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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
/ / 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
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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
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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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _/X/_ No _/ /_
The number of shares of Common Stock, par value $.01 per share, outstanding on
August 11, 1997 was 187,567,494.
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UNITED HEALTHCARE CORPORATION
INDEX
PAGE NUMBER
-------------
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets at
June 30, 1997 and December 31, 1996............................................................... 3
Condensed Consolidated Statements of Operations for the three and
six month periods ended June 30, 1997 and 1996.................................................... 4
Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 1997 and
1996............................................................................................... 5
Notes to Condensed Consolidated Financial Statements................................................ 6
Report of Independent Public Accountants............................................................ 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................... 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS.................................................................................... 15
Signatures.............................................................................................. 16
2
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
ASSETS
Current Assets
Cash and cash equivalents............................................................. $ 610.3 $ 1,036.7
Short-term investments................................................................ 269.6 610.6
Accounts receivable, net.............................................................. 703.4 605.8
Assets under management............................................................... 128.3 155.1
Other................................................................................. 276.7 331.4
--------- ------------
Total Current Assets................................................................ 1,988.3 2,739.6
Long-term Investments................................................................... 2,654.3 1,805.0
Property and Equipment, net............................................................. 333.2 313.0
Goodwill and Other Intangible Assets, net............................................... 2,150.1 2,139.0
--------- ------------
TOTAL ASSETS............................................................................ $ 7,125.9 $ 6,996.6
--------- ------------
--------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical costs payable................................................................. $ 1,595.5 $ 1,516.1
Other policy liabilities.............................................................. 286.1 334.0
Accounts payable...................................................................... 46.2 73.1
Accrued expenses and other liabilities................................................ 449.1 491.3
Unearned premiums..................................................................... 102.4 228.3
--------- ------------
Total Current Liabilities........................................................... 2,479.3 2,642.8
Long-term Obligations................................................................... 22.7 30.8
Convertible Preferred Stock............................................................. 500.0 500.0
--------- ------------
Shareholders' Equity
Common stock, $.01 par value--500,000,000 shares authorized; 187,313,000 and
184,865,000 issued and outstanding.................................................. 1.9 1.8
Additional paid-in capital............................................................ 1,235.3 1,148.0
Retained earnings..................................................................... 2,884.8 2,680.2
Net unrealized holding gains (losses) on investments available for sale, net of income
tax effects......................................................................... 1.9 (7.0)
--------- ------------
Total Shareholders' Equity.......................................................... 4,123.9 3,823.0
--------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................................. $ 7,125.9 $ 6,996.6
--------- ------------
--------- ------------
See notes to unaudited condensed consolidated financial statements
3
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
REVENUES
Premiums......................................................... $ 2,500.3 $ 2,095.1 $ 4,944.9 $ 4,009.4
Management Services and Fees..................................... 366.3 351.8 722.0 709.7
Investment and Other Income...................................... 63.9 45.3 114.7 91.2
--------- --------- --------- ---------
Total Revenues................................................. 2,930.5 2,492.2 5,781.6 4,810.3
--------- --------- --------- ---------
OPERATING EXPENSES
Medical Costs.................................................... 2,118.6 1,821.0 4,182.6 3,406.3
Selling, General and Administrative Costs........................ 591.7 542.1 1,167.0 1,050.4
Depreciation and Amortization.................................... 35.5 31.9 69.1 63.0
--------- --------- --------- ---------
Total Operating Expenses....................................... 2,745.8 2,395.0 5,418.7 4,519.7
--------- --------- --------- ---------
EARNINGS FROM OPERATIONS........................................... 184.7 97.2 362.9 290.6
Merger Costs..................................................... -- (15.0) -- (15.0)
--------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES....................................... 184.7 82.2 362.9 275.6
Provision for Income Taxes....................................... (69.0) (31.9) (138.3) (106.3)
--------- --------- --------- ---------
NET EARNINGS....................................................... 115.7 50.3 224.6 169.3
CONVERTIBLE PREFERRED STOCK DIVIDENDS.............................. (7.2) (7.2) (14.4) (14.4)
--------- --------- --------- ---------
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS..................... $ 108.5 $ 43.1 $ 210.2 $ 154.9
--------- --------- --------- ---------
--------- --------- --------- ---------
NET EARNINGS PER COMMON SHARE...................................... $ 0.57 $ 0.23 $ 1.11 $ 0.84
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING......................... 190.4 186.7 189.9 183.7
--------- --------- --------- ---------
--------- --------- --------- ---------
See notes to unaudited condensed consolidated financial statements
4
UNITED HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
-------------------------
1997 1996
------------ -----------
OPERATING ACTIVITIES
Net Earnings........................................................................... $ 224.6 $ 169.3
Non-cash Items:
Depreciation and amortization...................................................... 69.1 63.0
Provision for future losses........................................................ 45.0
Other.............................................................................. (7.7) (5.2)
Net Change in Other Operating Items:
Accounts receivable and other current assets....................................... (50.2) (194.1)
Accounts payable................................................................... (24.8) (16.4)
Accrued expenses and other liabilities............................................. (11.2) (118.9)
Medical costs payable.............................................................. 80.2 169.5
Other policy liabilities........................................................... (22.0) 23.3
Unearned premiums.................................................................. (125.5) (81.2)
------------ -----------
Cash Flows From Operating Activities............................................. 132.5 54.3
------------ -----------
INVESTING ACTIVITIES
Cash Assumed in Acquisition, net of cash paid and other effects...................... -- 59.1
Purchases of Property and Equipment and Capitalized Software......................... (89.8) (74.7)
Purchases of Investments Available for Sale.......................................... (3,167.4) (1,915.6)
Maturities/Sales of Investments Available for Sale................................... 2,668.9 1,931.5
Purchases of Investments Held to Maturity............................................ (28.2) (11.8)
Maturities of Investments Held to Maturity........................................... 39.1 5.2
Other................................................................................ (13.0) 3.0
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Cash Flows Used for Investing Activities......................................... (590.4) (3.3)
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FINANCING ACTIVITIES
Net Proceeds from Stock Option Exercises............................................. 46.6 24.8
Payment of Long-term Obligations..................................................... -- (.5)
Dividends Paid
Convertible Preferred Stock........................................................ (14.4) (14.4)
Common Stock....................................................................... (5.6) (5.3)
Other................................................................................ 4.9 --
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Cash Flows From Financing Activities............................................. 31.5 4.6
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... (426.4) 55.6
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................................... 1,036.7 940.1
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................................... $ 610.3 $ 995.7
------------ -----------
------------ -----------
See notes to unaudited condensed consolidated financial statements
5
UNITED HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting solely of
normal recurring adjustments, necessary for a fair presentation of the financial
results for the interim periods presented. These financial statements include
some amounts that are based on management's best estimates and judgments. The
most significant estimates relate to medical costs payable and other policy
liabilities, intangible asset valuations and integration and restructuring
reserves relating to the Company's acquisitions. These estimates are subject to
adjustment as further information becomes available and any such adjustment
could be significant.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, footnote disclosures which would substantially duplicate the
disclosures contained in the audited financial statements of the Company have
been omitted from these interim financial statements. Although the Company
believes that the disclosures presented below are adequate to make the interim
financial statements presented not misleading, these unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
2. DIVIDENDS
On February 13, 1997, the Company's Board of Directors approved an annual
dividend for 1997 of $0.03 per share to holders of the Company's common stock.
Dividends of $5.6 million were paid on April 15, 1997 to shareholders of record
at the close of business on April 3, 1997.
3. CASH AND INVESTMENTS
As of June 30, 1997, the amortized cost, gross unrealized holding gains and
losses and fair value of the Company's cash and investments were as follows (in
millions):
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
-------------- ----------------- ----------------- -----------
Cash and Cash Equivalents......................... $ 610.3 $ -- $ -- $ 610.3
Investments Available for Sale.................... 2,858.6 19.0 (15.8) 2,861.8
Investments Held to Maturity...................... 62.1 .2 (.1) 62.2
-------------- ----- ------ -----------
Total Cash and Investments...................... $ 3,531.0 $ 19.2 $ (15.9) $ 3,534.3
-------------- ----- ------ -----------
-------------- ----- ------ -----------
4. RECENTLY ISSUED ACCOUNTING STANDARDS
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
No. 128), which changes the computation and disclosure of earnings per share.
SFAS No. 128 is effective for both interim and annual periods ending after
December 15, 1997 and earlier application is not permitted. Under the Company's
current capital structure, the adoption of SFAS No. 128 will not have a material
impact on the Company's determination of earnings per share.
During June 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130), effective for fiscal years beginning after December 15,
1997. SFAS No. 130 will require the Company to report and display
6
UNITED HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
comprehensive income and its components. Comprehensive income is defined as
changes in equity of a business enterprise during a period except those
resulting from investments by owners and distributions to owners. The changes
required by SFAS No. 130 will not effect net income or shareholders' equity as
previously reported.
7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United HealthCare Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
United HealthCare Corporation (a Minnesota corporation) and Subsidiaries as of
June 30, 1997, and the related condensed consolidated statements of operations
and cash flows for the three and six month periods ended June 30, 1997 and 1996.
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 United HealthCare
Corporation and Subsidiaries as of and for the year ended December 31, 1996 (not
presented herein), and, in our report dated February 28, 1997, 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, 1996, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota
August 7, 1997
8
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements and notes thereto. A number of
factors should also be considered in conjunction with any discussion of
operations or results by the Company or its representatives, including any
forward-looking discussions. These factors are set forth in Exhibit 99 to this
Quarterly Report.
SUMMARY OPERATING INFORMATION
OPERATING RESULTS THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- --------------------------------------------- ----------------------------------- -----------------------------------
PERCENT PERCENT
(in millions except per share data) 1997 1996(a) CHANGE 1997 1996(a) CHANGE
--------- --------- ------------- --------- --------- -------------
Total Revenues............................... $ 2,930.5 $ 2,492.2 18% $ 5,781.6 $ 4,810.3 20%
Earnings from Operations..................... $ 184.7 $ 142.2 30% $ 362.9 $ 335.6 8%
Net Earnings................................. $ 115.7 $ 86.8 33% $ 224.6 $ 205.8 9%
Earnings Per Share........................... $ 0.57 $ 0.43 33% $ 1.11 $ 1.04 7%
Medical Costs to Premium Revenues............ 84.7% 84.8% 84.6% 83.8%
SG&A Expenses to Total Revenues.............. 20.2% 21.7% 20.2% 21.8%
PERCENT
ENROLLMENT BY PRODUCT JUNE 30, 1997 JUNE 30, 1996 CHANGE
- --------------------------------------------------------------------------- ------------- ------------- ------------
(in thousands)
Health Plan Products
Commercial............................................................... 4,383 3,726 18%
Medicare................................................................. 286 184 55
Medicaid................................................................. 483 392 23
------------- ------------- ---
Total Health Plan Products............................................. 5,152 4,302 20
Other Network-Based Products............................................... 5,350 5,473(b) (2)
Indemnity Products......................................................... 2,492 3,408(b) (27)
------------- ------------- ---
Total Enrollment....................................................... 12,994 13,183 (1)%
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ENROLLMENT BY FUNDING ARRANGEMENT
- ---------------------------------------------------------------------------
Fully Insured
Health Plan Products................................................... 4,846 3,999 21%
Other Network-Based Products........................................... 692 764 (9)
Indemnity Products..................................................... 492 804 (39)
------------- ------------- ---
Total Fully Insured.................................................. 6,030 5,567 8
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Self-Funded
Health Plan Products................................................... 306 303 1
Other Network-Based Products........................................... 4,658 4,709 (1)
Indemnity Products..................................................... 2,000 2,604 (23)
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Total Self-Funded.................................................... 6,964 7,616 (9)
------------- ------------- ---
Total Enrollment................................................... 12,994 13,183 (1)%
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------------- ------------- ---
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(a) Amounts include post-acquisition operating results of PHP, Inc. (PHP)
acquired on March 29, 1996, and HealthWise of America, Inc. (HealthWise)
acquired on April 12, 1996. For comparability purposes, amounts exclude
merger costs of $14.9 million ($9.1 million after tax) associated with the
acquisition of HealthWise and the provision for future losses on two
multi-year contracts of $45.0 million ($27.4 million after tax).
(b) For comparability purposes, amounts exclude 571,000 self-funded other
network-based and indemnity lives served by United HealthCare
Administrators, Inc., which was sold June 30, 1997.
9
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
PREMIUM REVENUES
Premium revenues of $2.5 billion in the second quarter of 1997 increased
$405 million, or 19%, over the second quarter of 1996. For the six months ended
June 30, 1997, premium revenues of $4.9 billion increased $936 million, or 23%,
over the same period in 1996. Excluding the effects of the Company's 1996
acquisitions of HealthWise and PHP, the increase in premium revenues for the six
months ended June 30, 1997 over the same period in 1996 was 20%.
The increase in premium revenues is primarily attributable to year-over-year
same-store health plan premium revenue growth of $425 million, or 27%, for the
quarter ended June 30, 1997, and $820 million, or 29%, for the six months ended
June 30, 1997. The health plan premium revenue increase reflects same-store
enrollment growth of 20% and an average year-over-year premium rate increase on
renewing commercial groups of approximately 5%. Growth in the Company's Medicare
programs also contributed to the increase in premium revenues. Included in the
total health plan same-store enrollment growth of 20% are year-over-year
same-store increases of 55% in the Company's Medicare enrollment. Significant
growth in Medicare enrollment will affect year-over-year comparability of
premium revenue. The Medicare product generally realizes per member premium
rates three to four times higher than the average commercial premium rates
because of the higher level of medical care services utilized by this
population.
The year-over-year increase in premium revenues from health plan operations
was partially offset by an expected decrease in premium revenues of $47 million
from fully insured non-network-based indemnity products. In response to
increased medical costs associated with these products, the Company instituted
rate increases averaging from 10% to 20% during 1996 and into 1997. These rating
actions appear to have been sufficient to cover the corresponding increases in
medical costs. As a result of these pricing decisions and other factors, the
Company has seen enrollment decreases in the non-network-based indemnity
products and expects these decreases to continue throughout 1997. To the extent
practicable, the Company will attempt to convert these enrollees to its
network-based managed care products.
MEDICAL COSTS
The combination of the Company's pricing strategy and its medical management
efforts are reflected in its medical care ratio (the percent of premium revenues
expensed as medical costs). The Company's commercial health plan business is
most sensitive to this strategy.
New and renewal commercial health plan premium rates are generally
established by the Company based on anticipated health care costs. The Company
believes its current health care cost trend is in the 3% to 4% range. In
response to this cost trend, the Company has been increasing premium rates in
excess of 5% on new and existing commercial health plan business in the last
half of 1996 and continuing throughout 1997.
The medical care ratio for the second quarter of 1997 was 84.7%, down
slightly from 84.8% in the comparable period a year ago. For the six months, the
medical care ratio increased from 83.8% in 1996 to 84.6% in 1997. The increase
in the six month 1997 medical care ratio is the result of several factors. A few
health plan markets, most notably Maryland, Rhode Island and the Gulf Coast, had
medical care ratios substantially higher than the Company's other health plans
in the aggregate. While the reasons varied from plan to plan, these results can
generally be attributed to medical cost controls and provider contracting
10
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
initiatives not being fully implemented and insufficient commercial premium
yields relative to corresponding medical costs. The Company anticipates
performance will improve in these markets; however, the Company believes these
health plans will continue to moderate the Company's overall results through the
remainder of 1997. The rapid growth associated with recently introduced Medicare
products in several new markets (with the proportionately higher medical care
ratios expected at this early stage of product introduction) and the absence of
Medicaid premium increases also contributed to the increased medical care ratio.
Further Medicaid premium reductions in certain markets are possible during the
second half of 1997 and this factor may affect the Company's ability to improve
its overall medical care ratio in the near term.
In the second quarter of 1996, the Company recorded a provision to cover the
estimated losses expected to be incurred through the remaining term of two
large, multi-year contracts in its St. Louis health plan of $45.0 million. These
contracts covered approximately 23% of the health plan's total commercial
insured enrollment at that time and run through 1998. With the contract loss
provision, the medical expense ratio was 86.9% for the second quarter of 1996
and 85.0% for the six months ended June 30, 1996.
MANAGEMENT SERVICES AND FEE REVENUES
Management services and fee revenues for the three and six months ended June
30, 1997 were $366 million and $722 million compared to $352 million and $710
million for the same periods in 1996. These revenues are primarily generated
from self-funded indemnity products wherein the Company receives a fee for the
provision of administrative services and generally assumes no financial
responsibility for health care costs associated with these products.
Additionally, the company generates fee revenues from administrative services
performed on behalf of managed health plans and for services provided by the
Company's specialty managed care services.
Management services and fee revenues from self-funded indemnity products
decreased $19 million through the first six months of 1997 compared to the same
period in 1996 as a result of declining enrollment in this product. This
decrease is fully offset by an increase in revenues generated from the Company's
other sources of management services and fee revenues, attributable to
enrollment growth within the managed health plans and an increase in lives
served by the specialty managed care services operations, most notably in the
behavioral health and demand management businesses.
INVESTMENT AND OTHER INCOME
Investment and other income of $64 million in the second quarter of 1997
increased by $19 million, or 41%, over the second quarter of 1996. For the six
months ended June 30, 1997, investment and other income of $115 million
increased by $24 million, or 26%, over the same period in 1996. The increase in
investment and other income is primarily attributable to an increase in cash and
investments of $402 million, or 13%, from June 30, 1996 to June 30, 1997 and a
decision to extend maturities on a portion of the Company's investments, thereby
generating a higher rate of return. Additionally, during the second quarter of
1997, the Company recorded a $0.02 per share gain on the sale of its subsidiary,
United HealthCare Administrators, Inc.
11
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs as a percent of total revenues
(the SG&A ratio) decreased from 21.7% in the second quarter of 1996 to 20.2% in
the first quarter of 1997, and remained flat at 20.2% in the second quarter.
This improvement in the SG&A ratio reflects ongoing operating efficiencies as
well as the Company's diligence in managing these expenses. On an absolute
dollar basis, selling, general and administrative costs in the first half of
1997 increased $117 million, or 11%, over the first half of 1996, reflecting the
additional infrastructure necessary to support the corresponding $936 million
increase in premium-based business, as well as additional investment in new
Medicare markets and increased support for its growing specialty managed care
service operations.
INFLATION
Although the general rate of inflation has remained relatively stable and
health care cost inflation has declined in recent years, the total national
health care cost inflation rate still exceeds the general inflation rate. The
Company uses various strategies to mitigate the negative effects of health care
cost inflation, including setting commercial premiums based on its anticipated
health care costs, risk-sharing arrangements with the Company's various health
care providers, and other health care cost containment measures. Specifically,
the Company's health plans attempt to control medical and hospital costs through
contractual arrangements primarily with independent providers of health care
services. Cost-effective delivery of health care services by such health care
providers is encouraged by emphasizing preventive health services, the
appropriate use of specialty referral services, and the reduction of unnecessary
hospitalizations. While the Company currently believes its strategies to
mitigate health care cost inflation will continue to be successful, competitive
pressures, new health care product introductions, demands from providers and
customers, applicable regulations or other factors may adversely affect the
Company's ability to control the impact of health care cost increases. In
addition, certain non-network-based products do not have similar health care
cost containment measures as the Company's network-based managed care products.
As a result, the Company is subject to more health care cost inflation risk with
these products.
GOVERNMENT REGULATION
The Company's primary business, offering health care coverage and health
care management services, is heavily regulated at both the federal and state
levels. The Company believes that it is in compliance in all material respects
with the various federal and state regulations applicable to its current
operations. To maintain such compliance, it may be necessary for the Company or
one of its subsidiaries to make changes from time to time in its services,
products, marketing methods, or organizational or capital structure.
Government regulation of health care coverage products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Changes in
applicable laws and regulations are continually being considered and the
interpretation of existing laws and rules also may change from time to time.
Regulatory agencies generally have broad discretion in promulgating regulations
and in interpreting and enforcing laws and rules.
While the Company is unable to predict what regulatory changes may occur or
the impact on the Company of any particular change, the Company's operations and
financial results could be negatively affected by regulatory revisions. Certain
proposed changes in Medicare and Medicaid programs may increase the
opportunities for the Company to enroll people under products developed for the
Medicare and Medicaid-eligible populations. Other proposed changes also may
limit the reimbursement available to
12
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
the Company and increase competition in those programs, which could adversely
affect the Company's financial results. The continued consideration and
enactment of "anti-managed care" laws and regulations by federal and state
bodies may make it more difficult for the Company to control medical costs and
may adversely affect financial results.
A number of jurisdictions have enacted small group insurance and rating
reforms, which generally limit the ability of insurers and health plans to use
risk selection as a method of controlling medical costs for small group
business. These laws generally may limit or eliminate use of preexisting
conditions exclusions, experience rating and industry class rating, and may
limit the amount of rate increases from year to year. Under these laws, medical
cost control through provider contracting and managing care may become more
important, and the Company currently believes its experience in these areas will
allow it to compete effectively.
In addition to changes in applicable laws and rules, the Company is
potentially subject to governmental audits, investigations and enforcement
actions. These include possible government actions relating to the federal
Employee Retirement Income Security Act (ERISA), which regulates insured and
self-insured health coverage plans offered by employers, the Federal Employees
Health Benefit Plan (FEHBP), federal and state fraud and abuse laws, and laws
relating to utilization management and the delivery of health care. Any such
government action could result in assessment of damages, civil or criminal fines
or penalties, or other sanctions, including exclusion from participation in
government programs. Although the Company is currently involved in various
government audits, such as under the FEHBP or relating to services for ERISA
plans, the Company currently does not believe the results of such audits will
have a material adverse effect on the Company's financial position or results of
operations.
FINANCIAL CONDITION AND LIQUIDITY
Cash and investments at June 30, 1997 were $3.5 billion, a $102 million
increase in the second quarter of 1997 and a $82 million increase compared to
December 31, 1996. The increase in cash and investments since year-end is
primarily a result of cash generated from operations of $133 million and
proceeds received from common stock issuances of $47 million partially offset by
$90 million in purchases of property and equipment and capitalized software
payments.
Under applicable state regulations, several of the Company's subsidiaries
are required to maintain capital levels to support their operations. After
giving effect to these regulations and certain business considerations, the
Company had approximately $934 million in cash and investments available for
general corporate use at June 30, 1997.
The Company continues to focus on expanding its health care programs to the
Medicare population. In connection with the introduction of a Medicare health
plan product in a particular site, significant expenditures must be incurred.
These start-up expenditures include a lengthy and detailed regulatory approval
process, product-specific provider contracting and network configuration, high
up-front sales and marketing costs, and staffing of service areas in advance of
product sales. In addition, start-up markets generally experience a higher
medical care ratio due to the low enrollment base. The Company expects to incur
operating losses from its Medicare products in these start-up markets usually
for the first 12 to 18 months until Medicare enrollment is sufficient to cover
the corresponding administrative cost structure in each site and to absorb the
medical risk attributable to these products.
13
UNITED HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
In February 1997, the Company completed a contract to deliver Medicare
supplement insurance and is developing an array of new products for the American
Association of Retired Persons (AARP) beginning in January 1998. Under the terms
of the 10-year contract, the Company's portion of the AARP insurance offerings
is expected to represent approximately $3.5 billion in annual premium revenue
from over 4.5 million policyholders.
The Company currently believes its available cash resources will be
sufficient to meet its current operating requirements and internal development
and integration initiatives. In addition, the Company believes that, based on
its current financial condition and results of operations, it would be able to
finance additional cash requirements in the public or private markets, if
necessary.
There currently are no other material definitive commitments for future use
of the Company's available cash resources; however, management continually
evaluates opportunities to expand its operations, which includes internal
development of new products and programs and may include additional
acquisitions.
14
UNITED HEALTHCARE CORPORATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are filed in response to Item 601 of Regulation S-K.
EXHIBIT NO. EXHIBIT
- -------------- -------------------------------------------------------------------------
Exhibit 10(a ) -- United HealthCare Corporation Amended
and Restated 1991 Stock and Incentive Plan
Exhibit 10(b ) -- United HealthCare Corporation Nonemployee
Director Stock Option Plan
Exhibit 10(c ) -- United HealthCare Corporation 1997
Long-Term Incentive Program
Exhibit 11 -- Statements Re Computation of Per Share Earnings
Exhibit 15 -- Letter Re Unaudited Interim Financial Information
Exhibit 99 -- Cautionary Statements
15
UNITED HEALTHCARE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED HEALTHCARE CORPORATION
By /s/ WILLIAM W. MCGUIRE, M.D.
------------------------------------------
Dated: August 13, 1997 William W. McGuire, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By /s/ DAVID P. KOPPE
------------------------------------------
Dated: August 13, 1997 David P. Koppe
CHIEF FINANCIAL OFFICER
16
UNITED HEALTHCARE CORPORATION
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------
10(a) United HealthCare Corporation Amended and Restated 1991 Stock and Incentive Plan...................
10(b) United HealthCare Corporation Nonemployee Director Stock Option Plan...............................
10(c) United HealthCare Corporation 1997 Long-Term Incentive Program.....................................
11 Statements Re Computation of Per Share Earnings....................................................
15 Letter Re Unaudited Interim Financial Information..................................................
99 Cautionary Statements..............................................................................