UNITED HEALTHCARE CORP, 10-Q, 1999-05-17

UNITED HEALTHCARE CORP
10-Q, 1999-05-17
HOSPITAL & MEDICAL SERVICE PLANS

Previous: CUCOS INC, 10QSB, 1999-05-17

Next: TEMPLE INLAND INC, 10-Q, 1999-05-17

<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

------------------------

FORM 10-Q
---------------

(MARK ONE)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 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
May 12, 1998, was 173,142,366.

- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
UNITEDHEALTH GROUP
INDEX

<TABLE>
<CAPTION>
PAGE
NUMBER
-------------
<S> <C>
PART I. FINANCIAL INFORMATION.

ITEM I. FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidated Balance Sheets at March 31, 1999 and December 31, 1998....................... 3

Condensed Consolidated Statements of Operations for the three month periods ended March 31, 1999 and
1998............................................................................................... 4

Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 1999 and
1998............................................................................................... 5

Notes to Condensed Consolidated Financial Statements................................................ 6

Report of Independent Public Accountants............................................................ 13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 14

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................... 25

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS............................................................................. 26

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 26

ITEM 6. EXHIBITS...................................................................................... 27

Signatures.............................................................................................. 28
</TABLE>

2
<PAGE>
UNITEDHEALTH GROUP

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents............................................................. $ 1,369 $ 1,644
Short-Term Investments................................................................ 138 170
Accounts Receivable, net.............................................................. 1,039 991
Assets Under Management............................................................... 1,154 1,155
Other Current Assets.................................................................. 222 320
----------- ------
Total Current Assets................................................................ 3,922 4,280
Long-Term Investments................................................................... 2,765 2,610
Property and Equipment, net............................................................. 294 294
Goodwill and Other Intangible Assets, net............................................... 2,509 2,517
----------- ------
TOTAL ASSETS............................................................................ $ 9,490 $ 9,701
----------- ------
----------- ------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical Costs Payable................................................................. $ 2,902 $ 2,780
Other Policy Liabilities.............................................................. 714 714
Accounts Payable and Accrued Liabilities.............................................. 801 739
Short-Term Debt....................................................................... 400 459
Accrued Operational Realignment and Other Charges..................................... 211 236
Unearned Premiums..................................................................... 199 414
----------- ------
Total Current Liabilities........................................................... 5,227 5,342
Long-Term Debt.......................................................................... 249 249
Other Long-Term Liabilities............................................................. 66 72
----------- ------
Shareholders' Equity
Common Stock, $.01 par value; 500,000,000 shares authorized; 176,994,000 and
183,930,000 issued and outstanding.................................................. 2 2
Additional Paid-in Capital............................................................ 762 1,107
Retained Earnings..................................................................... 3,017 2,885
Accumulated Other Comprehensive Income:
Net Unrealized Holding Gains on Investments Available for Sale, net of income tax
effects........................................................................... 167 44
----------- ------
Total Shareholders' Equity.......................................................... 3,948 4,038
----------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................................. $ 9,490 $ 9,701
----------- ------
----------- ------
</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
MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
REVENUES
Premiums..................................................................................... $ 4,318 $ 3,682
Management Services and Fees................................................................. 434 371
Investment and Other Income.................................................................. 57 62
--------- ---------
Total Revenues............................................................................. 4,809 4,115
--------- ---------
OPERATING EXPENSES
Medical Costs................................................................................ 3,720 3,152
Selling, General and Administrative Expenses................................................. 813 712
Depreciation and Amortization................................................................ 55 42
--------- ---------
Total Operating Expenses................................................................... 4,588 3,906
--------- ---------
EARNINGS FROM OPERATIONS....................................................................... 221 209
Interest Expense............................................................................. (11) --
--------- ---------
EARNINGS BEFORE INCOME TAXES................................................................... 210 209
Provision for Income Taxes................................................................... (78) (77)
--------- ---------
NET EARNINGS................................................................................... 132 132
CONVERTIBLE PREFERRED STOCK DIVIDENDS.......................................................... -- (7)
--------- ---------
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS................................................. $ 132 $ 125
--------- ---------
--------- ---------
BASIC NET EARNINGS PER COMMON SHARE............................................................ $ 0.73 $ 0.65
--------- ---------
--------- ---------
DILUTED NET EARNINGS PER COMMON SHARE.......................................................... $ 0.72 $ 0.63
--------- ---------
--------- ---------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........................................... 180 193
DILUTIVE EFFECT OF OUTSTANDING STOCK OPTIONS................................................... 3 6
--------- ---------
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, ASSUMING DILUTION........................ 183 199
--------- ---------
--------- ---------
</TABLE>

See notes to condensed consolidated financial statements

4
<PAGE>
UNITEDHEALTH GROUP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings................................................................................ $ 132 $ 132
Noncash Items:
Depreciation and Amortization............................................................. 55 42
Other..................................................................................... (3) --
Net Change in Other Operating Items:
Accounts Receivable and Other Current Assets.............................................. (30) (92)
Medical Costs Payable..................................................................... 110 101
Accounts Payable and Accrued Liabilities.................................................. 101 12
Accrued Operational Realignment and Other Charges......................................... (25) --
Unearned Premiums......................................................................... (218) (133)
--------- ---------
Cash Flows From Operating Activities.................................................... 122 62
--------- ---------
INVESTING ACTIVITIES
Cash Paid for Acquisitions, net of cash assumed and other effects........................... (21) (84)
Purchases of Property and Equipment and Capitalized Software................................ (47) (41)
Proceeds from Sales of Property and Equipment............................................... -- 29
Purchases of Investments.................................................................... (491) (1,247)
Maturities/Sales of Investments............................................................. 569 1,201
--------- ---------
Cash Flows From (Used for) Investing Activities......................................... 10 (142)
--------- ---------
FINANCING ACTIVITIES
Proceeds from Stock Option Exercises........................................................ 21 35
Common Stock Repurchases.................................................................... (369) (30)
Payments of Short-term Borrowings........................................................... (59) --
Dividends Paid.............................................................................. -- (7)
--------- ---------
Cash Flows Used for Financing Activities.................................................. (407) (2)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS......................................................... (275) (82)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................................ 1,644 750
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD...................................................... $ 1,369 $ 668
--------- ---------
--------- ---------
</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. 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. These activities will result in a reduction of more than 4,000
positions, affecting 6,000 people in various locations. Through March 31, 1999,
we have eliminated approximately 2,400 positions pursuant to the Plan.

6
<PAGE>
UNITEDHEALTH GROUP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

2. OPERATIONAL REALIGNMENT AND OTHER CHARGES (CONTINUED)
The following is a roll-forward of accrued operational realignment and other
charges through March 31, 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
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
</TABLE>

The asset impairments consisted principally of: 1) purchased in-process research
and development associated with our acquisition of Medicode, Inc.; and 2)
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.

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 $4.0 million was expended through March 31, 1999, with another $0.5
million expected to be spent over the next three months to complete these
research and development projects.

Businesses we intend to dispose of include our managed workers' compensation
business, and medical and behavioral health provider clinics. Markets where we
plan to curtail or make changes to our operating presence include our small
group health insurance business and three health plan markets that are in
non-strategic locations. Our accompanying financial statements include the
operating results of businesses 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 $40 million as of March 31, 1999. The losses
anticipated on the disposition of these businesses, including severance,
impairment of assets, abandoned facilities, and additional exit costs, total
approximately $175 million and were included in the $725 million of operational
realignment and other charges recorded in the second quarter of 1998. We expect
to complete the disposition of these businesses prior to December 31, 1999.

7
<PAGE>
UNITEDHEALTH GROUP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

2. OPERATIONAL REALIGNMENT AND OTHER CHARGES (CONTINUED)
Our accompanying Consolidated Statements of Operations include revenues and
operating losses from these businesses for the three months ending March 31 as
follows (in millions):

<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Revenues...................................................................... $ 155 $ 168
Operating losses before income taxes.......................................... $ (5) $ (5)
</TABLE>

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
month period ended March 31, 1999, we incurred expenses of approximately $15
million related to these activities.

The original operational realignment plan provided for substantial completion in
1999. Certain divestitures and market realignment transactions are requiring
additional time to close, and accordingly, will extend into the third and fourth
quarters of 1999. Other initiatives, including the consolidation of certain
claims and administrative processing operations, will require additional time to
fully implement and will continue into the year 2000. 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, or losses on business held for disposal.

3. CASH AND INVESTMENTS

As of March 31, 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......................... $ 1,369 $ -- $ -- $ 1,369
Debt Securities--Investments Available for Sale... 2,459 49 (7) 2,501
Equity Securities--Investments Available for
Sale............................................ 91 225 -- 316
Debt Securities- Held to Maturity................. 86 -- -- 86
------ ----- --- -----------
Total Cash and Investments...................... $ 4,005 $ 274 $ (7) $ 4,272
------ ----- --- -----------
------ ----- --- -----------
</TABLE>

Gross realized gains of $4 million and $8 million, and gross realized losses of
$3 million and $2 million were recognized for the three months ended March 31,
1999 and 1998, respectively, and are included in investment and other income in
the accompanying Condensed Consolidated Statements of Operations.

4. DEBT

In November 1998, we issued $650 million of unsecured notes payable at a
weighted-average interest rate of 6.0%. The debt placement consisted of $400
million in unsecured notes due December 1999, with an

8
<PAGE>
UNITEDHEALTH GROUP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

4. DEBT (CONTINUED)
interest rate of 5.65% and $250 million in unsecured notes due December 2003,
with an interest rate of 6.65%.

In December 1998, we also established a $600 million commercial paper program,
thereby providing increased flexibility in managing our capital structure. At
March 31, 1999, we had no commercial paper borrowings outstanding.

In support of our commercial paper program, we entered into a $600 million
credit arrangement with a group of banks. The agreement is comprised of a $300
million five-year revolving credit facility and $300 million 364-day credit
facility. No borrowings were outstanding as of March 31, 1999 under the credit
facilities. Debt consists of the following:

<TABLE>
<CAPTION>
MARCH 31, 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
6.65% 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 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.
As of March 31, 1999, we are well within the requirements of all debt covenants.

The carrying value of the Company's outstanding debt approximates its fair value
at March 31, 1999.

5. 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

9
<PAGE>
UNITEDHEALTH GROUP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5. AMERICAN ASSOCIATION OF RETIRED PERSONS CONTRACT (CONTINUED)
periods of the contract. The RSF balance was $509 million as of December 31,
1998, and is $519 million as of March 31, 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 MARCH 31, 1999 DECEMBER 31, 1998
- - -------------------------------------------------------------- --------------- -----------------
<S> <C> <C>
Assets Under Management....................................... $ 1,154 $ 1,155
Premiums Receivable........................................... $ 286 $ 287
Medical Costs Payable......................................... $ 842 $ 830
Other Policy Liabilities...................................... $ 519 $ 509
Other Liabilities............................................. $ 79 $ 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.

6. STOCK REPURCHASE PROGRAM

Under our current stock repurchase program, we may purchase up to 27.7 million
shares of our outstanding common stock. Purchases may be made from time to time
at prevailing prices, subject to certain restrictions on volume, pricing, and
timing. During the three month period ended March 31, 1999, we repurchased 7.5
million shares at an aggregate cost of $369 million. Since inception of the
program in November 1997 through April 1999, we have repurchased 22.9 million
shares.

7. 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-month periods ended March 31
(in millions):

<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net Earnings.................................................................. $ 132 $ 132
Change in Net Unrealized Holding Gains (Losses) on Investments Available for
Sale, net of income tax effects............................................. 123 (8)
--------- ---------
Comprehensive Income.......................................................... $ 255 $ 124
--------- ---------
--------- ---------
</TABLE>

10
<PAGE>
8. 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 health care indemnity and managed
care 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-Registered Trademark-, 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.

- 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, and eliminations of intersegment
transactions and balances.

The following tables present segment financial information for the three-month
periods ended March 31, 1999 and 1998 (in millions):

<TABLE>
<CAPTION>
HEALTH CARE SPECIALIZED CORPORATE &
FIRST QUARTER 1999 SERVICES UNIPRISE CARE SERVICES INGENIX ELIMINATIONS CONSOLIDATED
- - --------------------------------------- ----------- ----------- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues--External Customers........... $ 4,306 $ 335 $ 72 $ 39 $ -- $ 4,752
Revenues--Intersegment................. -- 109 91 14 (214) --
Investment and Other Income............ 42 6 1 -- 8 57
----------- ----- ----- --- ----- ------
Total Revenues......................... $ 4,348 $ 450 $ 164 $ 53 $ (206) $ 4,809
----------- ----- ----- --- ----- ------
----------- ----- ----- --- ----- ------
Earnings from Operations............... $ 138 $ 46 $ 27 $ 2 $ 8 $ 221
----------- ----- ----- --- ----- ------
----------- ----- ----- --- ----- ------
</TABLE>

11
<PAGE>
8. SEGMENT FINANCIAL INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
HEALTH CARE SPECIALIZED CORPORATE &
FIRST QUARTER 1998 SERVICES UNIPRISE CARE SERVICES INGENIX ELIMINATIONS CONSOLIDATED
- - ------------------------------------- ----------- ----------- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues--External Customers......... $ 3,669 $ 302 $ 64 $ 18 $ -- $ 4,053
Revenues--Intersegment............... -- 85 82 15 (182) --
Investment and Other Income.......... 32 5 1 -- 24 62
----------- ----- ----- --- ----- ------
Total Revenues....................... $ 3,701 $ 392 $ 147 $ 33 $ (158) $ 4,115
----------- ----- ----- --- ----- ------
----------- ----- ----- --- ----- ------
Earnings from Operations............. $ 124 $ 32 $ 28 $ 1 $ 24 $ 209
----------- ----- ----- --- ----- ------
----------- ----- ----- --- ----- ------
</TABLE>

12
<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 March 31, 1999 and the related
condensed consolidated statements of operations and cash flows for the three
month periods ended March 31, 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,
May 6, 1999

13
<PAGE>
UNITED HEALTHGROUP

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.

FIRST QUARTER 1999 FINANCIAL PERFORMANCE HIGHLIGHTS

Summary highlights of our first quarter 1999 results include:

- Earnings per share reached $0.72, an increase of 14% from $0.63 per share
reported in the first quarter of 1998 and up $0.05 per share, or 7%,
sequentially over the fourth quarter of 1998.

- We reported cash flows from operations of $122 million, nearly doubling
first quarter 1998 levels.

- Consolidated revenues increased 17% over the first quarter of 1998 to $4.8
billion, driven by 7% plus net price increases and 8% same-store
risk-based commercial health plan enrollment growth at UnitedHealthcare.

- We repurchased an additional 7.5 million shares of our common stock during
the first quarter, bringing our total shares repurchased since inception
of our stock repurchase activities in November 1997 to 22.9 million shares
through April 1999.

- We improved operating cost ratios despite additional costs associated with
Y2K remediation, membership conversion and core process improvement
efforts.

SUMMARY OPERATING INFORMATION

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------- PERCENT
OPERATING RESULTS 1999 1998 CHANGE
- - ---------------------------------------------------------------------------- --------- --------- -------------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Total Revenues.............................................................. $ 4,809 $ 4,115 17%
Earnings from Operations.................................................... $ 221 $ 209 6%
Net Earnings Applicable to Common Shareholders.............................. $ 132 $ 125 6%
Net Earnings Per Common Share, Assuming Dilution............................ $ 0.72 $ 0.63 14%
Medical Costs to Premium Revenues........................................... 86.2% 85.6%
Medical Costs to Premium Revenues, Excluding AARP........................... 84.5% 83.7%
SG&A Expenses to Total Revenues............................................. 16.9% 17.3%
</TABLE>

14
<PAGE>
UNITED HEALTHGROUP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table summarizes enrollment by product and funding arrangement as
of March 31 (in thousands):

<TABLE>
<CAPTION>
INCREASE
1999(A) 1998 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
UnitedHealthcare
Risk-Based:
Health Plans.................................................................. 5,304 4,603 15%
Other Network-Based and Indemnity............................................. 513 574 (11)%
--
--------- ---------
Total Commercial............................................................ 5,817 5,177 12%
Medicare...................................................................... 443 380 17%
Medicaid...................................................................... 518 510 2%
--
--------- ---------
Total Risk-Based:............................................................... 6,778 6,067 12%

Fee-Based:
Commercial.................................................................... 1,776 1,600 11%
--
--------- ---------
Total UnitedHealthcare............................................................ 8,554 7,667 12%

Uniprise
Risk-Based.................................................................... 226 314 (28)%
Fee-Based..................................................................... 5,555 5,066 10%
--
--------- ---------
Total Uniprise.................................................................. 5,781 5,380 7%
--
--------- ---------
Total Enrollment, excluding Ovations.............................................. 14,335 13,047 10%
--
--
--------- ---------
--------- ---------
</TABLE>

- - ------------------------

(a) Includes the 338,000 commercial members, 25,000 Medicare members, and
121,000 Medicaid members of HealthPartners of Arizona, acquired in October
1998, and the 27,000 commercial members of Principal Health Care of Texas,
which was acquired in August 1998.

15
<PAGE>
RESULTS OF OPERATIONS

PREMIUM REVENUES

Premium revenues in the first quarter of 1999 totaled $4,318 million, an
increase of $636 million, or 17%, over the first quarter of 1998.

Health Care Services' first quarter 1999 premium revenues totaled $4,170
million, an increase of $618 million, or 17%, over the first quarter of 1998.
This increase reflects UnitedHealthcare's same-store risk-based commercial
health plan enrollment growth of 8% and average year-over-year premium rate
increases on renewing commercial groups exceeding 7%. Growth in Medicare
programs also contributed to the increase in premium revenues with same-store
growth of 10% in UnitedHealthcare's Medicare enrollment. Significant growth in
Medicare enrollment affects year-over-year comparability of premium 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.

Despite the year-over-year growth in Medicare enrollment at March 31, we are
projecting Medicare enrollment at December 31, 1999 will be relatively flat
compared with December 31, 1998 enrollment of 483,000 members. Effective January
1, 1999, we withdrew Medicare product offerings from 86 counties, affecting
approximately 60,000, or 12% of our Medicare members as of December 31, 1998. We
will continue to evaluate the markets we serve throughout 1999 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 during 1999.

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 medical care ratio by product line
for the three-month periods ended March 31:

<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
UnitedHealthcare:
Commercial............................................................ 84.7% 84.3%
Medicare.............................................................. 88.9% 86.9%
Medicaid.............................................................. 86.3% 79.7%
--------- ---------
Total UnitedHealthcare.............................................. 85.7% 84.5%
--------- ---------
Consolidated UnitedHealth Group......................................... 86.2% 85.6%
--------- ---------
Consolidated, excluding AARP............................................ 84.5% 83.7%
--------- ---------
</TABLE>

Our medical care ratio increased from 85.6% in the first quarter of 1998 to
86.2% in the first quarter of 1999. Excluding the AARP business, on a
year-over-year basis, the medical care ratio increased from 83.7% to 84.5%. On a
sequential basis, our medical care ratio, excluding AARP, remained flat with the
fourth quarter of 1998 at 84.5%.

The increase of $568 million, or 18%, in medical costs in the first quarter of
1999 over the comparable prior year period is largely commensurate with the 17%
growth in premium revenues. During the first quarter of 1999, we estimate our
medical cost trend was 4% to 5% compared with the full-year 1998 medical cost
trend of approximately 4%. We expect medical cost increases to remain stable
during the remainder of 1999 in the 4% to 5% range, and we also expect our
medical care ratio will improve as a result of 1999 premium yield increases on
new and renewal commercial business exceeding 7%.

16
<PAGE>
MANAGEMENT SERVICES AND FEE REVENUES

Management services and fee revenues during the three-months ended March 31,
1999 totaled $434 million representing an increase of $63 million, or 17%, over
the same period in 1998. These revenues are primarily generated from self-funded
products where we receive a fee for administrative services and assume no
financial responsibility for health care costs associated with these products.
In addition, we receive fee revenues from administrative services we perform on
behalf of managed health plans and for services provided by our Specialized Care
Services and Ingenix businesses.

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 and growth in our Specialized Care Services
business contributed to the increase in management services and fees in the
first quarter of 1999.

OPERATING EXPENSES

Selling, general and administrative expenses as a percent of total revenues (the
SG&A ratio) decreased from 17.3% during the first quarter of 1998 to 16.9%
during the first quarter of 1999. The improvement in the year-over-year SG&A
ratio reflects the benefits of our cost reduction and improvement efforts in
1998 and continuing into 1999. For the three months ended March 31, 1999,
selling, general and administrative expenses increased $101 million, or 14%,
over the comparable period in 1998. This increase reflects the additional costs
to support the corresponding $4.8 billion, or 17%, increase in revenues, as well
as additional investment in future growth platforms, and incremental operating
expenses related to recent acquisitions.

OPERATIONAL REALIGNMENT AND OTHER CHARGES

17
<PAGE>
The following is a roll-forward of accrued operational realignment and other
charges through March 31, 1999, (in millions):

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
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
</TABLE>

The asset impairments consisted principally of: 1) purchased in-process research
and development associated with our acquisition of Medicode, Inc.; 2) 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 change our operating presence, and other
realignment initiatives.

<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Revenues...................................................... $ 155 $ 168
Operating losses before income taxes.......................... $ (5) $ (5)
</TABLE>

18
<PAGE>
The original operational realignment plan provided for substantial completion in
1999. Certain divestitures and market realignment transactions are requiring
additional time to close, and accordingly, will extend into the third and fourth
quarters of 1999. Other initiatives, including the consolidation of certain
claims and administrative processing operations, will require additional time to
fully implement and will continue into the year 2000. 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, or losses on business held for disposal.

We believe the aggregate reduction in our overall cost structure from our
realignment and other cost reduction activities will approximate $300 million
annually by the end of the year 2000. We expect to realize approximately $75
million of these reductions in 1999.

BUSINESS SEGMENTS

The following summarizes the operating results of our business segments for
three-month periods ended March 31(in millions):

REVENUES

<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Health Care Services................................................... $ 4,348 $ 3,701
Uniprise............................................................... 450 392
Specialized Care Services.............................................. 164 147
Ingenix................................................................ 53 33
Corporate and Eliminations............................................. (206) (158)
--------- ---------
Consolidated Revenues.............................................. $ 4,809 $ 4,115
--------- ---------
--------- ---------
</TABLE>

EARNINGS FROM OPERATIONS

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Health Care Services................................................... $ 138 $ 124
Uniprise............................................................... 46 32
Specialized Care Services.............................................. 27 28
Ingenix................................................................ 2 1
Corporate.............................................................. 8 24
----- -----
Consolidated Earnings from Operations.............................. $ 221 $ 209
----- -----
----- -----
</TABLE>

HEALTH CARE SERVICES

The Health Care Services segment, comprised of UnitedHealthcare and Ovations,
posted record revenues of $4.3 billion, representing an increase of $647
million, or 17%, over the first quarter of 1998. UnitedHealthcare grew
same-store risk-based commercial health plan enrollment by 8% and realized
average premium yield increases of over 7% on renewing commercial groups.
Additionally, UnitedHealthcare made significant improvements in managing
operating expenses reducing their SG&A ratio from 15.3% in 1998 to 14.6% in
1999. UnitedHealthcare's enrollment growth and expense management initiatives
contributed significantly to Health Care Services' increase in earnings from
operations of $14 million, or 11%, over the comparable period in 1998.

UNIPRISE

Uniprise's revenues increased by $58 million, or 15%, over the first quarter of
1998 driven primarily by growth in its multi-site customer base and modest price
increases on fee-based business. Uniprise's

19
<PAGE>
earnings from operations grew by $14 million over the first quarter of 1998 as a
result of the increased revenues and reduced operating costs as a percentage of
revenues.

SPECIALIZED CARE SERVICES

Specialized Care Services revenues increased by $17 million, or 12%, over the
first 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. Earnings from operations of $27 million were
relatively flat when compared with the first quarter of 1998. Earnings from
operations in 1999 did not increase commensurate with revenue growth as a result
of administrative costs associated with new dental and vision product iniatives.

INGENIX

Revenues increased by $20 million over the comparable prior year period as a
result of acquisitions during the second half of 1998. Despite the increased
revenues, earnings from operations were relatively flat with the prior year
primarily as a result of increased amortization expense related to goodwill
associated with Ingenix's acquisitions.

FINANCIAL CONDITION AND LIQUIDITY AT MARCH 31, 1999

During the first quarter of 1999, we generated cash from operations of $122
million. We continued to maintain a strong financial condition and liquidity
position, with cash and investments of $4.3 billion at March 31, 1999. Total
cash and investments decreased by approximately $150 million since December 31,
1998, primarily resulting from $369 million of common stock repurchases during
the first quarter of 1999.

Under our current stock repurchase program, we may purchase up to 27.7 million
shares of our outstanding common stock. Purchases may be made from time to time
at prevailing prices, subject to certain regulatory restrictions relating to
volume, pricing and timing. During the first three months of 1999, we
repurchased 7.5 million shares at an aggregate cost of $369 million. Since
inception of the program in November 1997 through April 1999, we have
repurchased 22.9 million shares.

In April 1999, the Securities and Exchange Commission declared effective the
shelf registration statement we had previously filed in November 1998. The shelf
registration covers $1.05 billion of debt securities, preferred stock, common
stock, depository shares, warrants and trust preferred securities. An existing
shelf registration with $200 million of registered but unissued securities was
rolled into this new shelf registration, bringing the aggregate initial public
offering price of all securities covered by the shelf registration statement
declared effective to $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.

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 $380 million of our $4.3 billion
of cash and investments at March 31, 1999, was available for general corporate
use, including working capital needs.

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 March 31, 1999, we were well within the requirements of all debt covenants.

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 in the range of $75 million to $100 million over the next 12
months.

20
<PAGE>
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. Our long-term investments, $2.8
billion as of March 31, 1999, are classified as available for sale and 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 changes in 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 or increase
administrative costs.

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 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 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.

21
<PAGE>
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 Year 2000
activities follows.

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 system 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 are in the
process of reviewing some of our smaller mainframe systems and making
modifications as necessary. 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.

TELECOMMUNICATIONS. We have inventoried all of our telecommunication
systems--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%

22
<PAGE>
compliant and our voice network is 91% compliant as of April 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 93% 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 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.

OTHER YEAR 2000 MATTERS

NON-INFORMATION TECHNOLOGY SYSTEMS. We have approximately 300 owned or leased
facilities throughout the world. 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 facilities are scheduled to be Year 2000 compliant 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.
Approximately 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 expect to complete
our analysis of critical vendor readiness and identification of alternative
vendors, where necessary, by July 31, 1999. We are assessing our options with
regard to contacting all of the 300,000 medical providers we conduct business
with regarding Year 2000 compliance issues. We will be testing and verifying the
electronic collection of data with these 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 March 31, 1999, our

23
<PAGE>
historical and projected costs to complete our Year 2000 remediation plan are as
follows (amounts in millions):

<TABLE>
<CAPTION>
COST INCURRED TO DATE PROJECTED COSTS
---------------------------- --------------------------
YEAR RESOURCES AMORTIZATION RESOURCES AMORTIZATION TOTAL
- - ------------------------------------------------------- ------------- ------------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
1996................................................... $ 1 $ -- $ -- $ -- $ 1
1997................................................... 12 -- -- -- 12
1998................................................... 18 -- -- -- 18
1999................................................... 5 2 13 5 25
2000................................................... -- -- 3 9 12
2001................................................... -- -- -- 9 9
2002................................................... -- -- -- 2 2
--- ----- ----- ----- ---
$ 36 $ 2 $ 16 $ 25 $ 79
--- ----- ----- ----- ---
--- ----- ----- ----- ---
</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 area of our Year 2000 compliance effort is currently
developing 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
will be final by July 31, 1999.

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 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 March 31, 1999, the Company's regulated subsidiaries had aggregate
statutory capital and surplus of approximately $1.2 billion, compared with their
aggregate minimum statutory capital and surplus requirements of $439 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 March 31, 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

24
<PAGE>
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 March 31, 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
$220 million unrealized gain, $140 million net of income tax effects, in
shareholders' equity as of March 31, 1999. Assuming an immediate decrease of 25%
in Healtheon's stock price, the hypothetical reduction in shareholders' equity
related to these holdings is estimated to be $35 million (net of income tax
effects), or 0.9% of total shareholders' equity at March 31, 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.

25
<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 asset 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 materialy 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Company's Annual Meeting of Shareholders held on May 12, 1999 (the
"Annual Meeting"), the Company's shareholders voted on three items: the election
of four directors, a shareholder proposal requesting that the Board of Directors
take the necessary steps to declassify the Board of Directors, and the
ratification of the appointment of Arthur Andersen LLP as independent public
accountants.

26
<PAGE>
The four directors elected at the Annual Meeting are: Thomas H. Kean, with
148,435,325 votes cast for his election and 1,454,137 votes withheld; Robert L.
Ryan, with 148,440,625 votes cast for his election and 1,448,837 votes withheld;
William G. Spears with 148,439,197 votes cast for his election and 1,450,265
votes withheld; and Gail R. Wilensky, with 148,425,473 votes cast for her
election and 1,463,989 votes withheld. The directors whose term of office as a
director continued after the Annual Meeting are: William C. Ballard, Jr.,
Richard T. Burke, James A. Johnson, Douglas W. Leatherdale, William W. McGuire,
M.D., Walter F. Mondale and Mary O. Mundinger.

A shareholder proposal requesting that the Board of Directors take the necessary
steps to declassify the Board of Directors so that all directors are elected
annually received 93,911,978 votes cast for the proposal, 42,200,441 votes cast
against the proposal and 450,464 votes abstaining. There were 13,326,579 broker
non-votes cast on this matter. In order to declassify the Board of Directors,
the Board of Directors must first approve and then submit to the shareholders
for their approval an amendment to the Company's Articles of Incorporation. The
Board of Directors will consider the proposal to declassify the Board of
Directors at its upcoming meetings, and if it determines that declassifying the
Board of Directors is in the best interest of the Company and its shareholders,
it will submit the matter to a vote of the shareholders at the next annual
meeting of shareholders.

The appointment of Arthur Andersen LLP as independent public accountants for the
year ending December 31, 1999 was ratified with 149,105,809 votes cast for
ratification, 484,495 votes cast against ratification and 299,158 votes
abstaining. There were no broker non-votes on this matter.

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> <C>
Exhibit 15 -- Letter Re Unaudited Interim Financial Information
Exhibit 99 -- Cautionary Statements
</TABLE>

(b) The Company filed the following reports on Form 8-K during the three month
period ended March 31, 1999:

1) Form 8-K dated January 8, 1999. The items reported were items 5 and 7
concerning the redemption of all of its outstanding shares of 5.75%
Series A Convertible Preferred Stock on December 24, 1998 at an aggregate
cost to the Company of $520,125,000.

2) Form 8-K dated February 23, 1999. The item reported was item 5
concerning information discussed in the investor teleconference on
February 18.

27
<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.

<TABLE>
<S> <C> <C>
UNITED HEALTHCARE CORPORATION
</TABLE>

<TABLE>
<C> <S> <C>
/s/ STEPHEN J. HEMSLEY
- - ------------------------------ Chief Operating Officer Dated: May 17, 1999
Stephen J. Hemsley

/s/ ARNOLD H. KAPLAN
- - ------------------------------ Chief Financial Officer Dated: May 17, 1999
Arnold H. Kaplan

/s/ PATRICK J. ERLANDSON
- - ------------------------------ Chief Accounting Officer Dated: May 17, 1999
Patrick J. Erlandson
</TABLE>

28
<PAGE>
UNITED HEALTHCARE CORPORATION
EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------------ -----------------------------------------------------------------------------------------------
<S> <C> <C>
Exhibit 15 -- Letter Re Unaudited Interim Financial Information

Exhibit 99 -- Cautionary Statements
</TABLE>

<PAGE>

EXHIBIT 15

LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION

May 6, 1999

To the Shareholders and Directors of UnitedHealth Group:

We are aware that UnitedHealth Group, its corporate entity, United
HealthCare Corporation, and Subsidiaries has incorporated by reference in its
Registration Statements No. 2-95342, 33-01517, 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, 333-01915, 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 and
333-55777, 333-71007, its form 10-Q for the quarter ended March 31, 1999,
which includes our report dated May 6, 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

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000

<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 1,369 668
<SECURITIES> 2,703 3,330
<RECEIVABLES> 1,130 1,208
<ALLOWANCES> 91 63
<INVENTORY> 0 0
<CURRENT-ASSETS> 222 154
<PP&E> 781 699
<DEPRECIATION> 487 368
<TOTAL-ASSETS> 9,490 9,104
<CURRENT-LIABILITIES> 5,227 3,914
<BONDS> 249 0
0 500
0 0
<COMMON> 2 2
<OTHER-SE> 3,946 4,668
<TOTAL-LIABILITY-AND-EQUITY> 9,490 9,104
<SALES> 4,752 4,053
<TOTAL-REVENUES> 4,809 4,115
<CGS> 4,533 3,864
<TOTAL-COSTS> 4,533 3,864
<OTHER-EXPENSES> 55 42
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11 0
<INCOME-PRETAX> 210 209
<INCOME-TAX> 78 77
<INCOME-CONTINUING> 132 132
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 132 125<F1>
<EPS-PRIMARY> .73 .65
<EPS-DILUTED> .72 .63
<FN>
<F1>THE COMPANY HAD PREFERRED STOCK DIVIDENDS OF $7 MILLION AS A REDUCTION TO NET
EARNINGS IN 1998. IN DECEMBER 1998, THE COMPANY RETIRES ITS CONVERTIBLE
PREFERRED STOCK.
</FN>

</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,
and 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 the costs of doing business and
adversely affecting profitability.

1
<PAGE>
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
our 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 $3.3 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. As a consequence of this
withdrawal, we are precluded from re-entering these counties with Medicare
product offerings until 5 years after the effective date.

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 six 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. Although we believe such charges are adequate,
there can be no assurance that the costs associated with our realignment efforts
will not exceed the charges we have taken for such costs.

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 its health care and administrative costs
and capital requirements, and increase our liability for

2
<PAGE>
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 may 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.

The Company also is 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 (the "NAIC") is expected to adopt rules
which, if implemented by the states, will require certain capitalization levels
for health care coverage provided by insurance companies, HMOs and other risk
bearing health care entities. The requirements would take the form of risk-based
capital rules. Currently, similar risk-based capital rules apply generally to
insurance companies. Depending on the nature and extent of the new minimum
capitalization requirements ultimately implemented, there could be an increase
in the capital required for certain of our subsidiaries and there may be some
potential for disparate treatment of competing products. Federal solvency
regulation of companies providing Medicare-related benefit programs may also be
applied.

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 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,
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; provider disputes over compensation and termination of
provider contracts; disputes related to self-funded business, including actions
alleging claim administration errors and the failure to disclose network rate
discounts and other fee and rebate arrangements; disputes over copayment
calculations; and claims relating to customer audits and contract performance.
Recent court decisions and legislative activity may 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

3
<PAGE>
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 its
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 were 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. The Company has made several large acquisitions
in recent years and has an active ongoing acquisition and disposition program
under which it 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 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

4
<PAGE>
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 our knowledge and information-related 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.

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 affect 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.