized for the three month periods ended
June 30, 1999 and 1998, respectively, and are included in investment and other
income in the accompanying Condensed Consolidated Statements of Operations.
Gross realized gains of $7 million and $15 million, and gross realized losses of
$5 million and $3 million were recognized for the six month periods ended June
30, 1999 and 1998, respectively.
At June 30, 1999, our equity securities include a $682 million gross
unrealized gain related to our investment in approximately 9 million shares of
Healtheon Corporation common stock.
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------------------ ------------------------
CARRYING CARRYING
PAR VALUE VALUE PAR VALUE VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
5.65% Senior Unsecured Note due December 1999........... $ 400 $ 400 $ 400 $ 400
6.60% Senior Unsecured Note due December 2003........... 250 249 250 249
Commercial Paper........................................ -- -- 60 59
----- ----- ----- -----
650 649 710 708
Less: Current Portion................................... (400) (400) (460) (459)
----- ----- ----- -----
Total Long-Term Debt.................................. $ 250 $ 249 $ 250 $ 249
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
The carrying value of the Company's outstanding debt approximates its fair
value at June 30, 1999.
In August 1999, we increased our commercial paper program and our supporting
credit arrangement with a group of banks to an aggregate of $900 million. The
supporting credit arrangement is comprised of a $300 million revolving credit
facility, expiring in 2003, and a $600 million 364-day facility, expiring in
August 2000. In July 1999, we also developed the financing flexibility to issue
approximately $150 million of
9
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. DEBT (CONTINUED)
extendible commercial notes (ECN's). At June 30, 1999, we had no borrowings
outstanding under our commercial paper program, supporting credit facilities, or
ECN's.
The Company's debt arrangements and credit facilities contain various
covenants, the most restrictive of which place limitations on secured and
unsecured borrowings and require the Company to exceed minimum interest coverage
levels. We are well within the requirements of all debt covenants.
6. AMERICAN ASSOCIATION OF RETIRED PERSONS CONTRACT
On January 1, 1998, we entered into a ten-year contract to provide insurance
products and services to members of the AARP. Under the terms of the contract,
we are compensated for claims administration and other services as well as for
assuming underwriting risk. We are also engaged in product development
activities to complement the insurance offerings under this program. The AARP
has also contracted with certain other vendors to provide other member and
marketing services. We report premium revenues associated with the AARP program
net of the administrative fees paid to these vendors and an administrative
allowance we pay to the AARP.
Our underwriting results related to the AARP business are recorded as an
increase or decrease to a rate stabilization fund (RSF). The RSF is included in
other policy liabilities in the accompanying Condensed Consolidated Balance
Sheets. The primary components of our underwriting results are premium revenue,
medical costs, investment income, administrative expenses, member service
expenses, marketing expenses and premium taxes. To the extent we incur
underwriting losses that exceed the balance in the RSF, we would be required to
fund the deficit. Any deficit we fund could be covered by underwriting gains in
future periods of the contract. The RSF balance was $509 million as of December
31, 1998, and is $534 million as of June 30, 1999. We believe the RSF balance is
sufficient to cover any potential future underwriting or other risks associated
with the contract.
We assumed the policy and other policy liabilities related to the AARP
program and received cash and premiums receivables from the previous insurance
carrier equal to the carrying value of the liabilities assumed as of January 1,
1998. The following AARP program-related assets and liabilities are included in
our Condensed Consolidated Balance Sheets (in millions):
<TABLE>
<CAPTION>
BALANCE AS OF BALANCE AS OF
DESCRIPTION JUNE 30, 1999 DECEMBER 31, 1998
- ------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Assets Under Management................................ $ 1,199 $ 1,155
Receivables............................................ $ 290 $ 287
Medical Costs Payable.................................. $ 872 $ 830
Other Policy Liabilities............................... $ 534 $ 509
Accounts Payable and Accrued Liabilities............... $ 83 $ 103
</TABLE>
The effects of changes in balance sheet amounts associated with the AARP
program accrue to the AARP policyholders through the RSF balance. Accordingly,
we do not include the effect of such changes in our Consolidated Statements of
Cash Flows.
10
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. STOCK REPURCHASE PROGRAM
During the first quarter of 1999, we announced the completion of our first
share repurchase program aggregating 18.7 million shares at a total cost of $807
million. We also announced a program to repurchase up to approximately 9.0
million shares, or 5% of then outstanding shares, through November 1999.
During the six months ended June 30, 1999, we repurchased an aggregate 12.4
million shares for $603 million, bringing total purchases since inception of the
programs to 23.5 million shares, for $1,049 million. Under our current
authorization, we may repurchase an additional 4.2 million shares.
8. COMPREHENSIVE INCOME
The table below presents comprehensive income, defined as changes in the
equity of our business excluding changes resulting from investments by and
distributions to our shareholders, for the three and six-month periods ended
June 30 (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Earnings (Loss).................. $ 135 $ (565) $ 267 $ (433)
Change in Net Unrealized Holding
Gains (Losses) on Investments
Available for Sale, net of income
tax effects........................ 252 10 375 2
----- ----- ----- -----
Comprehensive Income (Loss).......... $ 387 $ (555) $ 642 $ (431)
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
9. SEGMENT FINANCIAL INFORMATION
Our reportable operating segments are organized and defined by a combination
of economic characteristics, including the types of products and services
offered and customer segments served by each segment. The following is a
description of the types of products and services from which each of our
business segments derives its revenues:
- HEALTH CARE SERVICES consists of UnitedHealthcare and Ovations and
provides the majority of our risk-based managed care product offerings.
UnitedHealthcare operates locally based organized health systems to serve
employers, their employees and dependents, as well as individuals,
including those enrolled in Medicare and Medicaid programs. Ovations
includes underwriting and services in support of AARP Health Care Options,
the group insurance program of the American Association of Retired
Persons, and EverCare, which delivers medical care to elderly residents of
nursing homes.
- UNIPRISE provides comprehensive employee benefits administrative services
to large multi-site employers, addressing all aspects of employee benefit
administration, including integrated enrollment and claims processing,
customer service, medical management and utilization review services.
Uniprise also provides administrative services to intermediary businesses
such as insurance companies, health plans, organized provider entities and
governmental agencies. Uniprise's revenues are primarily fee-based and we
generally assume no financial responsibility for health care costs
associated with these products.
11
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SEGMENT FINANCIAL INFORMATION (CONTINUED)
- SPECIALIZED CARE SERVICES provides specialized products and services using
independent networks, including behavioral health and substance abuse
services, employee assistance services, consumer health and well-being
information products, and disease management and transplant-related
products and services. These products are often included in products
offered by UnitedHealthcare and Uniprise, in addition to being marketed as
stand-alone products and services.
- INGENIX consists of products and services that use knowledge and
technology to provide customers with high-value information, data
analysis, research and consulting. Customers include drug and medical
device manufacturers, employers, providers, payers and government
agencies.
Transactions between business segments are recorded at their estimated fair
value, as if they were purchased from or sold to third parties. All intersegment
transactions are eliminated in consolidation. Assets and liabilities that are
jointly used are assigned to each segment using estimates of pro-rata usage.
Cash and investments are assigned such that each segment has minimum specified
levels of regulatory capital and working capital. The "Corporate and
Eliminations" column includes unassigned cash and investments, investment income
derived from these unassigned assets, company-wide costs associated with core
process improvement initiatives and eliminations of intersegment transactions
and balances.
The following tables present segment financial information for the three and
six month periods ended June 30, 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
HEALTH CARE SPECIALIZED CORPORATE &
THREE MONTHS ENDED JUNE 30, 1999 SERVICES UNIPRISE CARE SERVICES INGENIX ELIMINATIONS
- ----------------------------------------------- ------------ ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues--External Customers................... $ 4,338 $ 352 $ 78 $ 37 $ --
Revenues--Intersegment......................... -- 112 97 16 (225)
Investment and Other Income.................... 39 7 2 1 4
------ ----- ----- ----- -----
Total Revenues................................. $ 4,377 $ 471 $ 177 $ 54 $ (221)
------ ----- ----- ----- -----
Earnings from Operations....................... $ 140 $ 64 $ 30 $ 2 $ (11)
------ ----- ----- ----- -----
------ ----- ----- ----- -----
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999 CONSOLIDATED
- ----------------------------------------------- -------------
<S> <C>
Revenues--External Customers................... $ 4,805
Revenues--Intersegment......................... --
Investment and Other Income.................... 53
------
Total Revenues................................. $ 4,858
------
Earnings from Operations....................... $ 225
------
------
</TABLE>
<TABLE>
<CAPTION>
HEALTH CARE SPECIALIZED CORPORATE &
THREE MONTHS ENDED JUNE 30, 1998 SERVICES UNIPRISE CARE SERVICES INGENIX ELIMINATIONS
- ----------------------------------------------- ------------ ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues--External Customers................... $ 3,768 $ 309 $ 70 $ 28 $ --
Revenues--Intersegment......................... -- 82 82 17 (181)
Investment and Other Income.................... 32 6 -- -- 22
------ ----- ----- ----- -----
Total Revenues................................. $ 3,800 $ 397 $ 152 $ 45 $ (159)
------ ----- ----- ----- -----
Earnings (Loss) from Operations................ $ (435) $ (94) $ (68) $ (85) $ 3
------ ----- ----- ----- -----
------ ----- ----- ----- -----
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998 CONSOLIDATED
- ----------------------------------------------- -------------
<S> <C>
Revenues--External Customers................... $ 4,175
Revenues--Intersegment......................... --
Investment and Other Income.................... 60
------
Total Revenues................................. $ 4,235
------
Earnings (Loss) from Operations................ $ (679)
------
------
</TABLE>
12
<PAGE>
UNITEDHEALTH GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. SEGMENT FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
HEALTH CARE SPECIALIZED CORPORATE &
SIX MONTHS ENDED JUNE 30, 1999 SERVICES UNIPRISE CARE SERVICES INGENIX ELIMINATIONS
- ----------------------------------------------- ------------ ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues--External Customers................... $ 8,644 $ 687 $ 150 $ 76 $ --
Revenues--Intersegment......................... -- 221 188 30 (439)
Investment and Other Income.................... 81 13 3 1 12
------ ----- ----- ----- -----
Total Revenues................................. $ 8,725 $ 921 $ 341 $ 107 $ (427)
------ ----- ----- ----- -----
Earnings from Operations....................... $ 280 $ 110 $ 59 $ 4 $ (7)
------ ----- ----- ----- -----
------ ----- ----- ----- -----
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 CONSOLIDATED
- ----------------------------------------------- -------------
<S> <C>
Revenues--External Customers................... $ 9,557
Revenues--Intersegment......................... --
Investment and Other Income.................... 110
------
Total Revenues................................. $ 9,667
------
Earnings from Operations....................... $ 446
------
------
</TABLE>
<TABLE>
<CAPTION>
HEALTH CARE SPECIALIZED CORPORATE &
SIX MONTHS ENDED JUNE 30, 1998 SERVICES UNIPRISE CARE SERVICES INGENIX ELIMINATIONS
- ----------------------------------------------- ------------ ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues--External Customers................... $ 7,437 $ 611 $ 134 $ 46 $ --
Revenues--Intersegment......................... -- 167 164 32 (363)
Investment and Other Income.................... 64 11 1 -- 46
------ ----- ----- ----- -----
Total Revenues................................. $ 7,501 $ 789 $ 299 $ 78 $ (317)
------ ----- ----- ----- -----
Earnings (Loss) from Operations................ $ (311) $ (62) $ (40) $ (84) $ 27
------ ----- ----- ----- -----
------ ----- ----- ----- -----
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 CONSOLIDATED
- ----------------------------------------------- -------------
<S> <C>
Revenues--External Customers................... $ 8,228
Revenues--Intersegment......................... --
Investment and Other Income.................... 122
------
Total Revenues................................. $ 8,350
------
Earnings (Loss) from Operations................ $ (470)
------
------
</TABLE>
Excluding the $725 million operational realignment and other charges and
$175 million of charges related to contract losses associated with certain
Medicare markets and other increases to commercial and Medicare medical costs
payable estimates, 1998 results would have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
--------------------- -------------------
<S> <C> <C>
Health Care Services................................. $ 114 $ 238
Uniprise............................................. 57 89
Specialized Care Services............................ 27 55
Ingenix.............................................. 1 2
Corporate and Eliminations........................... 22 46
----- -----
Consolidated Earnings from Operations.............. $ 221 $ 430
----- -----
----- -----
</TABLE>
13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Directors of UnitedHealth Group:
We have reviewed the accompanying condensed consolidated balance sheet of
UnitedHealth Group, its corporate entity, United HealthCare Corporation (a
Minnesota corporation), and Subsidiaries as of June 30, 1999 and the related
condensed consolidated statements of operations and cash flows for the three and
six month periods ended June 30, 1999 and 1998. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of UnitedHealth Group and
Subsidiaries as of and for the year-ended December 31, 1998 (not presented
herein), and, in our report dated February 18, 1999, we expressed an unqualified
opinion on those statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1998, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota,
August 5, 1999
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read together with the accompanying
condensed consolidated financial statements and notes. In addition, the
following discussion should be considered in light of a number of factors that
affect the Company, the industry in which we operate, and business generally.
These factors are described in Exhibit 99 to this Quarterly Report.
SECOND QUARTER 1999 FINANCIAL PERFORMANCE HIGHLIGHTS
Summary highlights of our second quarter 1999 results include:
- Earnings per share reached $0.76, an increase of 15% from $0.66 per share
reported in the second quarter of 1998 (excluding 1998 second quarter
special operating charges) and up $0.04 per share, or 6%, sequentially
over the first quarter of 1999.
- Consolidated revenues increased 15% over the second quarter of 1998 to
$4.9 billion, reflecting strong and balanced growth across all business
segments.
- We reported cash flows from operations of $388 million for the six-month
period ended June 30, 1999, an increase of $171 million, or 79%, over 1998
levels.
- Net earnings applicable to common shareholders increased to $135 million
during the second quarter of 1999. The increase of $3 million, or 2%, in
net earnings applicable to common shareholders is not commensurate with
our 15% increase in earnings per share largely as a result of foregone
investment income on cash and investments used to repurchase our common
stock.
- We repurchased an additional 4.5 million shares of our common stock during
the second quarter, bringing our total shares repurchased since inception
of our stock repurchase activities in November 1997 to 23.5 million shares
through June 30, 1999. During the past 12 months, we repurchased
approximately 22 million shares of our common stock for approximately $1.0
billion.
- The second quarter ratio of SG&A expenses to total revenues increased
forty basis points on a year-over-year basis. This expected increase
reflects additional costs associated with core process improvement
initiatives.
SUMMARY OPERATING INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------- -------------------------------------
1998 1998
-------------------------- PERCENT --------------------------
1999 REPORTED ADJUSTED(a) CHANGE(b) 1999 REPORTED ADJUSTED(a)
--------- ----------- ------------- ------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenues......................... $ 4,858 $ 4,235 $ 4,235 15% $ 9,667 $ 8,350 $ 8,350
Earnings (Loss) from Operations........ $ 225 $ (679) $ 221 2% $ 446 $ (470) $ 430
Net Earnings (Loss) Applicable to
Common Shareholders.................. $ 135 $ (572) $ 132 2% $ 267 $ (448) $ 256
Net Earnings (Loss) Per Common Share,
Assuming Dilution.................... $ 0.76 $ (2.96) $ 0.66 15% $ 1.48 $ (2.33) $ 1.29
Medical Costs to Premium Revenues...... 85.7% 91.0% 86.4% 85.9% 88.4% 86.0%
Medical Costs to Premium Revenues,
Excluding AARP....................... 84.1% 90.8% 84.7% 84.3% 87.3% 84.2%
SG&A Expenses to Total Revenues........ 17.1% 16.7% 16.7% 17.0% 17.0% 17.0%
<CAPTION>
PERCENT
CHANGE(b)
-------------
<S> <C>
Total Revenues......................... 16%
Earnings (Loss) from Operations........ 4%
Net Earnings (Loss) Applicable to
Common Shareholders.................. 4%
Net Earnings (Loss) Per Common Share,
Assuming Dilution.................... 15%
Medical Costs to Premium Revenues......
Medical Costs to Premium Revenues,
Excluding AARP.......................
SG&A Expenses to Total Revenues........
</TABLE>
- ------------------------------
(a) Excludes the effects of $725 million of operational realignment and other
charges, and $175 million of charges related to contract losses associated
with certain Medicare markets and other increases to commercial and Medicare
medical costs payable estimates.
(b) Calculated as percentage change between 1999 results and 1998 results, as
adjusted.
15
<PAGE>
The following table summarizes people served by product and funding
arrangement as of June 30 (in thousands):
<TABLE>
<CAPTION>
INCREASE
1999(a) 1998 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
UnitedHealthcare
Commercial
Risk-Based:
Health Plans............................................ 5,295 4,730 12%
Other Network-Based and Indemnity....................... 508 546 (7)%
--------- --------- ---
Total Risk Based...................................... 5,803 5,276 10%
Fee-Based................................................. 1,811 1,611 12%
--------- --------- ---
Total Commercial...................................... 7,614 6,887 11%
Medicare.................................................... 445 419 6%
Medicaid.................................................... 531 511 4%
--------- --------- ---
Total UnitedHealthcare................................ 8,590 7,817 10%
Uniprise
Risk-Based................................................ 222 301 (26)%
Fee-Based................................................. 5,671 5,076 12%
--------- --------- ---
Total Uniprise........................................ 5,893 5,377 10%
--------- --------- ---
Total people served, excluding Ovations....................... 14,483 13,194 10%
--------- --------- ---
--------- --------- ---
</TABLE>
- ------------------------
(a) Includes the 338,000 commercial, 25,000 Medicare, and 121,000 Medicaid
people served by HealthPartners of Arizona, acquired in October 1998, and
the 27,000 commercial people served by Principal Health Care of Texas, which
was acquired in August 1998.
RESULTS OF OPERATIONS
CONSOLIDATED FINANCIAL RESULTS
Revenues
Our revenues are comprised of: 1) premium revenues associated with our
risk-based products (those where we assume financial responsibility for health
care costs); 2) management services and fees associated with administrative
services and fees associated with administrative services only customers,
managed health plans, and our Specialized Care Services and Ingenix businesses;
and 3) investment and other income. The following is a discussion of
consolidated revenue trends for each of our three components.
PREMIUM REVENUES
Premium revenues in the second quarter of 1999 totaled $4,372 million, an
increase of $599 million, or 16%, over the second quarter of 1998. For the six
months ended June 30, 1999, premium revenues of $8,690 million increased $1,235
million, or 17%, over the same period in 1998. These increases were primarily
driven by UnitedHealthcare's 10% year-over-year increase in risk-based
membership and average year-over-year premium yield increases on commercial
groups exceeding 7%.
MANAGEMENT SERVICES AND FEE REVENUES
Management services and fee revenues during the three and six month periods
ended June 30, 1999 totaled $433 million and $867 million, representing
increases of $31 million and $94 million, respectively,
16
<PAGE>
over the same periods in 1998. The overall increase in management services and
fee revenues is primarily the result of strong growth in Uniprise's multi-site
customer base and modest price increases in fee business. Additionally,
acquisitions and growth from our Ingenix business during 1998 contributed to the
increase in management services and fees in the first six months of 1999.
INVESTMENT AND OTHER INCOME
Investment and other income during the three and six month periods ended
June 30, 1999 totaled $53 and $110 million, representing decreases of $7 million
and $12 million, respectively, from the same periods in 1998. These decreases
are primarily attributable to a decrease in net capital gains from the sale of
investments. Net capital gains were $1 million and $2 million, respectively,
during the three and six-month periods ended June 30, 1999, compared with $6
million and $12 million during the same periods in 1998. Additionally, the
purchase of approximately 22 million shares of our common stock for
approximately $1.0 billion over the past twelve months decreased the level of
cash and investments available for investment purposes.
Operating Costs
MEDICAL COSTS
The combination of our pricing strategy and medical management efforts is
reflected in the medical care ratio (medical costs as a percentage of premium
revenues). The following table summarizes our consolidated medical care ratios
for the three-month and six-month periods ended June 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
--------- ------------------------ --------- ------------------------
REPORTED ADJUSTED(a) REPORTED ADJUSTED(a)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated UnitedHealth Group..... 85.7% 91.0% 86.4% 85.9% 88.4% 86.0%
--------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- --------- ----------- -----------
Consolidated, excluding AARP........ 84.1% 90.8% 84.7% 84.3% 87.3% 84.2%
--------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- --------- ----------- -----------
</TABLE>
- ------------------------
(a) Excludes the effects of $175 million of contract losses associated with
certain Medicare markets and other increases to commercial and Medicare
medical costs payable estimates.
Our consolidated medical care ratio decreased from 86.4% in the second
quarter of 1998 to 85.7% in the second quarter of 1999. Excluding the AARP
business, on a year-over-year basis, the medical care ratio decreased from 84.7%
to 84.1%. On a sequential basis, our medical care ratio, excluding AARP,
decreased from 84.5% in the first quarter of 1999 to 84.1% in the second quarter
of 1999. The decreases in our year-over-year medical care ratios are primarily
attributable to commercial premium yield increases in excess of underlying
medical cost trends.
On an absolute dollar basis, the increase of $486 million, or 15%, in
medical costs in the second quarter of 1999 over the comparable prior year
period is largely commensurate with the 16% growth in premium revenues. During
the first six months of 1999, we estimate our aggregate medical cost trend was
4.5% to 5.5% compared with the full-year 1998 medical cost trend of
approximately 4%. We are now pricing renewal commercial business with 8% or
higher premium yield increases, in line with our projected medical cost trends
of 5% to 6% for 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percent of total revenues
(the SG&A ratio) increased from 16.7% during the second quarter of 1998 to 17.1%
during the second quarter of 1999. For the three and six month periods ended
June 30, 1999, selling, general and administrative expenses
17
<PAGE>
increased $126 million and $227 million, or 18% and 16%, respectively over the
comparable periods in 1998. These increases reflect the additional costs to
support the corresponding 16% increase in revenues in 1999, as well incremental
operating expenses related to core process improvement initiatives and platform
system conversions.
BUSINESS SEGMENTS
The following summarizes the operating results of our business segments for
three-month and six-month periods ended June 30 (in millions):
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
SIX MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------------
PERCENT PERCENT
1999 1998 CHANGE 1999 1998 CHANGE
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Health Care Services......................... $ 4,377 $ 3,800 15% $ 8,725 $ 7,501 16%
Uniprise..................................... 471 397 19% 921 789 17%
Specialized Care Services.................... 177 152 16% 341 299 14%
Ingenix...................................... 54 45 20% 107 78 37%
Corporate and Eliminations................... (221) (159) 39% (427) (317) 35%
--------- --------- --- --------- --------- ---
Consolidated Revenues...................... $ 4,858 $ 4,235 15% $ 9,667 $ 8,350 16%
--------- --------- --- --------- --------- ---
--------- --------- --- --------- --------- ---
</TABLE>
EARNINGS FROM OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
--------- -------------------------- --------- --------------------------
REPORTED ADJUSTED(a) REPORTED ADJUSTED(a)
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Health Care Services................... $ 140 $ (435) $ 114 $ 280 $ (311) $ 238
Uniprise............................... 64 (94) 57 111 (62) 89
Specialized Care Services.............. 30 (68) 27 57 (40) 55
Ingenix................................ 2 (85) 1 4 (84) 2
Corporate and Eliminations............. (11) 3 22 (6) 27 46
--------- ----- ----- --------- ----- -----
Consolidated Earnings (Loss) from
Operations......................... $ 225 $ (679) $ 221 $ 446 $ (470) $ 430
--------- ----- ----- --------- ----- -----
--------- ----- ----- --------- ----- -----
</TABLE>
- ------------------------
(a) Excludes $725 million of operational realignment and other charges and $175
million of charges related to contract losses associated with certain
Medicare markets and other increases to commercial and Medicare medical
costs payable estimates.
HEALTH CARE SERVICES
The Health Care Services segment, comprised of UnitedHealthcare and
Ovations, posted record revenues of $4,377 million, representing an increase of
$577 million, or 15%, over the second quarter of 1998. For the six months ended
June 30, 1998, Health Care Services revenues grew to $8,725 million, an increase
of $1,244 million, or 16%, over the same period in 1998. UnitedHealthcare
increased its risk-based commercial enrollment by 10% and realized average
premium yield increases of over 7% on renewing commercial groups. Year-over-year
growth of 6% in UnitedHealthcare's Medicare enrollment also contributed to the
increase in revenues. Increases in Medicare enrollment affect the year-over-year
comparability of revenues. The Medicare product generally has per member premium
rates three to four times higher than average commercial premium rates because
Medicare members typically use proportionately more medical care services.
18
<PAGE>
Despite the year-over-year growth in Medicare enrollment at June 30, 1999,
we are projecting Medicare enrollment to remain relatively flat during the
remainder of 1999. Effective January 1, 1999, we withdrew Medicare+Choice
product offerings from 86 counties, affecting approximately 60,000, or 12% of
our Medicare members as of December 31, 1998. On July 1, 1999, we announced
plans for withdrawal from the Medicare+Choice product program in another 49
counties affecting 40,000 existing members, as well as the filing of significant
benefit adjustments, effective January 1, 2000. Annual revenues for 1999 from
the Medicare markets we are exiting are expected to be approximately $230
million. These actions are expected to further reduce the Company's enrollment,
but better position this program in the long-term in terms of profitability
relative to its cost of capital and required resource management. We will
continue to evaluate the markets we serve and, where necessary, we will alter
benefit designs and claim management activities. These actions may result in
further withdrawals of Medicare product offerings or reductions in membership.
The Health Care Services segment contributed earnings from operations of
$140 million and $280 million during the three and six month periods ended June
30, 1999, representing increases of $26 million, or 23%, and $42 million, or
18%, over the comparable 1998 periods (excluding 1998 special operating
charges). The increases in earnings are primarily attributable to enrollment
growth, commercial premium yield increases, and expense management initiatives.
UnitedHealthcare's commercial medical care ratio has improved on a
year-over-year basis, driven by premium yield increases in excess of underlying
medical cost trends. The following table summarizes UnitedHealthcare's medical
care ratios by product line for the three and six month periods ended June 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- -----------------------------------
1999 1998 1999 1998
--------- ---------------------- --------- ------------------------
REPORTED ADJUSTED(a) REPORTED ADJUSTED(a)
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
UnitedHealthcare:
Commercial........................ 84.5% 88.1% 85.3% 84.6% 86.2% 84.8%
Medicare.......................... 89.5% 109.2% 88.2% 89.2% 98.5% 87.6%
Medicaid.......................... 86.0% 84.0% 84.0% 86.1% 81.8% 81.8%
--------- --------- ----------- --------- ----------- -----------
Total UnitedHealthcare.......... 85.6% 92.2% 85.8% 85.6% 88.4% 85.2%
--------- --------- ----------- --------- ----------- -----------
--------- --------- ----------- --------- ----------- -----------
</TABLE>
- ------------------------
(a) Excludes the effects of $175 million of contract losses associated with
certain Medicare markets and other increases to commercial and Medicare
medical costs payable estimates.
UNIPRISE
Uniprise's revenues increased by $74 million, or 19%, over the second
quarter of 1998 driven primarily by growth in its multi-site customer base and
modest price increases on fee-based business. For the six months ended June 30,
1998, Uniprise's revenues grew to $921 million, an increase of $132 million, or
17%, over the same period in 1998. Uniprise's earnings from operations grew by
$22 million, or 25%, over the first half of 1998 as a result of the increased
revenues and reduced operating costs as a percentage of revenues, driven by
ongoing process improvement initiatives.
SPECIALIZED CARE SERVICES
Specialized Care Services revenues increased by $25 million, or 16%, over
the second quarter of 1998. This increase was primarily driven by an increase in
the number of individuals served by United Behavioral Health, our mental health
and substance abuse business. For the six months ended June 30, 1998,
Specialized Care Services revenues grew to $341 million, an increase of $42
million, or 14%, over the same period in 1998. Earnings from operations of $30
million increased by 11% compared with the second
19
<PAGE>
quarter of 1998. Earnings from operations in 1999 have not increased
commensurate with revenue growth as a result of development costs associated
with new product initiatives.
INGENIX
Revenues increased by $9 million over the comparable prior year period as a
result of acquisitions during the second half of 1998. For the six months ended
June 30, 1998, Ingenix's revenues grew to $107 million, an increase of $29
million, or 37%, over the same period in 1998. Earnings from operations were
relatively flat with the prior year primarily as a result of increased goodwill
amortization expense associated with Ingenix's acquisitions. Ingenix's earnings
in the second half of 1999 will improve as product integration efforts continue
and its publishing business moves into its seasonably strong fourth quarter.
CORPORATE AND ELIMINATIONS
Corporate includes investment income derived from cash and investments not
assigned to operating segments and the company-wide costs associated with core
process improvement initiatives. The decrease in Corporate earnings is
attributable to a decline in the level of unassigned cash and investments, and
associated investment income, primarily resulting from common stock repurchases,
and incremental 1999 core process improvement costs.
OPERATIONAL REALIGNMENT AND OTHER CHARGES
In conjunction with our operational realignment initiatives, we developed
and, in the second quarter of 1998, approved a comprehensive plan (the Plan) to
implement our operational realignment. We recognized corresponding charges to
operations of $725 million in the second quarter of 1998, which reflected the
estimated costs to be incurred under the Plan. The charges included costs
associated with asset impairments; employee terminations; disposing of or
discontinuing business units, product lines, and contracts; and consolidating
and eliminating certain claims processing operations and associated real estate
obligations.
The asset impairments consisted principally of purchased in-process research
and development associated with our acquisition of Medicode, Inc. and goodwill
and other long-lived assets including fixed assets, computer hardware and
software and leasehold improvements associated with businesses we intend to
dispose of or markets where we plan to curtail our operations or change our
operating presence, and other realignment initiatives.
During the second quarter of 1999, we revised our estimates for severance
and outplacement costs, non-cancelable lease obligations, and losses on
businesses held for disposal. The total of our operational realignment and other
charges did not change.
After eliminating approximately 2,800 positions, we now estimate total
severance and outplacement costs will be approximately $100 million. The
decrease of $22 million from our original estimate is primarily attributable to
lower than anticipated costs per employee and a substantially higher rate of
position reductions accomplished through attrition among affected employee
groups. We currently estimate that final execution of the Plan will result in
the reduction of approximately 5,200 positions, affecting approximately 6,400
people in various locations.
In June 1999, we completed the sale of our medical provider clinics. As a
result of differences between our original estimate and the final terms of the
sale agreement, we increased our accrual by $9 million to reflect the actual
losses incurred on the disposition of this business. During the second quarter
of 1999, we also completed the disposition of our behavioral health provider
clinics. The balances accrued in our operational realignment charge were
sufficient to cover actual costs associated with this disposition.
Another business we intend to dispose of is our managed workers'
compensation business. We have completed negotiations with a prospective buyer
and expect to close on the sale of this business in
20
<PAGE>
August 1999. The balances accrued in our operational realignment charge will be
sufficient to cover actual losses on the disposition of this business.
Remaining markets where we plan to curtail or make changes to our operating
presence include two health plan markets that are in non-strategic markets. With
regard to these markets, we have revised our plan of disposition in response to
current market conditions. In one market, we currently expect to sell or
commence formal liquidation of this business prior to December 31, 1999. In the
other non-strategic health plan market, we have revised our original plan of
reconfiguration to a complete market exit. As a result, we have increased our
estimate of noncancelable lease obligations by $13 million to include the
incremental costs to be incurred in the exit of this market.
We have completed the reconfiguration of our small group insurance business
and a third non-strategic health plan market. Our original operational
realignment charge covered asset impairments and other costs incurred in the
reconfiguration of these businesses.
The following is a roll-forward of accrued operational realignment and other
charges through June 30, 1999 (in millions):
<TABLE>
<CAPTION>
SEVERANCE AND DISPOSITION OF
ASSET OUTPLACEMENT NONCANCELABLE BUSINESSES AND
IMPAIRMENTS COSTS LEASE OBLIGATIONS OTHER COSTS
------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997.......................... $ -- $ -- $ -- $ --
Provision for Operational Realignment and Other
Charges............................................. 430 142 82 71
Additional Charges/(Credits).......................... 21 (20) (9) 8
Cash Payments......................................... -- (19) (6) (13)
Non-cash Charges...................................... (451) -- -- --
----- ----- --- ---
Balance at December 31, 1998.......................... -- 103 67 66
Cash Payments......................................... -- (9) (2) (14)
----- ----- --- ---
Balance at March 31, 1999............................. -- 94 65 52
Additional Charges/(Credits).......................... -- (22) 13 9
Cash Payments......................................... -- (15) (6) (22)
----- ----- --- ---
Balance at June 30, 1999.............................. $ -- $ 57 $ 72 $ 39
----- ----- --- ---
----- ----- --- ---
<CAPTION>
TOTAL
---------
<S> <C>
Balance at December 31, 1997.......................... $ --
Provision for Operational Realignment and Other
Charges............................................. 725
Additional Charges/(Credits).......................... --
Cash Payments......................................... (38)
Non-cash Charges...................................... (451)
---------
Balance at December 31, 1998.......................... 236
Cash Payments......................................... (25)
---------
Balance at March 31, 1999............................. 211
Additional Charges/(Credits).......................... --
Cash Payments......................................... (43)
---------
Balance at June 30, 1999.............................. $ 168
---------
---------
</TABLE>
Our accompanying financial statements include the operating results of
businesses and markets to be disposed of or discontinued in connection with the
operational realignment. The carrying value of the net assets held for sale or
disposal is approximately $25 million as of June 30, 1999. Our accompanying
Consolidated Statements of Operations include revenues and operating losses from
businesses disposed of or to be disposed, and markets we plan to exit, for the
three and six month periods ended June 30 as follows (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................. $ 199 $ 242 $ 432 $ 475
Operating income (loss) before income
taxes.............................. $ (9) $ (7) $ (24) $ (23)
</TABLE>
The table above does not include operating results from the counties where
we will be withdrawing our Medicare product offerings, effective January 1,
2000. Annual revenues for 1999 from the Medicare markets we are exiting are
expected to be approximately $230 million.
21
<PAGE>
The operational realignment and other charges do not cover certain aspects
of the Plan, including new information systems, data conversions, process
re-engineering, and employee relocation and training. These costs will be
charged to expense as incurred or capitalized, as appropriate. During the three
and six month periods ended June 30, 1999, we incurred expenses of approximately
$19 million and $34 million, respectively, related to these activities.
The original operational realignment plan provided for substantial
completion in 1999. We continue to implement our original realignment plan,
however, certain divestitures and market realignment activities are requiring
additional time to complete, and accordingly, will extend into the third and
fourth quarters of 1999. Other initiatives, including the consolidation of
certain claims and administrative processing operations, are requiring
additional time to fully implement and will continue into the year 2000. Based
on current facts and circumstances, we believe the remaining realignment reserve
is adequate to cover the costs to be incurred in executing the remainder of the
Plan. However, as we proceed with the execution of the Plan and more current
information becomes available, it may be necessary to adjust our estimates for
severance, lease obligations on exited facilities, and losses on businesses held
for disposal.
FINANCIAL CONDITION AND LIQUIDITY AT JUNE 30, 1999
During the first six months of 1999, we generated cash from operations of
$388 million. We continued to maintain a strong financial condition and
liquidity position, with cash and investments of $4.6 billion at June 30, 1999.
Total cash and investments increased by $184 million since December 31, 1998.
As further described under "Regulatory Capital and Dividend Restrictions,"
many of our subsidiaries are subject to various government regulations. After
taking into account these regulations, approximately $175 million of our $4.6
billion of cash and investments at June 30, 1999, was available for general
corporate use, including working capital needs.
At June 30, 1999, outstanding debt consists of $400 million of unsecured
notes due December 1999 and $250 million of unsecured notes due December 2003.
In August 1999, we increased our commercial paper program and our supporting
credit arrangement with a group of banks to an aggregate of $900 million. The
supporting credit arrangement is comprised of a $300 million revolving credit
facility, expiring in 2003, and a $600 million 364-day facility, expiring in
August 2000. In July 1999, we also developed the financing flexibility to issue
approximately $150 million of extendible commercial notes (ECN's). At June 30,
1999, we had no borrowings outstanding under our commercial paper program,
supporting credit facilities, or ECN's.
In April 1999, the Securities and Exchange Commission declared effective the
shelf registration statement we had filed in October 1998. The shelf
registration covers $1.05 billion of debt securities, preferred stock, common
stock, depository shares, warrants and trust preferred securities. Including an
earlier shelf registration with $200 million of registered but unissued
securities, the aggregate initial public offering price of all securities
covered by the shelf registrations is $1.25 billion. The Company may publicly
offer such securities from time to time at prices and terms to be determined at
the time of offering.
The Company's debt arrangements and credit facilities contain various
covenants, the most restrictive of which place limitations on secured and
unsecured borrowings and require the Company to exceed minimum interest coverage
levels. At June 30, 1999, we were well within the requirements of all debt
covenants.
Our senior debt is rated "A" by Standard & Poors and Duff & Phelps, and "A3"
by Moody's. Our commercial paper and ECN's are rated "A-1" by Standard & Poors,
"D-1" by Duff & Phelps, and "P-2" by Moody's.
22
<PAGE>
In the second quarter of 1998, we recognized special charges to operations
of $725 million associated with the implementation of our operational
realignment plan. We believe our remaining after-tax cash outlay associated with
these charges will be approximately $85 to $100 million over the next 12 months.
During the first quarter of 1999, we announced the completion of our first
share repurchase program aggregating 18.7 million shares at a total cost of $807
million. We also announced a program to repurchase up to approximately 9 million
shares, or 5% of then outstanding shares, through November 1999.
During the six months ended June 30, 1999, we repurchased an aggregate 12.4
million shares for $603 million, bringing total purchases since inception of the
programs to 23.5 million shares, for $1,049 million. Under our current
authorization, we may repurchase an additional 4.2 million shares.
We expect our available cash and investment resources, operating cash flows,
and financing capability to be sufficient to meet our current operating
requirements and other corporate development initiatives. A substantial portion
of our long-term investments, $3.1 billion as of June 30, 1999, are classified
as available for sale. These investments are periodically sold prior to their
maturity to fund working capital or for other purposes.
Currently, we do not have any other material definitive commitments that
require cash resources; however, we continually evaluate opportunities to expand
our operations. This includes internal development of new products and programs
and may include acquisitions.
GOVERNMENT REGULATION
Our primary business, offering health care coverage and health care
management services, is heavily regulated at the federal and state levels. We
strive to comply in all respects with applicable regulations and may need to
make changes from time to time in our services, products, marketing methods or
organizational or capital structure.
Regulatory agencies generally have broad discretion to issue regulations and
interpret and enforce laws and rules. 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. These changes could affect our
operations and financial results.
Certain Medicare and Medicaid programs changes could limit available
reimbursement in those programs, with adverse affects on our financial results.
Also, it could be more difficult for us to control medical costs if federal and
state bodies continue to consider and enact significant and onerous managed care
and privacy laws and regulations. Among the legislative proposals are proposals
that could expand health plan liability, increase medical expenses, increase
administrative costs or limit network management options.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) may
represent the most significant federal reform of employee benefit law since the
enactment of the Employee Retirement Income Security Act (ERISA) in 1974.
Significant provisions of HIPAA include guaranteeing the availability of health
insurance for certain employees, limiting the use of preexisting condition
exclusions, prohibiting discrimination on the basis of health status, and making
it easier to continue coverage in cases where a person is terminated or changes
employers. Under HIPAA and other similar state laws, medical cost control
through amended provider contracts and improved preventive and chronic care
management may become more important. We believe our experience in these areas
will allow us to compete effectively.
A comprehensive set of claims regulations has been proposed by the United
States Department of Labor (DOL) that could have a significant impact on the
Company. These regulations are applicable to employee benefit plans subject to
ERISA. In addition to various other requirements, the regulations would create
new time frames for processing claims and giving notification of incomplete
claims, would impose certain notification requirements following a claim
determination, and would impose certain post-appeal
23
<PAGE>
disclosure obligations on the Company's insured and self-funded business. The
DOL has solicited public comment on the proposals, and the regulations, if
adopted, could vary significantly from the proposals.
Health care fraud and abuse has become a top priority for the nation's law
enforcement entities, which have focused on participants in federal government
health care programs such as Medicare, Medicaid and the Federal Employees Health
Benefits Program (FEHBP). We participate extensively in these programs.
We also are subject to governmental investigations and enforcement actions.
Included are actions relating to ERISA, which regulates insured and self-funded
health coverage plans offered by employers; the FEHBP; federal and state fraud
and abuse and related laws; and laws relating to care management and health care
delivery. Government actions could result in assessment of damages, civil or
criminal fines or penalties, or other sanctions, including exclusion from
participation in government programs. We currently are involved in various
government investigations and audits, but we do not believe the results will
have a material adverse effect on our financial position or results of
operations.
INFLATION
Although the general rate of inflation has remained relatively stable and
health care cost inflation has stabilized in recent years, the national health
care cost inflation rate still exceeds the general inflation rate. We use
various strategies to mitigate the negative effects of health care cost
inflation, including setting commercial premiums based on anticipated health
care costs, risk-sharing arrangements with various health care providers, and
other health care cost containment measures. Specifically, health plans try to
control medical and hospital costs through contracts with independent providers
of health care services. Through these contracted care providers, our health
plans emphasize preventive health care and appropriate use of specialty and
hospital services.
While we currently believe our strategies to mitigate health care cost
inflation will continue to be successful, competitive pressures, new health care
product introductions, demands from health care providers and customers,
applicable regulations or other factors may affect our ability to control the
impact of health care cost increases. In addition, certain non-network-based
products do not have health care cost containment measures similar to those in
place for network-based products. As a result, there is added health care cost
inflation risk with these products, which comprise approximately 10% of our
consolidated risk-based membership.
YEAR 2000 ACTIVITIES
Our business depends significantly on effective information systems, and we
have many different information systems for our various businesses. Our
information systems require on-going enhancements to keep pace with the
continuing changes in information technology, evolving industry standards, and
customer preferences. We have been modifying our computer systems to accommodate
the "Year 2000". The "Year 2000" problem exists throughout the global
marketplace as many computer systems and applications were developed to
recognize the year as a two-digit number, with the digits "00" being recognized
as the year 1900.
Starting in 1995, our formal Year 2000 Project Office began implementing a
remediation plan to ensure that critical information systems applications,
end-user developed application tools, and critical business interfaces remain
intact, and can function properly through the century change. We are on schedule
to complete, test, and certify our Year 2000 remediation efforts by September
30, 1999. A more detailed description and current status of our mission critical
Year 2000 activities follows.
24
<PAGE>
TECHNICAL INFRASTRUCTURE
MAINFRAME TECHNOLOGY. In conjunction with our two vendors that provide
support for our data center operations, we have completed, tested and certified
100% of our remediation efforts for the hardware, and operating systems on our
two primary mainframe computer systems. We are also at compliant version levels
for all of our supporting software at both data centers. In addition, we have
made modifications to some of our smaller mainframe systems to make them
compliant. We have also installed separate test environments (both mainframe and
distributed) to test our business applications in a simulated Year 2000
environment.
DESKTOP HARDWARE & SOFTWARE. We have inventoried all of our desktop
hardware and software over 40,000 computing devices of multiple makes and
models. All non-compliant desktop hardware and software have been identified and
will be modified or replaced with compliant systems by September 30, 1999. As of
June 30, 1999, we are 83% compliant with our desktop hardware and software
systems.
TELECOMMUNICATIONS. We have inventoried our entire system of over 28,000
telecommunication devices, including traffic routers and phone switches. We are
using two outside vendors to assist us in modifying or replacing non-compliant
telecommunication systems. Our data network is 100% compliant and our voice
network is 94% compliant as of June 30, 1999. We expect all our
telecommunication networks and devices will be Year 2000 compliant by September
30, 1999.
BUSINESS APPLICATIONS
SOFTWARE APPLICATIONS. We use approximately 500 different software
applications that include over 80 million lines of computer code. We have
surveyed our software applications and have identified systems that will not be
used after December 31, 1999, and systems that will be modified for Year 2000
compliance. We have determined that 33% of our software applications will not be
used after December 31, 1999 due to conversions, consolidations and software
replacements. Of the remaining applications, over 98% have been made Year 2000
compliant, tested and certified or are scheduled to be certified for compliance.
The balance of the applications are yet to be tested. All mission critical Year
2000 software modifications were completed by March 31, 1999, with further
testing and certification during the remainder of 1999.
END-USER DEVELOPED APPLICATIONS. End-user developed applications are
analysis tools that have been internally developed by individual employees or
operating segments primarily running on personal computers or client servers.
The Year 2000 Project Office has continuously communicated with all employees
explaining the risks of non-compliant applications and provided tools and
techniques to make them compliant. We have identified and are tracking and
assessing Year 2000 compliance issues with respect to all potentially critical
end-user applications. Over 50% of employee workstations have been assessed or
remediated. We are on schedule to meet a September 30, 1999 completion date.
OTHER YEAR 2000 MATTERS
NON-INFORMATION TECHNOLOGY SYSTEMS. We have approximately 300 owned or
leased facilities throughout the world. Over 50% of our mission critical
facilities are compliant. We have contacted all of our facility managers
regarding Year 2000 compliance issues. In addition, we have contracted with a
real estate management company to assist in our Year 2000 compliance efforts.
All mission critical facilities are scheduled to be Year 2000 compliant, or
compliant with a work-around process by September 1, 1999.
DEPENDENCE ON THIRD PARTIES. We have a contractual relationship with
approximately 300,000 different medical providers and over 92,000 vendors. Over
2,000 vendors have been identified as critical business partners and suppliers.
We are currently in communication with these critical business partners to
analyze their Year 2000 compliance efforts. We have completed our analysis of
corporate critical vendor readiness and continue to identify alternative
vendors, where necessary. Individual business units continue to analyze
additional vendors for compliance and Year 2000 readiness. We will continue to
distribute Year 2000
25
<PAGE>
educational materials to our medical providers with whom we conduct business. As
appropriate, we will be testing and verifying the electronic collection of data
with selected providers through our EDI (electronic data interface)
clearinghouse vendors.
COSTS OF YEAR 2000 COMPLIANCE. The projected costs of our Year 2000
compliance efforts and the date on which we plan to complete the necessary Year
2000 remediation efforts are based on management's best estimates, which were
derived utilizing various assumptions of future events. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
significantly from our current plans. Specific factors that might cause
significant differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct the
relevant computer codes, and the ability of our significant vendors, providers,
customers and others with which we conduct business to identify and resolve
their own Year 2000 issues.
Costs associated with modifying internal use software for Year 2000
compliance are charged to expense as incurred. Purchases of hardware or software
that replace existing hardware or software that is not Year 2000 compliant are
capitalized and amortized over their useful lives. As of June 30, 1999, our
historical and projected costs to complete our Year 2000 remediation plan are as
follows (amounts in millions):
<TABLE>
<CAPTION>
YEAR RESOURCES AMORTIZATION RESOURCES AMORTIZATION TOTAL
- -------------------------------------------- ----------- ------------- ----------- ------------- -----
COST INCURRED TO DATE PROJECTED COSTS
-------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1996........................................ $ 1 $ -- $ -- $ -- $ 1
1997........................................ 12 -- -- -- 12
1998........................................ 18 -- -- -- 18
1999........................................ 9 3 5 4 21
2000........................................ -- -- 3 9 12
2001........................................ -- -- -- 9 9
2002........................................ -- -- -- 2 2
--- --- --- --- ---
$ 40 $ 3 $ 8 $ 24 $ 75
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
BUSINESS RISKS OF NON-COMPLIANT SYSTEMS. Although we are committed to
completing and testing our remediation plan well in advance of the Year 2000,
there are risks if we do not meet our objectives by December 31, 1999.
Operationally, the most severe risk is business interruption. Specific examples
of situations that could cause business interruption include, but are not
limited to 1) computer hardware or application software processing errors or
failures, 2) facilities or infrastructure failures, or 3) critical outside
providers, suppliers, or customers who may not be Year 2000 compliant. Depending
on the extent and duration of business interruption resulting from non-compliant
Year 2000 systems, such interruption may have a material adverse effect on our
results of operations, liquidity, and financial condition.
CONTINGENCY PLANS. Each mission critical area of our Year 2000 compliance
effort has developed contingency plans to mitigate the risk of failure, and to
provide for a speedy recovery from possible failures associated with the century
change. The contingency plans detail strategies to implement in 1999 to prepare
for the century rollover, and actions to execute if problems arise. Contingency
plans are being reviewed for consistency and completeness. These plans are being
incorporated into the year end plans and will be retained for reference in the
Year 2000 Event Center.
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
The Company's operations are conducted through United HealthCare
Corporation, its wholly-owned subsidiary United HealthCare Services, Inc. and
their respective subsidiaries, which consist principally of Health Maintenance
Organizations (HMOs) and insurance companies. HMOs and insurance companies are
subject to state regulations that, among other things, may require the
maintenance of minimum levels
26
<PAGE>
of statutory capital, as defined by each state, and restrict the timing and
amount of dividends and other distributions that may be paid to their respective
parent companies. Generally, the amount of dividend distributions that may be
paid by regulated insurance and HMO companies, without prior approval by state
regulatory authorities, is limited based on the entity's level of statutory net
income and statutory capital and surplus.
As of June 30, 1999, the Company's regulated subsidiaries had aggregate
statutory capital and surplus of approximately $1.3 billion, compared with their
aggregate minimum statutory capital and surplus requirements of approximately
$470 million.
The National Association of Insurance Commissioners has adopted rules which,
to the extent that they are implemented by the states, will set new minimum
capitalization requirements for insurance companies, HMOs and other entities
bearing risk for health care coverage. The requirements take the form of
risk-based capital rules. The change in rules for insurance companies was
effective December 31, 1998. The new HMO rules are subject to state-by-state
adoption, but few states had adopted the rules as of June 30, 1999. The HMO
rules, if adopted by the states in their proposed form, would significantly
increase the capital required for certain of our subsidiaries. However, we
believe we can redeploy capital among our regulated entities to minimize the
need for incremental capital investment of general corporate financial resources
into regulated subsidiaries. As such, we do not anticipate a significant impact
on our aggregate capital or investments in regulated subsidiaries.
CONCENTRATIONS OF CREDIT RISK
Investments in financial instruments such as marketable securities and
commercial premiums receivable may subject UnitedHealth Group to concentrations
of credit risk. Our investments in marketable securities are managed by
professional investment managers within an investment policy authorized by the
board of directors. This policy limits the amounts that may be invested in any
one issuer. Concentrations of credit risk with respect to commercial premiums
receivable are limited to the large number of employer groups that comprise our
customer base. As of June 30, 1999, there were no significant concentrations of
credit risk.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the date of the Company's Annual Report on Form 10-K, as amended by
our Form 10-K/A, for the year ended December, 31, 1998, a change has occurred in
the company's exposure to market risk associated with the Company's investments
in equity securities.
We own approximately nine million shares of Healtheon Corporation
(Healtheon) common stock. With Healtheon's recent public stock offering in
February 1999 and subsequent increases to the fair value of Healtheon's stock,
we have recorded a $682 million unrealized gain, or $430 million, net of income
tax effects, in shareholders' equity as of June 30, 1999. Assuming an immediate
decrease of 50% in Healtheon's stock price, the hypothetical reduction in
shareholders' equity related to these holdings is estimated to be $215 million
(net of income tax effects), or 5.2% of total shareholders' equity at June 30,
1999. We do not believe that our risks of loss in future earnings or a decline
in fair values attributable to our investment portfolio are material to our
consolidated financial position or results of operations.
27
<PAGE>
UNITEDHEALTH GROUP
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Because of the nature of its business, United is subject to suits which
allege failures to provide or pay for health care or other benefits, poor
outcomes for care delivered or arranged under United's programs, impermissible
nonacceptance or termination of providers, failures to return withheld amounts
from provider compensation, failures to pay benefits by a self-funded plan
serviced by United, improper copayment calculations and other allegations. Some
of these suits may include claims for substantial non-economic or punitive
damages. 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. However, the likelihood or outcome of current or future suits cannot
be accurately predicted, and they could adversely affect United's financial
results.
Six suits assert claims under the United States securities laws against
United and certain of its current and former officers and directors. The
plaintiffs are stockholders of United who purport to sue on behalf of a class of
purchasers of common shares of United during the period February 12, 1998
through August 5, 1998 (the "Class Period"). Each complaint was filed in the
United States District Court for the District of Minnesota. Each of the six
actions claims violations of Sections 10(b) and 20(a) of the Securities Exchange
Act and SEC Rule 10b-5. In substance, the complaints allege that United made
materially false or misleading statements about the profitability and
performance of the Company's Medicare business during the Class Period. Two of
the complaints also allege that the Company made materially false statements
about its medical costs and the expenses related to the Company's realignment.
The complaints also allege that the statements were made with the intention of
deceiving members of the investing public and with the intention that the price
of United shares would rise, making it possible for insiders at the Company to
profit by selling shares at a time when they knew the Company's true financial
condition, but the investing public did not. The complaints allege that once the
Company's true financial condition was revealed on August 6, 1998, the price of
United common shares fell from a closing price of $52 7/8 on August 5, 1998, to
a closing price of $37 7/8 on August 6, 1998. The complaints seek compensatory
damages in unspecified amounts.
On January 19, 1999, we received a consolidated amended complaint (IN RE
UNITED HEALTHCARE CORPORATION SECURITIES LITIGATION, No. 98-1888 in the United
States District Court for the District of Minnesota) for the six suits which
essentially restates the allegations made in the earlier complaints.
On March 22, 1999, two actions were filed in the United States District
Court for the District of Minnesota by two pension funds against United, certain
current and former officers and directors, and other individuals yet to be
identified. The pension funds wish to "opt-out" of the aforementioned purported
class action suits. These individual actions essentially restate the allegations
made in the purported class actions and claim violations of Sections 10(b),
18(a) and 20 of the Securities Exchange Act. In addition, both actions assert a
claim of negligent misrepresentation and securities claims under state law. In
the aggregate, the plaintiff pension funds seek compensatory damages totaling
approximately $12.1 million.
The defendants intend to defend these actions vigorously.
28
<PAGE>
ITEM 6. EXHIBITS
(a) The following exhibits are filed in response to Item 601 of Regulation
S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------------------------------------------------------
<S> <C>
Exhibit 15 --Letter Re Unaudited Interim Financial Information
Exhibit 99 --Cautionary Statements
</TABLE>
29
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
UNITED HEALTHCARE CORPORATION
/s/ STEPHEN J. HEMSLEY
- --------------------------- Chief Operating Officer Dated: August 13, 1999
Stephen J. Hemsley
/s/ ARNOLD H. KAPLAN
- --------------------------- Chief Financial Officer Dated: August 13, 1999
Arnold H. Kaplan
/s/ PATRICK J. ERLANDSON
- --------------------------- Chief Accounting Officer Dated: August 13, 1999
Patrick J. Erlandson
30
<PAGE>
UNITED HEALTHCARE CORPORATION
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------------------------------------------------------
<S> <C>
Exhibit 15 --Letter Re Unaudited Interim Financial Information
Exhibit 99 --Cautionary Statements
</TABLE>
31
<PAGE>
EXHIBIT 15
LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
August 5, 1999
UnitedHealth Group:
We are aware that UnitedHealth Group has incorporated by reference in its
Registration Statements Nos. 2-95342, 33-03558, 33-22310, 33-27208, 33-36579,
33-50282, 33-59083, 33-59623, 33-63885, 33-67918, 33-68300, 33-75846,
33-79632, 33-79634, 33-79636, 33-79638, 333-01517, 333-01915, 333-02525,
333-04401, 333-04875, 333-05291, 333-05717, 333-06533, 333-25923, 333-27277,
333-41661, 333-44569, 333-44613, 333-45289, 333-45319, 333-50461, 333-55777,
333-71007 and 333-81337, its Form 10-Q for the quarter ended June 30, 1999,
which includes our report dated August 5, 1999 covering the unaudited interim
condensed consolidated financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not considered a
part of the registration statement prepared or certified by our Firm or a
report prepared or certified by our Firm within the meaning of Sections 7 and
11 of the Act.
Very truly yours,
/s/ ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
UNITEDHEALTH GROUP'S FORM 10-Q FOR THE SIX MONTH PERIODS ENDING JUNE 30, 1999
AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 1,230 663
<SECURITIES> 3,378 3,406
<RECEIVABLES> 1,058 1,285
<ALLOWANCES> (83) (66)
<INVENTORY> 0 0
<CURRENT-ASSETS> 71 178
<PP&E> 783 727
<DEPRECIATION> (503) (394)
<TOTAL-ASSETS> 9,754 8,888
<CURRENT-LIABILITIES> 5,260 4,236
<BONDS> 249 0
0 0
0 500
<COMMON> 2 2
<OTHER-SE> 4,156 4,129
<TOTAL-LIABILITY-AND-EQUITY> 9,754 8,888
<SALES> 9,557 8,228
<TOTAL-REVENUES> 9,667 8,350
<CGS> 9,111 8,005
<TOTAL-COSTS> 9,221 8,095
<OTHER-EXPENSES> 0 725
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 22 0
<INCOME-PRETAX> 424 (470)
<INCOME-TAX> (157) 37
<INCOME-CONTINUING> 267 (433)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 267 (448)
<EPS-BASIC> 1.51 (2.33)
<EPS-DILUTED> 1.48 (2.33)
</TABLE>
<PAGE>
EXHIBIT 99
CAUTIONARY STATEMENTS
The statements contained in this Form 10-Q include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "PSLRA"). When used in this Form 10-Q and in future filings by the
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 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
our 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, we are not undertaking to address or update
each factor in future filings or communications regarding our business or
results, and are 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 the Company's past, as well as current, forward-looking statements
about future results. The Company's actual results in the future may differ
materially from those expressed in prior communications.
HEALTH CARE COSTS. We use a large portion of our revenue to pay the costs
of health care services or supplies delivered to our members. Total health care
costs we incur are affected by the number of individual services rendered and
the cost of each service. Much of our premium revenue is priced before services
are delivered and the related costs are incurred, usually on a prospective
annual basis. Although we try to base the premiums we charge in part on our
estimate of future health care costs over the fixed premium period, competition,
regulations and other circumstances may limit our ability to fully base premiums
on estimated costs. In addition, many factors may and often do cause actual
health care costs to exceed what was estimated and reflected in premiums. These
factors may include increased use 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 earnings we report for any
particular quarter include estimates of covered services incurred by our
enrollees during that period for claims that have not been received or
processed. Because these are estimates, our earnings may be adjusted later to
reflect the actual costs. Relatively insignificant changes in the medical care
ratio, because of the narrow margins of our health plan business, can create
significant changes in our earnings.
Our medical care ratio has generally increased over the past several fiscal
years. We are addressing the medical care ratio by altering benefit designs,
recontracting with providers, and aggressively increasing both our
contemporaneous and retrospective claim management activities. Our inability to
implement these changes successfully could lead to further increases in our
medical care ratio.
In addition, our operating results may be affected by the seasonal changes
in the level of health care use during the calendar year. Although there are no
assurances, per member medical costs generally have been higher in the first
half than in the second half of each year.
INDUSTRY FACTORS. The managed care industry receives significant negative
publicity. This publicity has been accompanied by increased legislative
activity, regulation and review of industry practices. These factors may
adversely affect our ability to market our products or services, may require us
to change our products and services, and may increase the regulatory burdens
under which we operate, further increasing our costs of doing business and
adversely affecting our profitability.
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COMPETITION. In many of our geographic or product markets, we compete with
a number of other entities, some of which may have certain characteristics or
capabilities that give them a competitive advantage. We believe the barriers to
entry in these markets are not substantial, so the addition of new competitors
can occur relatively easily, and consumers enjoy significant flexibility in
moving to new managed care providers. Certain Company customers may decide to
perform functions or services we provide for themselves, which would decrease
our revenues. Certain Company providers may decide to market products and
services to our customers in competition with us. In addition, significant
merger and acquisition activity has occurred in the industry in which we operate
as well as in industries that act as suppliers to us, such as the hospital,
physician, pharmaceutical and medical device industries. To the extent that
there is strong competition or that competition intensifies in any market, our
ability to retain or increase customers or providers, or maintain or increase
our revenue growth, pricing flexibility, control over medical cost trends and
marketing expenses may be adversely affected.
AARP CONTRACT. Under our long-term contract with the American Association
of Retired Persons ("AARP"), we provide Medicare supplemental, hospital
indemnity health insurance and other products to AARP members. As a result of
the agreement, the number of members we serve, products we offer, and services
we provide has grown significantly. Our portion of the AARP's insurance program
represents approximately $3.4 billion in annual net premium revenue from
approximately 3.8 million AARP members. The success of the AARP arrangement will
depend, in part, on our ability to service these new members, develop additional
products and services, price the products and services competitively, and
respond effectively to federal and state regulatory changes. Additionally,
events that adversely affect the AARP could have an adverse effect on the
success of our arrangement with the AARP.
MEDICARE OPERATIONS. In the second quarter of 1998, we experienced a
significant rise in the medical care ratio for our Medicare operations. The
increase in medical costs was primarily due to the business growth in new
markets with higher and more volatile medical cost trends, coupled with lower
reimbursement rates. In response, we announced in October 1998 our decision to
withdraw Medicare product offerings from 86 of the 206 counties we then served.
The decision, effective January 1, 1999, affected approximately 60,000, or 12%,
of Medicare members as of December 31, 1998. On July 1, 1999, we announced plans
for withdrawal from the Medicare+Choice product program in another 49 counties
affecting 40,000 existing members, as well as the filing of significant benefit
adjustments, effective January 1, 2000. These actions may result in further
withdrawals of Medicare product offerings or reductions in membership. As a
consequence of these withdrawals, we are precluded from re-entering these
counties with Medicare product offerings until 5 years after the effective date
of withdrawal.
We will continue to offer Medicare products in strong and economically
viable markets. However, our ability to improve the financial results of all of
our Medicare operations will depend on a number of factors, including future
premium increases, growth in markets where we have achieved sufficient size to
operate efficiently, benefit design, provider contracting, and other factors.
There can be no assurance that we will be able to successfully prevent future
losses on our Medicare operations.
REALIGNMENT OF OPERATIONS. We recognized a charge in the second quarter of
1998 to earnings for our realignment. In January 1998, we initiated a
significant realignment of our operations into five businesses. As part of the
realignment, we are shifting resources and activities to more directly support
the operations of our businesses. Although we do not expect our realignment
efforts to negatively affect our product offerings, provider relations, billing
and collection disciplines, claims processing and payment activities, or other
business functions, there can be no assurance that such negative effects may not
occur. Our second quarter 1998 charge to earnings for costs associated with the
realignment was $725 million. Since the charges were recorded, certain estimates
have changed, however, we continue to believe the aggregate of such charges is
adequate to cover costs to be incurred. However, there can be no assurance that
the costs
associated with our realignment efforts will not exceed the charges we have
taken for such costs.
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GOVERNMENT PROGRAMS AND REGULATION. Our business is heavily regulated on a
federal, state and local level. The laws and rules governing our business and
interpretations of those laws and rules are subject to frequent change. Broad
latitude is given to the agencies administering those regulations. Existing or
future laws and rules could force us to change how we do business, restrict
revenue and enrollment growth, increase our health care and administrative costs
and capital requirements, and increase our liability for medical malpractice or
other actions. We must obtain and maintain regulatory approvals to market many
of our products. Delays in obtaining or failure to obtain or maintain these
approvals could adversely affect our revenue or the number of our members, or
could increase our costs. A significant portion of our 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, generally are subject to frequent change, including changes
that may reduce the number of persons enrolled or eligible, reduce the amount of
reimbursement or payment levels, or reduce or increase our administrative or
health care costs under such programs. Such changes have adversely affected our
results and willingness to participate in such programs in the past and may also
do so in the future.
We are also subject to various governmental reviews, audits and
investigations. Such oversight 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 damage our reputation in various markets and
make it more difficult for us to sell our products and services.
The National Association of Insurance Commissioners has adopted rules which,
to the extent that they are implemented by the states, will set new minimum
capitalization requirements for insurance companies, HMOs and other entities
bearing risk for health care coverage. The requirements take the form of
risk-based capital rules. The change in rules for insurance companies was
effective December 31, 1998. The new HMO rules are subject to state-by-state
adoption, but few states had adopted the rules as of June 30, 1999. The HMO
rules, if adopted by the states in their proposed form, would significantly
increase the capital required for certain of our subsidiaries. Although we
believe we can redeploy capital among our regulated entities, such rule changes
may require incremental investments of general corporate resources into
regulated subsidiaries.
PROVIDER RELATIONS. One of the significant techniques we use to manage
health care costs and utilization and monitor the quality of care being
delivered is contracting with physicians, hospitals and other providers. Because
our health plans are geographically diverse and most of those health plans
contract with a large number of providers, we currently believe our exposure to
provider relations issues is limited. In any particular market, however,
providers could refuse to contract, demand higher payments, or take other
actions, either individually or collectively through unions, that could result
in higher health care costs, less desirable products for customer 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, physician or practice management companies, which
aggregate physician practices for administrative efficiency and marketing
leverage, continue to expand. These providers may compete directly with us. If
these providers refuse to contract with us, use their market position to
negotiate favorable contracts, or place us at a competitive disadvantage those
activities could adversely affect our ability to market products or to be
profitable in those areas.
LITIGATION AND INSURANCE. We may be a party to a variety of legal actions
that affect any business, such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, anti-competitive claims, shareholder suits, including
securities fraud, and intellectual property related litigation. In addition,
because of the nature of our business, we are subject to a variety of legal
actions relating to our business operations. These could include: claims
relating to the denial of health care benefits; medical malpractice actions;
claims of vicarious liability for providers' actions; provider disputes over
compensation and termination of provider contracts; disputes related to
self-funded
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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
increase our exposure for any of these types of claims. In some cases,
substantial non-economic or punitive damages may be sought. We currently have
insurance coverage for some of these potential liabilities. Other potential
liabilities may not be covered by insurance, 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. Our business depends significantly on effective
information systems, and we have many different information systems for our
various businesses. Our information systems require an ongoing commitment of
resources to maintain and enhance existing systems and develop new systems in
order to keep pace with continuing changes in information processing technology,
evolving industry standards, and changing customer preferences. In addition, we
may from time to time obtain significant portions of our systems-related or
other services or facilities from independent third parties, which may make our
operations vulnerable to such third parties' failure to perform adequately. As a
result of our acquisition activities, we have acquired additional systems and
have been taking steps to reduce the number of systems and have upgraded and
expanded our information systems capabilities. Failure to maintain effective and
efficient information systems could cause loss of existing customers, difficulty
in attracting new customers, customer and provider disputes, regulatory
problems, increases in administrative expenses or other adverse consequences.
THE YEAR 2000. We are in the process of modifying our computer systems to
accommodate the Year 2000. We currently expect to complete this modification
enough in advance of the Year 2000 to avoid adverse impacts on our operations.
We are expensing the costs incurred to make these modifications. Our operations
could be adversely affected if we are unable to complete our Year 2000
modifications in a timely manner or if other companies with which we do business
fail to complete their Year 2000 modifications in a timely manner.
ADMINISTRATIVE AND MANAGEMENT. Efficient and cost-effective administration
of our operations is essential to our profitability and competitive positioning.
While we attempt to effectively manage such expenses, staff-related and other
administrative expenses may rise from time to time due to business or product
start-ups or expansions, growth or changes in business, acquisitions, regulatory
requirements or other reasons. These expense increases are not clearly
predictable and may adversely affect results. We believe we currently have an
experienced, capable management and technical staff. The market for management
and technical personnel, including information systems professionals, in the
health care industry is very competitive. Loss of certain managers or a number
of such managers or technical staff could adversely affect our ability to
administer and manage our business.
MARKETING. We market our products and services through both employed sales
people and independent sales agents. Although we have many sales employees and
agents, the departure of certain key sales employees or agents or a large subset
of such individuals could impair our ability to retain existing customers and
members. In addition, certain of our 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 our
health plans or other business units may not have obtained or maintained, or may
not desire or be able to obtain or maintain, such rating accreditation or
certification, which could adversely affect our ability to obtain or retain
business with these customers.
ACQUISITIONS AND DISPOSITIONS. We have made several large acquisitions in
recent years and have an active ongoing acquisition and disposition program
under which we may engage in transactions involving the acquisition or
disposition of assets, products or businesses, some or all of which may be
material. These acquisitions may entail certain risks and uncertainties and may
affect ongoing business operations because
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of 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.
DATA AND PROPRIETARY INFORMATION. Many of the products that are part of our
knowledge and information-related business depend significantly on the integrity
of the data on which they are based. If the information contained in our
databases were found or perceived to be inaccurate, or if such information were
generally perceived to be unreliable, commercial acceptance of our
database-related products would be adversely and materially affected.
Furthermore, the use by all of our business of patient data is regulated at
federal, state, and local levels. These laws and rules are changed frequently by
legislation or administrative interpretation. These restrictions could adversely
affect revenues from these products and, more generally, affect our business,
financial condition and results of operations.
There are various proposals addressing the use of patient data from federal
and state legislative and regulatory bodies currently under consideration. If
enacted, some of these proposals may impose restrictions on our use of patient
data and may increase our cost to use patient data.
The success of our knowledge and information-related business also depends
significantly on our ability to maintain proprietary rights to our products. We
rely on our agreements with customers, confidentiality agreements with
employees, and our trade secrets, copyrights and patents to protect our
proprietary rights. We cannot assure that these legal protections and
precautions will prevent misappropriation of our proprietary information. In
addition, substantial litigation regarding intellectual property rights exists
in the software industry, and we expect software products to be increasingly
subject to third-party infringement claims as the number of products and
competitors in this industry segment grows. Such litigation could have an
adverse effect on the ability of our knowledge and information-related business
to market and sell its products and on our business, financial condition and
results of operations.
STOCK MARKET. The market prices of the securities of the Company and
certain of the publicly-held companies in the industry in which we operate 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. We cannot assure the level or stability of our share price
at any time, or the impact of the foregoing or any other factors may have on our
share price.
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