United Health Group [PDF Document] Form 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
≤ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004

or

n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission Ñle number: 1-10864

UnitedHealth Group Incorporated
(Exact name of registrant as speciÑed in its charter)

Minnesota 41-1321939
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) IdentiÑcation No.)

UnitedHealth Group Center 55343
9900 Bren Road East (Zip Code)
Minnetonka, Minnesota
(Address of principal executive oÇces)

(952) 936-1300
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has Ñled all reports required to be Ñled 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 Ñle such reports), and (2) has been subject to such Ñling requirements for the
past 90 days. Yes ¥ No n

Indicate by check mark whether the registrant is an accelerated Ñler (as deÑned in Rule 12b-2 of the
Exchange Act). Yes ¥ No n

As of November 4, 2004, 653,628,555 shares of the registrant's Common Stock, $.01 par value per share, were
issued and outstanding.

UNITEDHEALTH GROUP
INDEX

Page
Number

Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003ÏÏÏ 3
Condensed Consolidated Statements of Operations for the three and nine month periods ended
September 30, 2004 and 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4
Condensed Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 2004 and 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5
Notes to Condensed Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6
Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34
Item 4. Controls and Procedures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35

Part II. Other Information
Item 1. Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35
Item 2. Issuer Purchases of Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36
Item 5. Other InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37
Item 6. Exhibits and Reports on Form 8-K ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37
Signatures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39
Exhibits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)
UNITEDHEALTH GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share and per share data)

September 30, December 31,
2004 2003

ASSETS
Current Assets
Cash and Cash Equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,635 $ 2,262
Short-Term Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 774 486
Accounts Receivable, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 910 745
Assets Under ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,959 2,019
Deferred Income Taxes and Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 918 608
Total Current Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,196 6,120
Long-Term Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,091 6,729
Property, Equipment, Capitalized Software, and Other Assets, netÏÏÏÏÏÏÏÏÏÏÏ 1,196 1,096
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,165 3,509
Other Intangible Assets, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,249 180
TOTAL ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $27,897 $17,634
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Medical Costs Payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,541 $ 4,152
Accounts Payable and Accrued Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,149 1,575
Other Policy Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,965 2,117
Commercial Paper and Current Maturities of Long-Term Debt ÏÏÏÏÏÏÏÏÏÏÏ 150 229
Unearned Premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 762 695
Total Current Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,567 8,768
Long-Term Debt, less current maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,750 1,750
Future Policy BeneÑts for Life and Annuity ContractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,642 1,517
Deferred Income Taxes and Other Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 871 471
Commitments and Contingencies (Note 12)
Shareholders' Equity
Common Stock, $0.01 par value Ì 1,500 shares authorized; 654 and 583
issued and outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7 6
Additional Paid-In Capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,179 58
Retained Earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,745 4,915
Accumulated Other Comprehensive Income:
Net Unrealized Gains on Investments, net of tax eÅects ÏÏÏÏÏÏÏÏÏÏÏ 136 149
Total Shareholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,067 5,128
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $27,897 $17,634
See notes to condensed consolidated Ñnancial statements

3

UNITEDHEALTH GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except per share data)

Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003

REVENUES
Premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $8,920 $6,395 $23,985 $18,791
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 842 780 2,444 2,329
Investment and Other Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97 63 278 180
Total RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,859 7,238 26,707 21,300
MEDICAL AND OPERATING COSTS
Medical CostsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,180 5,174 19,375 15,333
Operating Costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,488 1,226 4,151 3,620
Depreciation and Amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 99 75 268 222
Total Medical and Operating Costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,767 6,475 23,794 19,175
EARNINGS FROM OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,092 763 2,913 2,125
Interest ExpenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (34) (24) (86) (71)
EARNINGS BEFORE INCOME TAXES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,058 739 2,827 2,054
Provision for Income Taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (360) (263) (979) (736)
NET EARNINGS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 698 $ 476 $ 1,848 $ 1,318
BASIC NET EARNINGS PER COMMON SHARE ÏÏÏÏÏÏÏ $ 1.09 $ 0.81 $ 2.99 $ 2.23
DILUTED NET EARNINGS PER COMMON SHAREÏÏÏÏ $ 1.04 $ 0.77 $ 2.85 $ 2.13
BASIC WEIGHTED-AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 641 589 618 592
DILUTIVE EFFECT OF OUTSTANDING STOCK
OPTIONSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29 28 30 28
DILUTED WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 670 617 648 620


4

UNITEDHEALTH GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)

Nine Months Ended
September 30,
2004 2003

OPERATING ACTIVITIES
Net Earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,848 $1,318
Noncash Items:
Depreciation and Amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 268 222
Deferred Income Taxes and Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25 28
Net Change in Other Operating Items, net of eÅects from acquisitions and changes
in AARP balances:
Accounts Receivable and Other AssetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (31) (17)
Medical Costs Payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 335 291
Accounts Payable and Other Accrued LiabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 606 430
Unearned Premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (166) (139)
Cash Flows From Operating Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,885 2,133
INVESTING ACTIVITIES
Cash Paid for Acquisitions, net of cash assumed and other eÅects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,912) (87)
Purchases of Property, Equipment and Capitalized Software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (240) (281)
Purchases of Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,076) (1,927)
Maturities and Sales of Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,420 2,267
Cash Flows Used For Investing Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,808) (28)
FINANCING ACTIVITIES
Proceeds from Common Stock Issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 440 214
Common Stock Repurchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,098) (1,362)
Repayments of Commercial Paper, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (79) (461)
Proceeds from Issuances of Long-Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,000 450
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33 (9)
Cash Flows From (Used For) Financing Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 296 (1,168)
INCREASE IN CASH AND CASH EQUIVALENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,373 937
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,262 1,130
CASH AND CASH EQUIVALENTS, END OF PERIOD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,635 $2,067
Supplementary schedule of noncash investing activities:
Common stock issued for acquisitionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,557 $ Ì


5

UNITEDHEALTH GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation and Use of Estimates

Unless the context otherwise requires, the use of the terms the quot;quot;Company,'' quot;quot;we,'' quot;quot;us,'' and quot;quot;our'' in the
following refers to UnitedHealth Group Incorporated and its subsidiaries.

The accompanying unaudited condensed consolidated Ñnancial statements reÖect all adjustments, consisting
solely of normal recurring adjustments, needed to present the Ñnancial results for these interim periods fairly.
In accordance with the rules and regulations of the Securities and Exchange Commission, we have omitted
certain footnote disclosures that would substantially duplicate the disclosures contained in our annual audited
Ñnancial statements. Read together with the disclosures below, we believe the interim Ñnancial statements are
presented fairly. However, these unaudited condensed consolidated Ñnancial statements should be read
together with the consolidated Ñnancial statements and the notes included in our Annual Report on
Form 10-K for the year ended December 31, 2003.

These consolidated Ñnancial statements include certain amounts that are based on our best estimates and
judgments. These estimates require us to apply complex assumptions and judgments, often because we must
make estimates about the eÅects of matters that are inherently uncertain and will change in subsequent
periods. The most signiÑcant estimates relate to medical costs, medical costs payable, revenues, contingent
liabilities, and asset valuations, allowances and impairments. We adjust these estimates each period, as more
current information becomes available, and any adjustment could have a signiÑcant impact on our consoli-
dated operating results. The impact of any changes in estimates is included in the determination of earnings in
the period in which the estimate is adjusted.

2. Stock-Based Compensation

We account for activity under our stock-based employee compensation plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25, quot;quot;Accounting for Stock Issued to
Employees.'' Accordingly, we do not recognize compensation expense when we grant employee stock options
because we grant stock options at exercise prices not less than the fair value of our common stock on the date
of grant.

The following table shows the eÅect on net earnings and earnings per share had we applied the fair value
expense recognition provisions of Statement of Financial Accounting Standards (FAS) No. 123, quot;quot;Accounting
for Stock-Based Compensation,'' to stock-based employee compensation (in millions, except per share data).
Three Months Nine Months
Ended Ended
2004 2003 2004 2003

NET EARNINGS
As Reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 698 $ 476 $1,848 $1,318
Compensation Expense, net of tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (31) (32) (95) (92)
Pro FormaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 667 $ 444 $1,753 $1,226
BASIC NET EARNINGS PER COMMON SHARE
As Reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.09 $0.81 $ 2.99 $ 2.23
Pro FormaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.04 $0.75 $ 2.83 $ 2.07
DILUTED NET EARNINGS PER COMMON SHARE
As Reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.04 $0.77 $ 2.85 $ 2.13
Pro FormaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.00 $0.72 $ 2.71 $ 1.98

6

UNITEDHEALTH GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

3. Acquisitions
On July 29, 2004, our Health Care Services business segment acquired Oxford Health Plans, Inc. (Oxford).
Oxford provides health care and beneÑt services for individuals and employers, principally in New York City,
northern New Jersey and southern Connecticut. This merger signiÑcantly strengthens our market position in
this region and provides substantial distribution opportunities for our other UnitedHealth Group businesses.
Under the terms of the purchase agreement, Oxford shareholders received 0.6357 shares of UnitedHealth
Group common stock and $16.17 in cash for each share of Oxford common stock they owned. Total
consideration issued was approximately $5.0 billion, comprised of approximately 52.2 million shares of
UnitedHealth Group common stock (valued at approximately $3.4 billion based upon the average of
UnitedHealth Group's share closing price for two days before, the day of and two days after the acquisition
announcement date of April 26, 2004), approximately $1.3 billion in cash and UnitedHealth Group vested
common stock options with an estimated fair value of $240 million issued in exchange for Oxford's
outstanding vested common stock options. The purchase price and costs associated with the acquisition
exceeded the preliminary estimated fair value of the net tangible assets acquired by approximately $4.1 billion.
We have preliminarily allocated the excess purchase price over the fair value of the net tangible assets
acquired to Ñnite-lived intangible assets of $735 million and associated deferred tax liabilities of $277 million,
and goodwill of approximately $3.7 billion. The Ñnite-lived intangible assets consist primarily of member lists
and health care physician and hospital networks, with an estimated weighted-average useful life of 15 years.
The acquired goodwill is not deductible for income tax purposes. Our preliminary estimate of the fair value of
the tangible assets/(liabilities) as of the acquisition date, which is subject to further reÑnement, is as follows:
(in millions Ì unaudited)

Cash, Cash Equivalents and InvestmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,680
Accounts Receivable and Other Current Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 169
Property, Equipment, Capitalized Software and Other Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37
Medical Costs Payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (713)
Other Current Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (317)
Net Tangible Assets AcquiredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 856

On February 10, 2004, our Health Care Services business segment acquired Mid Atlantic Medical Services,
Inc. (MAMSI). MAMSI oÅers a broad range of health care coverage and related administrative services for
individuals and employers in the mid-Atlantic region of the United States. This merger signiÑcantly
strengthens UnitedHealthcare's market position in the mid-Atlantic region and provides substantial distribu-
tion opportunities for other UnitedHealth Group businesses. Under the terms of the purchase agreement,
MAMSI shareholders received 0.82 shares of UnitedHealth Group common stock and $18 in cash for each
share of MAMSI common stock they owned. Total consideration issued was approximately $2.7 billion,
comprised of 36.4 million shares of UnitedHealth Group common stock (valued at $1.9 billion based on the
average of UnitedHealth Group's share closing price for two days before, the day of and two days after the
acquisition announcement date of October 27, 2003) and $800 million in cash. The purchase price and costs
associated with the acquisition exceeded the preliminary estimated fair value of the net tangible assets
acquired by approximately $2.1 billion. We have preliminarily allocated the excess purchase price over the fair
value of the net tangible assets acquired to Ñnite-lived intangible assets of $360 million and associated deferred
tax liabilities of $126 million, and goodwill of approximately $1.9 billion. The Ñnite-lived intangible assets
consist primarily of member lists and health care physician and hospital networks, with an estimated
weighted-average useful life of 19 years. The acquired goodwill is not deductible for income tax purposes. Our

7

UNITEDHEALTH GROUP

preliminary estimate of the fair value of the tangible assets/(liabilities) as of the acquisition date, which is
subject to further reÑnement, is as follows:
(in millions Ì unaudited)

Cash, Cash Equivalents and Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $736
Accounts Receivable and Other Current Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 228
Property, Equipment, Capitalized Software and Other Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89
Medical Costs Payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (297)
Other Current LiabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (132)
Net Tangible Assets Acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $624

The results of operations and Ñnancial condition of Oxford and MAMSI have been included in our Condensed
Consolidated Statements of Operations and Condensed Consolidated Balance Sheets since the acquisition
date. The unaudited pro forma Ñnancial information presented below assumes that the acquisitions of Oxford
and MAMSI had occurred as of the beginning of each respective period presented below. The pro forma
adjustments include the pro forma eÅect of UnitedHealth Group shares issued in the acquisitions, the
amortization of Ñnite-lived intangible assets arising from the preliminary purchase price allocations, interest
expense related to Ñnancing the cash portion of the purchase price and the associated income tax eÅects of the
pro forma adjustments. Because the unaudited pro forma Ñnancial information has been prepared based on
preliminary estimates of fair values, the actual amounts recorded as of the completion of the purchase price
allocation may diÅer materially from the information presented below. The unaudited pro forma results have
been prepared for comparative purposes only and do not purport to be indicative of the results of operations
that would have occurred had the Oxford and MAMSI acquisitions been consummated at the beginning of
the respective periods.
For the Three For the Nine
Months Ended Months Ended
Proforma Ì unaudited 2004 2003 2004 2003
(In millions, except per share data)
RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,302 $9,239 $30,262 $27,269
Net Earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 719 $ 611 $ 2,037 $ 1,627
Earnings Per Share
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.09 $ 0.90 $ 3.07 $ 2.39
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.05 $ 0.86 $ 2.94 $ 2.29

4. Cash, Cash Equivalents and Investments

As of September 30, 2004, the amortized cost, gross unrealized gains and losses, and fair value of cash, cash
equivalents and investments were as follows (in millions):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value

Cash and Cash Equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,635 $Ì $Ì $ 3,635
Debt Securities Ì Available for Sale ÏÏÏÏÏÏÏÏÏÏÏÏ 8,334 213 (14) 8,533
Equity Securities Ì Available for SaleÏÏÏÏÏÏÏÏÏÏÏ 182 9 (2) 189
Debt Securities Ì Held to MaturityÏÏÏÏÏÏÏÏÏÏÏÏÏ 143 Ì Ì 143
Total Cash and Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12,294 $222 $(16) $12,500

8

UNITEDHEALTH GROUP

During the three and nine month periods ended September 30, we recorded realized gains and losses on the
sale of investments, excluding the UnitedHealth Capital dispositions described below, as follows (in millions):
Ended Ended
2004 2003 2004 2003

Gross Realized Gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6 $13 $26 $35
Gross Realized LossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6) (5) (11) (21)
Net Realized Gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $Ì $8 $15 $14

In addition, during the Ñrst quarter of 2004, we realized a capital gain of $25 million on the sale of certain
UnitedHealth Capital investments. With the proceeds from this sale, we made a cash contribution of
$25 million to the United Health Foundation in the Ñrst quarter of 2004. The realized gain of $25 million and
the related contribution expense of $25 million are included in Investment and Other Income in the
accompanying Condensed Consolidated Statement of Operations.

5. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill, by operating segment, for the nine months ended September 30,
2004 and 2003, were as follows (in millions):
Health Specialized
Care Care Consolidated
Services Uniprise Services Ingenix Total

Balance at December 31, 2003ÏÏÏÏÏÏÏÏÏÏ $1,770 $698 $409 $632 $3,509
Acquisitions and Subsequent Payments ÏÏ 5,630 Ì Ì 26 5,656
Balance at September 30, 2004 ÏÏÏÏÏÏÏÏÏ $7,400 $698 $409 $658 $9,165
Health Specialized
Care Care Consolidated
Services Uniprise Services Ingenix Total

Balance at December 31, 2002ÏÏÏÏÏÏÏÏÏÏ $1,693 $698 $363 $609 $3,363
Acquisitions and Subsequent Payments ÏÏ 12 Ì 38 11 61
Balance at September 30, 2003 ÏÏÏÏÏÏÏÏÏ $1,705 $698 $401 $620 $3,424

The weighted-average useful life, gross carrying value, accumulated amortization and net carrying value of
other intangible assets as of September 30, 2004 and December 31, 2003 were as follows (in millions):
September 30, 2004 December 31, 2003
Weighted- Gross Net Gross Net
Average Carrying Accumulated Carrying Carrying Accumulated Carrying
Useful Life Value Amortization Value Value Amortization Value

Customer Contracts and
Membership Lists ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 years $1,174 $(31) $1,143 $ 93 $ (6) $ 87
Patents, Trademarks and Technology ÏÏÏÏÏÏÏ 9 years 64 (31) 33 73 (26) 47
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 years 91 (18) 73 57 (11) 46
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 years $1,329 $(80) $1,249 $223 $(43) $180

Amortization expense relating to other intangible assets was $18 million and $37 million for the three and nine
months ended September 30, 2004 and $5 million and $13 million for the three and nine months ended
September 30, 2003.

9

UNITEDHEALTH GROUP

Estimated amortization expense for the years ending December 31 relating to other intangible assets included
in the September 30, 2004 Condensed Consolidated Balance Sheets is as follows (in millions):
2004 2005 2006 2007 2008

$60 $93 $92 $89 $87

6. Medical Costs and Medical Costs Payable
Medical costs and medical costs payable include estimates of our obligations for medical care services that
have been rendered on behalf of insured consumers but for which claims have either not yet been received or
processed, and estimates of liabilities for physician, hospital and other medical cost disputes. We develop
estimates for medical costs incurred but not reported using an actuarial process that is consistently applied,
centrally controlled and automated. The actuarial models consider factors such as time from date of service to
claim receipt, claim backlogs, care provider contract rate changes, medical care consumption and other
medical cost trends. Each period, we re-examine previously established medical costs payable estimates based
on actual claim submissions and other changes in facts and circumstances. As the liability estimates recorded
in prior periods become more exact, we increase or decrease the amount of the estimates, with the changes in
estimates included in medical costs in the period in which the change is identiÑed. In every reporting period,
our operating results include the eÅects of more completely developed medical costs payable estimates
associated with previously reported periods.
Medical costs for the three months ended September 30, 2004 include approximately $50 million of favorable
medical cost development related to prior Ñscal years and approximately $50 million of favorable medical cost
development related to the Ñrst and second quarters of 2004. Medical costs for the three months ended
September 30, 2003 include approximately $20 million of favorable medical cost development related to prior
Ñscal years and approximately $80 million of favorable medical cost development related to the Ñrst and
second quarters of 2003. Medical costs for the nine months ended September 30, 2004 and 2003 include
approximately $200 million and $130 million, respectively, of favorable medical cost development related to
prior years. Management believes the amount of medical costs payable is reasonable and adequate to cover the
Company's liability for unpaid claims as of September 30, 2004.

10

UNITEDHEALTH GROUP

7. Commercial Paper and Debt
Commercial paper and debt consisted of the following (in millions):
September 30, 2004 December 31, 2003
Carrying Fair Carrying Fair
Value Value Value Value

Commercial Paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì $ 79 $ 79
Floating-Rate Notes due November 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 150 150 150 150
7.5% Senior Unsecured Notes due November 2005ÏÏÏÏÏÏ 400 422 400 438
5.2% Senior Unsecured Notes due January 2007 ÏÏÏÏÏÏÏÏ 400 417 400 427
3.4% Senior Unsecured Notes due August 2007 ÏÏÏÏÏÏÏÏ 550 549 Ì Ì
3.3% Senior Unsecured Notes due January 2008 ÏÏÏÏÏÏÏÏ 500 497 500 499
3.8% Senior Unsecured Notes due February 2009 ÏÏÏÏÏÏÏ 250 249 Ì Ì
4.9% Senior Unsecured Notes due April 2013 ÏÏÏÏÏÏÏÏÏÏ 450 456 450 454
4.8% Senior Unsecured Notes due February 2014 ÏÏÏÏÏÏÏ 250 250 Ì Ì
Total Commercial Paper and Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,900 3,951 1,979 2,047
Less Current Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (150) (150) (229) (229)
Long-Term Debt, less current maturities ÏÏÏÏÏÏÏÏÏÏÏÏ $3,750 $3,801 $1,750 $1,818

In July 2004, we issued $1.2 billion of commercial paper to fund the cash portion of the Oxford purchase price.
In August 2004, we reÑnanced the commercial paper by issuing $550 million of 3.4% Ñxed-rate notes due
August 2007, $450 million of 4.1% Ñxed-rate notes due August 2009 and $500 million of 5.0% Ñxed-rate notes
due August 2014. In February 2004, we issued $250 million of 3.8% Ñxed-rate notes due February 2009 and
$250 million of 4.8% Ñxed-rate notes due February 2014 to Ñnance a majority of the cash portion of the
MAMSI purchase price. In December 2003, we issued $500 million of 3.3% Ñxed-rate notes due January
2008, and in March 2003, we issued $450 million of 4.9% Ñxed-rate notes due April 2013. We used the
proceeds from these borrowings to repay commercial paper and term debt maturing in 2003, and for general
corporate purposes including working capital, business acquisitions and share repurchases.
We have interest rate swap agreements that qualify as fair value hedges to convert the majority of our interest
rate exposure from a Ñxed to a variable rate. The interest rate swap agreements have aggregate notional
amounts of $2.9 billion with variable rates that are benchmarked to the six-month LIBOR rate. At
September 30, 2004, the rates used to accrue interest expense on these agreements ranged from 2.1% to 2.7%.
The diÅerential between the Ñxed and variable rates to be paid or received is accrued and recognized over the
life of the agreements as an adjustment to interest expense in the Condensed Consolidated Statements of
Operations. The interest rates on our November 2004 Öoating-rate notes are reset quarterly to the three-month
LIBOR (London Interbank OÅered Rate) plus 0.6%. As of September 30, 2004, the applicable rate on the
notes was 2.3%.
In June 2004, we executed a credit arrangement for a $1 billion Ñve-year revolving credit facility to support
our commercial paper program. This credit facility replaced our $450 million revolving facility that was set to
expire in July 2005, and our $450 million, 364-day facility that was set to expire in July 2004. In June 2004, we
also executed a credit arrangement for a $1.5 billion 364-day bridge facility. The bridge facility was used to
support the issuance of commercial paper to fund the cash portion of the Oxford purchase price in July 2004.
The bridge facility was terminated in August 2004 in conjunction with the reÑnancing of the commercial
paper discussed above. As of September 30, 2004, we had no amounts outstanding under these credit facilities.

11

UNITEDHEALTH GROUP

Our debt arrangements and credit facilities contain various covenants, the most restrictive of which require us
to maintain a debt-to-total-capital ratio below 45% and to exceed speciÑed minimum interest coverage levels.
We are in compliance with the requirements of all debt covenants.

8. AARP

In January 1998, we initiated a 10-year contract to provide health insurance products and services to members
of AARP. Under the terms of the contract, we are compensated for transaction processing and other services
as well as for assuming underwriting risk. We are also engaged in product development activities to
complement the insurance oÅerings under this program. Premium revenues from our portion of the AARP
insurance oÅerings are approximately $4.5 billion annually.

The underwriting gains or losses related to the AARP business are directly recorded as an increase or decrease
to a rate stabilization fund (RSF). The primary components of the underwriting results are premium revenue,
medical costs, investment income, administrative expenses, member services expenses, marketing expenses
and premium taxes. Underwriting gains and losses are recorded as an increase or decrease to the RSF and
accrue to AARP policyholders, unless cumulative net losses were to exceed the balance in the RSF. To the
extent underwriting losses exceed the balance in the RSF, we would have to fund the deÑcit. Any deÑcit we
fund could be recovered by underwriting gains in future periods of the contract. To date, we have not been
required to fund any underwriting deÑcits. The RSF balance is reported in Other Policy Liabilities in the
accompanying Condensed Consolidated Balance Sheets. We believe the RSF balance is suÇcient to cover
potential future underwriting or other risks associated with the contract.

The following AARP program-related assets and liabilities are included in our Condensed Consolidated
Balance Sheets (in millions):
Balance as of
September 30, December 31,
2004 2003

Accounts Receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 382 $ 352
Assets Under ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,921 $1,959
Medical Costs Payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 888 $ 874
Other Policy Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,230 $1,275
Other Current Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 185 $ 162

The eÅects of changes in balance sheet amounts associated with the AARP program accrue to AARP
policyholders through the RSF balance. Accordingly, we do not include the eÅect of such changes in our
Condensed Consolidated Statements of Cash Flows.

Pursuant to our agreement, AARP assets under management are managed separately from our general
investment portfolio and are used to pay costs associated with the AARP program. These assets are invested at
our discretion, within investment guidelines approved by AARP. Interest earnings and realized investment
gains and losses on these assets accrue to AARP policyholders through the RSF. As such, they are not
included in our earnings. Assets under management are reported at their fair market value, and unrealized
gains and losses are included directly in the RSF associated with the AARP program. As of September 30,
2004 and December 31, 2003, the amortized cost, gross unrealized gains and losses, and fair value of cash,

12

UNITEDHEALTH GROUP

cash equivalents and investments associated with the AARP insurance program, included in Assets Under
Management, were as follows (in millions):
Gross Gross
September 30, 2004 Cost Gains Losses Value

Cash and Cash Equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 208 $Ì $Ì $ 208
Debt Securities Ì Available for Sale ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,663 52 (2) 1,713
Total Cash and Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,871 $52 $(2) $1,921
Gross Gross
December 31, 2003 Cost Gains Losses Value

Cash and Cash Equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 218 $Ì $Ì $ 218
Debt Securities Ì Available for Sale ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,655 86 Ì 1,741
Total Cash and Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,873 $86 $Ì $1,959

As of September 30, 2004 and December 31, 2003, respectively, debt securities consisted of $770 million and
$711 million in U.S. Government and Agency obligations, $20 million and $16 million in state and municipal
obligations and $923 million and $1,014 million in investment grade corporate obligations. At September 30,
2004 and December 31, 2003, respectively, debt securities with maturities of less than one year totaled
$81 million and $52 million, debt securities maturing in one to Ñve years totaled $973 million and
$1,404 million, debt securities maturing in Ñve to 10 years totaled $413 million and $160 million and debt
securities with maturities more than 10 years totaled $246 million and $125 million.

9. Stock Repurchase Program
Under our board of directors' authorization, we maintain a common stock repurchase program. Repurchases
may be made from time to time at prevailing prices, subject to restrictions on volume, pricing and timing.
During the nine months ended September 30, 2004, we repurchased 33.7 million shares through this program
at an average price of approximately $63 per share and at an aggregate cost of $2.1 billion. In November 2004,
the board of directors renewed the stock repurchase program. The Company is currently authorized to
repurchase up to 65 million shares of common stock under the program.

10. Comprehensive Income
The table below presents comprehensive income, deÑned as changes in the equity of our business excluding
changes resulting from investments by and distributions to our shareholders, for the three and nine month
periods ended September 30 (in millions):
Ended Ended
2004 2003 2004 2003

Net Earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $698 $476 $1,848 $1,318
Change in Net Unrealized Gains on Investments, net of tax effects ÏÏ 99 (29) (13) 8
Comprehensive Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $797 $447 $1,835 $1,326

13

UNITEDHEALTH GROUP

11. Segment Financial Information

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 the UnitedHealthcare, Ovations and AmeriChoice businesses.
UnitedHealthcare coordinates network-based health and well-being services on behalf of local employers
and consumers. Ovations delivers health and well-being services for Americans over the age of 50.
AmeriChoice facilitates and manages health care services for state Medicaid programs and their beneÑ-
ciaries. The Ñnancial results of UnitedHealthcare, Ovations and AmeriChoice have been combined in the
Health Care Services segment column in the tables presented below because these businesses have similar
economic characteristics and have similar products and services, types of customers, distribution methods
and operational processes, and operate in a similar regulatory environment, typically within the same legal
entity.

‚ Uniprise provides network-based health and well-being access and services, business-to-business transaction
processing services, consumer connectivity and technology support services to large employers and health
plans.

‚ Specialized Care Services is a portfolio of health and well-being companies, each serving a specialized
market need with an oÅering of beneÑts, networks, services and resources.

‚ Ingenix is a leader in the Ñeld of health care information serving pharmaceutical, biotechnology and medical
device companies, health insurers and other payers, physicians and other health care providers, large
employers and government agencies.

Transactions between business segments principally consist of customer service and transaction processing
services Uniprise provides to Health Care Services, certain product oÅerings sold to Uniprise and Health Care
Services customers by Specialized Care Services, and sales of medical beneÑts cost, quality and utilization
data and predictive modeling to Health Care Services and Uniprise by Ingenix. These transactions are
recorded at management's best estimate of fair value, as if the services 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 speciÑed levels of regulatory capital or working capital for non-regulated
businesses. The quot;quot;Eliminations'' column includes eliminations of inter-segment transactions.

14

UNITEDHEALTH GROUP

The following table presents segment Ñnancial information for the three and nine month periods ended
September 30, 2004 and 2003 (in millions):
Health Specialized
Care Care
Three Months Ended September 30, 2004 Services Uniprise Services Ingenix Eliminations Consolidated

Revenues Ì External Customers ÏÏ $ 8,627 $ 676 $ 346 $113 $ Ì $ 9,762
Revenues Ì Intersegment ÏÏÏÏÏÏÏÏ Ì 159 229 57 (445) Ì
Investment and Other Income ÏÏÏÏ 85 7 5 Ì Ì 97
Total Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,712 $ 842 $ 580 $170 $ (445) $ 9,859
Earnings from Operations ÏÏÏÏÏÏÏÏ $ 763 $ 171 $ 124 $ 34 $ Ì $ 1,092
Health Specialized
Care Care
Three Months Ended September 30, 2003 Services Uniprise Services Ingenix Eliminations Consolidated

Revenues Ì External Customers ÏÏ $ 6,173 $ 625 $ 273 $104 $ Ì $ 7,175
Revenues Ì Intersegment ÏÏÏÏÏÏÏÏ Ì 145 199 44 (388) Ì
Total Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,224 $ 778 $ 476 $148 $ (388) $ 7,238
Earnings from Operations ÏÏÏÏÏÏÏÏ $ 490 $ 154 $ 100 $ 19 $ Ì $ 763
Health Specialized
Care Care
Nine Months Ended September 30, 2004 Services Uniprise Services Ingenix Eliminations Consolidated

Revenues Ì External Customers ÏÏ $23,108 $2,013 $1,012 $296 $ Ì $26,429
Revenues Ì Intersegment ÏÏÏÏÏÏÏÏ Ì 485 681 160 (1,326) Ì
Total Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $23,350 $2,520 $1,707 $456 $(1,326) $26,707
Earnings from Operations ÏÏÏÏÏÏÏÏ $ 1,976 $ 508 $ 356 $ 73 $ Ì $ 2,913
Health Specialized
Care Care
Nine Months Ended September 30, 2003 Services Uniprise Services Ingenix Eliminations Consolidated

Revenues Ì External Customers ÏÏ $18,196 $1,865 $ 790 $269 $ Ì $21,120
Revenues Ì Intersegment ÏÏÏÏÏÏÏÏ Ì 436 592 126 (1,154) Ì
Total Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18,344 $2,322 $1,393 $395 $(1,154) $21,300
Earnings from Operations ÏÏÏÏÏÏÏÏ $ 1,342 $ 459 $ 281 $ 43 $ Ì $ 2,125

12. Commitments and Contingencies
Legal Matters
Because of the nature of our businesses, we are routinely made party to a variety of legal actions related to the
design, management and oÅerings of our services. We record liabilities for our estimates of probable costs
resulting from these matters. These matters include, but are not limited to, claims relating to health care
beneÑts coverage, medical malpractice actions, contract disputes and claims related to disclosure of certain
business practices. Following the events of September 11, 2001, the cost of business insurance coverage

15

UNITEDHEALTH GROUP

increased signiÑcantly. As a result, we have increased the amount of risk that we self-insure, particularly with
respect to matters incidental to our business.
In 1999, a number of class action lawsuits were Ñled against us and virtually all major entities in the health
beneÑts business. Generally, the suits are purported class actions on behalf of physicians for alleged breaches
of federal statutes, including the Employee Retirement Income Security Act of 1974, as amended (ERISA),
and the Racketeer InÖuenced Corrupt Organization Act (RICO). The suits seek injunctive, compensatory
and equitable relief as well as restitution, costs, fees and interest payments. All activity in the trial court has
been stayed pending the industry defendants' appeal of an arbitration order.
In March 2000, the American Medical Association Ñled a lawsuit against the Company in connection with the
calculation of reasonable and customary reimbursement rates for non-network providers. The suit seeks
declaratory, injunctive and compensatory relief as well as costs, fees and interest payments. An amended
complaint was Ñled on August 25, 2000, which alleged two classes of plaintiÅs, an ERISA class and a non-
ERISA class. After the court dismissed certain ERISA claims and the claims brought by the American
Medical Association, a third amended complaint was Ñled. On October 25, 2002, the court granted in part and
denied in part our motion to dismiss the third amended complaint. We are engaged in discovery in this matter.
Although the results of pending litigation are always uncertain, we do not believe the results of any such
actions currently threatened or pending, including those described above, will, individually or in aggregate,
have a material adverse eÅect on our consolidated Ñnancial position or results of operations.

Government Regulation
Our business is regulated at federal, state, local and international levels. 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. State legislatures and Congress continue to focus on health care
issues as the subject of proposed legislation. Existing or future laws and rules could force us to change how we
do business, restrict revenue and enrollment growth, increase our health care and administrative costs and
capital requirements, and increase our liability in federal and state courts for coverage determinations, contract
interpretation and other actions. Further, we must obtain and maintain regulatory approvals to market many of
our products.
We are regularly subject to routine, regular and special governmental audits, investigations and enforcement
actions. In addition, a state Department of Insurance or other state or federal authority (including CMS, the
OÇce of the Inspector General, the OÇce of Personnel Management, the OÇce of Civil Rights, the
Department of Justice, and state attorneys general) may from time to time begin a special audit of one of our
health plans, our insurance plans or one of our other operations to investigate issues such as utilization
management; Ñnancial, eligibility or other data reporting; prompt claims payment; or coverage determinations
for medical services, including emergency room care. Any such government actions can result in assessment of
damages, civil or criminal Ñnes or penalties, or other sanctions, including loss of licensure or exclusion from
participation in government programs. We record liabilities for our estimate of probable costs resulting from
these matters. Although the results of pending matters are always uncertain, we do not believe the results of
any of the current investigations, audits or reviews, individually or in the aggregate, will have a material
adverse eÅect on our consolidated Ñnancial position or results of operations.

Other Contingencies
In 2002, Oxford Health Plans, Inc. (Oxford), which we acquired on July 29, 2004, entered into agreements
with two insurance companies that guaranteed cost reduction targets related to certain orthopedic medical
services. In 2003, the insurers sought to rescind or terminate the agreements claiming various misrepresenta-
tions and material breaches of the agreements by Oxford. Pursuant to the agreements, Oxford has Ñled claims

16

UNITEDHEALTH GROUP

to recover $25 million of costs incurred and expensed in excess of the cost reduction targets for the period from
November 2002 to October 2003. Oxford also anticipates it will Ñle additional claims of $25 million for costs
incurred and expensed in excess of the cost reduction targets for the period from November 2003 to October
2004. Both insurers have commenced arbitrations. An arbitration hearing is scheduled for 2005. We believe
the insurers' claims are without merit and we will vigorously seek to enforce our rights.

13. Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 46,
quot;quot;Consolidation of Variable Interest Entities Ì an Interpretation of ARB No. 51.'' FIN No. 46, as revised in
December 2003, requires an enterprise to consolidate a variable interest entity if that enterprise has a variable
interest that will absorb a majority of the entity's expected losses, receive a majority of the entity's expected
residual returns, or both. The adoption of FIN No. 46 did not have any impact on our consolidated Ñnancial
position or results of operations.
In March 2004, the FASB issued an exposure draft of a proposed standard entitled quot;quot;Share Based Payment'',
which would amend FAS No. 123, quot;quot;Accounting for Stock-Based Compensation,'' and FAS No. 95,
quot;quot;Statement of Cash Flows.'' The proposed standard, if adopted, would require expensing stock options issued
by the Company based on their estimated fair value at the date of grant and would be eÅective for the third
quarter of 2005. Upon issuance of a Ñnal standard, which is expected in late 2004, the Company will evaluate
the impact on our consolidated Ñnancial position and results of operations.
In March 2004, the FASB issued EITF Issue No. 03-1 (quot;quot;EITF 03-1''), quot;quot;The Meaning of Other-Than
Temporary Impairment and its Application to Certain Investments.'' EITF 03-1 includes new guidance for
evaluating and recording impairment losses on certain debt and equity investments when the fair value of the
investment security is less than its carrying value. The provisions of this rule are required to be applied
prospectively to all current and future investments accounted for in accordance with FAS No. 115,
quot;quot;Accounting for Certain Investments in Debt and Equity Securities,'' and other cost method investments
beginning in the third quarter of 2004. In September 2004, the FASB delayed the eÅective date for the
measurement and recognition provisions until the issuance of additional implementation guidance, expected in
December 2004. The Company is currently evaluating the impact of this new accounting standard on its
process for determining other-than-temporary impairments of applicable debt and equity securities.

17

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
UnitedHealth Group Incorporated
Minnetonka, Minnesota
We have reviewed the accompanying condensed consolidated balance sheet of UnitedHealth Group Incorpo-
rated and Subsidiaries (the Company) as of September 30, 2004, and the related condensed consolidated
statements of operations for the three-month and nine-month periods ended September 30, 2004 and 2003,
and of cash Öows for the nine-month periods ended September 30, 2004 and 2003. These condensed
consolidated Ñnancial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards of the Public Company Accounting Oversight Board
(United States). A review of interim Ñnancial information consists principally of applying analytical
procedures and making inquiries of persons responsible for Ñnancial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the expression of an opinion regarding the Ñnancial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modiÑcations that should be made to such condensed
consolidated Ñnancial statements for them to be in conformity with accounting principles generally accepted in
the United States of America.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet of UnitedHealth Group Incorporated and Subsidiaries
as of December 31, 2003, and the related consolidated statements of operations, shareholders' equity, and cash
Öows for the year then ended (not presented herein); and in our report dated February 10, 2004, we expressed
an unqualiÑed opinion on those consolidated Ñnancial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2003 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
November 5, 2004

18

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read together with the accompanying unaudited condensed consolidated
Ñnancial statements and notes. In addition, the following discussion should be considered in light of a number
of factors that aÅect the Company, the industry in which we operate, and business generally. These factors are
described in the Cautionary Statements section of this Quarterly Report.

Summary highlights of our third quarter 2004 results include:

‚ Diluted net earnings per common share of $1.04, an increase of 35% from $0.77 per share reported in the
third quarter of 2003 and an increase of 12% from $0.93 per share reported in the second quarter of 2004.

‚ Consolidated revenues of approximately $9.9 billion increased $2.6 billion, or 36%, over the third quarter of
2003. Excluding the impact of acquisitions, consolidated revenues increased by approximately 8% over the
prior year.

‚ Earnings from operations of $1.1 billion, up $329 million, or 43%, over the prior year and up $147 million, or
16%, sequentially over the second quarter of 2004.

‚ Consolidated operating margin of 11.1% improved from 10.5% in the third quarter of 2003.

‚ Cash Öows from operations of nearly $2.9 billion for the nine months ended September 30, 2004, an
increase of 35% compared to $2.1 billion for the nine months ended September 30, 2003.

Summary Operating Information
Percent Percent
(In millions, except per share data) 2004 2003 Change 2004 2003 Change

Total Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $9,859 $7,238 36% $26,707 $21,300 25%
Earnings from OperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,092 $ 763 43% $ 2,913 $ 2,125 37%
Net Earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 698 $ 476 47% $ 1,848 $ 1,318 40%
Diluted Net Earnings Per Common ShareÏÏÏÏ $ 1.04 $ 0.77 35% $ 2.85 $ 2.13 34%
Medical Care RatioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 80.5% 80.9% 80.8% 81.6%
Medical Care Ratio, excluding AARP ÏÏÏÏÏÏÏ 79.3% 79.5% 79.5% 80.3%
Operating Cost Ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.1% 16.9% 15.5% 17.0%
Return on Equity (annualized) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 30.7% 40.4% 32.3% 38.4%
Operating Margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.1% 10.5% 10.9% 10.0%

Results of Operations

Consolidated Financial Results

Revenues

Revenues are comprised of premium revenues from risk-based products; service revenues, which primarily
include fees for management, administrative and consulting services; and investment and other income.

Premium revenues are primarily derived from risk-based health insurance arrangements in which the
premium is Ñxed, typically for a one-year period, and we assume the economic risk of funding our customers'
health care services and related administrative costs. Service revenues consist primarily of fees derived from
services performed for customers that self-insure the medical costs of their employees and their dependents.
For both premium risk-based and fee-based customer arrangements, we provide coordination and facilitation
of medical services, transaction processing, customer, consumer and care provider services, and access to
contracted networks of physicians, hospitals and other health care professionals.

19

Consolidated revenues for the three and nine months ended September 30, 2004 of $9.9 billion and
$26.7 billion, respectively, increased by $2.6 billion, or 36%, and $5.4 billion, or 25%, over the comparable
2003 periods. Consolidated revenues for the three and nine months ended September 30, 2004 increased over
the comparable 2003 periods by approximately 28% and 17%, respectively, as a result of revenues from
businesses acquired since the third quarter of 2003 with the remaining increase due primarily to rate increases
on premium and fee-based services and growth across business segments. Following is a discussion of third
quarter consolidated revenue trends for each of our three revenue components.

Premium Revenues
Consolidated premium revenues for the three and nine month periods ended September 30, 2004 of
$8.9 billion and $24.0 billion, respectively, increased by $2.5 billion, or 39%, and $5.2 billion, or 28%, over the
comparable 2003 periods. Excluding the impact of acquisitions, consolidated premium revenues increased by
approximately 9% for both the three and nine months ended September 30, 2004 over the comparable 2003
periods primarily driven by premium rate increases.
For the three and nine months ended September 30, 2004, UnitedHealthcare premium revenues increased by
$2.0 billion and $3.9 billion, respectively, due mainly to the acquisitions of Oxford, MAMSI and Golden
Rule Financial Corporation (Golden Rule) since the third quarter of 2003 and average net premium rate
increases of approximately 9% to 10% on UnitedHealthcare's renewing commercial risk-based business,
partially oÅset by a decrease in the number of individuals served by risk-based products. Ovations premium
revenues increased by approximately 22% and 16% for the three and nine months ended September 30, 2004,
respectively, over the comparable 2003 periods driven by an increase in the number of individuals served by
Medicare supplement products provided to AARP members and by Medicare Advantage products and the
related premium rate increases as well as the acquired Oxford Medicare business. Premium revenues from
AmeriChoice Medicaid programs for the three and nine months ended September 30, 2004 increased by
$131 million, or 20%, and $353 million, or 19%, respectively, over the comparable 2003 periods primarily
driven by an increase in the number of individuals served and the acquisition of a Medicaid health plan in
Michigan in February 2004. The remaining premium revenue increase is due mainly to strong growth in
several of Specialized Care Services' businesses.

Service Revenues
Service revenues during the three and nine months ended September 30, 2004 of $842 million and $2.4 billion,
respectively, increased $62 million, or 8%, and $115 million, or 5%, over the comparable 2003 periods. The
increase in service revenues was driven primarily by aggregate growth of approximately 4%, excluding the
impact of acquisitions, in the number of individuals served by Uniprise and UnitedHealthcare under fee-based
arrangements during the nine months ended September 30, 2004 over the comparable 2003 period, as well as
annual rate increases.

Investment and Other Income
Investment and other income during the three and nine months ended September 30, 2004 totaled $97 million
and $278 million, respectively, representing increases of $34 million and $98 million over the comparable 2003
periods. Interest income for the three and nine months ended September 30, 2004 increased by $42 million
and $97 million, respectively, over the comparable 2003 periods mainly due to the impact of increased levels of
cash and Ñxed-income investments from the acquisitions of Oxford, MAMSI and Golden Rule. Net capital
gains on sales of investments for the three and nine months ended September 30, 2004 were zero and
$15 million, respectively, compared with $8 million and $14 million for the three and nine months ended
September 30, 2003.

Medical Costs
The combination of pricing, beneÑt designs, consumer health care utilization and comprehensive care
facilitation eÅorts is reÖected in the medical care ratio (medical costs as a percentage of premium revenues).

20

The consolidated medical care ratio for the three and nine months ended September 30, 2004 of 80.5% and
80.8%, respectively, improved from 80.9% and 81.6% in the comparable 2003 periods. Excluding the AARP
business,1 the medical care ratio for the three and nine months ended September 30, 2004 of 79.3% and 79.5%,
respectively, improved from 79.5% and 80.3% in the comparable 2003 periods. These medical care ratio
decreases resulted primarily from net premium rate increases that slightly exceeded overall medical beneÑt
cost increases and changes in product, business and customer mix.

Each period, our operating results include the eÅects of revisions in medical cost estimates related to all prior
periods. Changes in medical cost estimates related to prior periods that are identiÑed in the current period are
included in total medical costs reported for the current period. Medical costs for the third quarter of 2004
include approximately $50 million of favorable medical cost development related to the prior Ñscal years and
$50 million of favorable medical cost development related to the Ñrst and second quarters of 2004. Medical
costs for the third quarter of 2003 include approximately $20 million of favorable medical cost development
related to prior Ñscal years and $80 million of favorable medical cost development related to the Ñrst and
second quarters of 2003. Medical costs for the nine months ended September 30, 2004 and 2003 include
approximately $200 million and $130 million, respectively, of favorable medical cost development related to
prior years.

On an absolute dollar basis, medical costs for the three and nine months ended September 30, 2004 increased
$2.0 billion, or 39%, and $4.0 billion, or 26%, respectively, over the comparable 2003 periods. The increase was
driven primarily by a rise in medical costs of approximately 9% due to medical cost inÖation and a moderate
increase in health care consumption, and incremental medical costs related to businesses acquired since the
third quarter of 2003.

Operating Costs

The operating cost ratio (operating costs as a percentage of total revenues) for the three and nine months
ended September 30, 2004 of 15.1% and 15.5%, respectively, improved from 16.9% and 17.0% in the
comparable 2003 periods. These decreases were driven primarily by revenue mix changes, with premium
revenues growing at a faster rate than service revenues. Our premium-based products have lower operating
cost ratios than our fee-based products. Additionally, the decrease in the operating cost ratio reÖects
productivity gains from technology deployment and other cost management initiatives.

On an absolute dollar basis, operating costs for the three and nine months ended September 30, 2004
increased $262 million, or 21%, and $531 million, or 15%, respectively, over the comparable 2003 periods.
These increases were driven by a 2% increase in total individuals served by Health Care Services and Uniprise
during the nine months ended September 30, 2004 over the comparable 2003 period excluding the impact of
acquisitions, increases in broker commissions and premium taxes due to increased revenues, general operating
cost inÖation and additional operating costs associated with businesses acquired since the third quarter of
2003.

Depreciation and Amortization

Depreciation and amortization for the three and nine months ended September 30, 2004 of $99 million and
$268 million, respectively, increased from $75 million and $222 million in the comparable 2003 periods. The
increases were due to additional depreciation and amortization resulting from higher levels of computer
equipment, capitalized software and intangible assets as a result of technology enhancements, business growth
and businesses acquired since the third quarter of 2003.

1
Management believes disclosure of the medical care ratio excluding the AARP business is meaningful since underwriting gains or
losses related to the AARP business accrue to AARP policyholders through a rate stabilization fund (RSF). Although the Company is at
risk for underwriting losses to the extent cumulative net losses exceed the balance in the RSF, the Company has not been required to fund
any underwriting deÑcits to date and management believes the RSF balance is suÇcient to cover potential future underwriting or other
risks associated with the contract during the foreseeable future.

21

Income Taxes
Our eÅective income tax rate for the three and nine months ended September 30, 2004 was 34.0% and 34.6%,
respectively, compared to 35.5% and 35.8% in the comparable 2003 periods. The decreases were driven by
changes in business and income mix between states with diÅering income tax rates, as well as favorable
settlements of prior year income tax returns. The eÅective tax rate excluding these settlements would have
been approximately 35.0% for both the three and nine months ended September 30, 2004.

Business Segments
The following summarizes the operating results of our business segments for three and nine month periods
ended September 30 (in millions):

Revenues
Percent Percent
2004 2003 Change 2004 2003 Change

Health Care Services ÏÏÏÏÏÏÏÏÏÏÏÏÏ $8,712 $6,224 40% $23,350 $18,344 27%
Uniprise ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 842 778 8% 2,520 2,322 9%
Specialized Care ServicesÏÏÏÏÏÏÏÏÏÏ 580 476 22% 1,707 1,393 23%
Ingenix ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 170 148 15% 456 395 15%
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (445) (388) n/a (1,326) (1,154) n/a
Consolidated Revenues ÏÏÏÏÏÏÏÏÏÏ $9,859 $7,238 36% $26,707 $21,300 25%

Earnings from Operations
Percent Percent
2004 2003 Change 2004 2003 Change

Health Care Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 763 $490 56% $1,976 $1,342 47%
Uniprise ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 171 154 11% 508 459 11%
Specialized Care Services ÏÏÏÏÏÏÏÏÏÏÏÏÏ 124 100 24% 356 281 27%
IngenixÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34 19 79% 73 43 70%
Consolidated Earnings from
Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,092 $763 43% $2,913 $2,125 37%

Health Care Services
The Health Care Services segment, comprised of the UnitedHealthcare, Ovations and AmeriChoice
businesses, had revenues for the three and nine months ended September 30, 2004 of $8.7 billion and
$23.4 billion, respectively, representing increases of $2.5 billion, or 40%, and $5.0 billion, or 27%, over the
comparable 2003 periods. Excluding the impact of acquisitions, Health Care Services revenues for the three
and nine months ended September 30, 2004 increased by approximately 8% and 7%, respectively, primarily
driven by premium rate increases partially oÅset by a decrease in the number of individuals served by
commercial risk-based products.
The increase in Health Care Services revenues primarily resulted from an increase in UnitedHealthcare
premium revenues for the three and nine months ended September 30, 2004 of $2.0 billion and $3.9 billion,
respectively, due mainly to the acquisitions of Oxford, MAMSI and Golden Rule since the third quarter of
2003 and average net premium rate increases of approximately 9% to 10% on UnitedHealthcare's renewing
commercial risk-based business, partially oÅset by a decrease in the number of individuals served by

22

risk-based products. The remaining increase in Health Care Services revenues was largely due to growth in the
number of individuals served by UnitedHealthcare fee-based products, Ovations Medicare supplement
products provided to AARP members, Ovations Medicare Advantage products, and AmeriChoice Medicaid
products, as well as annual rate increases on these products.

For the three and nine months ended September 30, 2004, Health Care Services earnings from operations of
$763 million and $2.0 billion, respectively, increased $273 million, or 56%, and $634 million, or 47%, over the
comparable 2003 periods. These increases primarily resulted from revenue growth and improved gross margins
on UnitedHealthcare's risk-based products, growth in the number of individuals served by UnitedHealthcare's
fee-based products, and the acquisitions of Oxford, MAMSI and Golden Rule since the third quarter of 2003.
UnitedHealthcare's commercial medical care ratio decreased to 78.6% in the third quarter of 2004 from 79.2%
in 2003. The decrease is mainly due to net premium rate increases that slightly exceeded overall medical
beneÑt cost increases and changes in business and customer mix. Health Care Services' operating margin for
the three and nine months ended September 30, 2004 improved to 8.8% and 8.5% from 7.9% and 7.3%,
respectively, in the comparable 2003 periods. This was driven mainly by the lower medical care ratios and
changes in business and customer mix discussed above.

The following table summarizes individuals served by Health Care Services, by major market segment and
funding arrangement, as of September 30 (in thousands)1:
2004 2003

Commercial
Risk-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,635 5,005
Fee-based ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,200 2,855
Total Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,835 7,860
Medicare Advantage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 315 225
Medicaid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,240 1,090
Total Health Care ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,390 9,175

1
Excludes individuals served by Ovations' Medicare supplement products to AARP members.

The number of individuals served by UnitedHealthcare's commercial business as of September 30, 2004 was
10.8 million, an increase of approximately 3.0 million, or 38%, from September 30, 2003. Excluding the
acquisitions of Oxford, MAMSI, Golden Rule and a smaller regional health plan, the number of individuals
served by UnitedHealthcare's commercial business increased by 125,000. This was comprised of an increase of
approximately 220,000 in the number of individuals served with commercial fee-based products, driven by new
customer relationships and customers converting from risk-based products to fee-based products, partially
oÅset by a 95,000 decrease in the number of individuals served by risk-based products, resulting from
customers converting to self-funded, fee-based arrangements and a competitive commercial risk-based pricing
environment.

Excluding the Oxford acquisition, the number of individuals served by Ovations' Medicare Advantage
increased by 20,000, or 9%, from September 30, 2003. AmeriChoice's Medicaid enrollment increased by
150,000, or 14%, due to strong organic growth in the number of individuals served and the acquisition of a
Medicaid health plan in Michigan in February 2004, resulting in the addition of approximately 95,000
individuals served.

Uniprise

Uniprise revenues for the three and nine months ended September 30, 2004 of $842 million, and $2.5 billion,
respectively, increased by $64 million, or 8%, and $198 million, or 9%, over the comparable 2003 periods.
These increases were driven primarily by growth of approximately 3% in the number of individuals served by
Uniprise during the nine months ended September 30, 2004 over the comparable 2003 period and annual rate

23

increases. Uniprise served 9.6 million individuals and 9.2 million individuals as of September 30, 2004 and
2003, respectively.
Uniprise earnings from operations for the three and nine months ended September 30, 2004 of $171 million
and $508 million, respectively, increased $17 million, or 11%, and $49 million, or 11%, over the comparable
2003 periods. Operating margin for the three months ended September 30, 2004 improved to 20.3% and
20.2%, respectively, from 19.8% for both of the comparable 2003 periods. Uniprise has expanded its operating
margin through operating cost eÇciencies derived from process improvements, technology deployment and
cost management initiatives that have reduced labor and occupancy costs in its transaction processing and
customer service, billing and enrollment functions.

Specialized Care Services
For the three and nine months ended September 30, 2004, Specialized Care Services revenues of $580 million
and $1.7 billion, respectively, increased by $104 million, or 22%, and $314 million, or 23%, over the
comparable 2003 periods. These increases were principally driven by an increase in the number of individuals
served by certain of its specialty beneÑt businesses and rate increases related to these businesses as well as
revenues related to businesses acquired since the third quarter of 2003 of approximately $27 million and
$79 million for the three and nine months ended September 30, 2004, respectively.
Earnings from operations for the three and nine months ended September 30, 2004 of $124 million and
$356 million, respectively, increased $24 million, or 24%, and $75 million, or 27%, over the comparable 2003
periods. Specialized Care Services' operating margin for the three and nine months ended September 30, 2004
improved to 21.4% and 20.9%, from 21.0% and 20.2%, respectively, in the comparable 2003 periods. These
increases were driven primarily by operational and productivity improvements within several of Specialized
Care Services' businesses. With the continuing growth of the Specialized Care Services segment, we are
consolidating production and service operations to improve service, quality and consistency, and to enhance
productivity and eÇciency.

Ingenix
For the three and nine months ended September 30, 2004, Ingenix revenues of $170 million and $456 million,
respectively, increased by $22 million, or 15%, and $61 million, or 15%, over the comparable 2003 periods.
This was driven mainly by new business growth in the health information and clinical research businesses.
Earnings from operations for the three and nine month periods ended September 30, 2004 were $34 million
and $73 million, respectively, increasing by 79% and 70% over the comparable 2003 periods. The operating
margin for the three and nine months ended September 30, 2004 improved to 20.0% and 16.0%, from 12.8%
and 10.9%, respectively, in the comparable 2003 periods. These increases were driven by growth and
expanding margins in the health information and clinical research businesses. Ingenix typically generates
higher revenues and operating margins in the second half of the year due to seasonally strong demand for its
higher margin health information products.

Financial Condition and Liquidity at September 30, 2004
Liquidity
We manage our cash, investments and capital structure so we are able to meet the short- and long-term
obligations of our business while maintaining strong Ñnancial Öexibility and liquidity. We forecast, analyze and
monitor our cash Öows to enable prudent investment and Ñnancing activities within the conÑnes of our
Ñnancial strategy.
Our regulated subsidiaries generate signiÑcant cash Öows from operations. A majority of the assets held by our
regulated subsidiaries are in the form of cash, cash equivalents and investments. After considering expected
cash Öows from operating activities, we generally invest monies of regulated subsidiaries that exceed our short-
term obligations in longer term, investment-grade, marketable debt securities to improve our overall
investment return while meeting capital adequacy requirements. Factors we consider in making these

24

investment decisions include our board of directors' approved investment policy, regulatory limitations, return
objectives, tax implications, risk tolerance and maturity dates. Our long-term investments are also available for
sale to meet short-term liquidity and other needs. Monies in excess of the capital needs of our regulated
entities are paid to their non-regulated parent companies, typically in the form of dividends, for general
corporate use, when and as permitted by applicable regulations.

Our non-regulated businesses also generate signiÑcant cash Öows from operations for general corporate use.
Cash Öows generated by these entities, combined with the issuance of commercial paper, long-term debt and
the availability of our committed credit facility, further strengthens our operating and Ñnancial Öexibility. We
generally use these cash Öows to reinvest in our businesses in the form of capital expenditures, to expand the
depth and breadth of our services through business acquisitions, and to repurchase shares of our common
stock, depending on market conditions.

Cash generated from operating activities, our primary source of liquidity, is principally from net earnings,
excluding depreciation and amortization. As a result, any future decline in our proÑtability may have a
negative impact on our liquidity. The level of proÑtability of our risk-based business depends in large part on
our ability to accurately predict and price for health care cost increases. This risk is partially mitigated by the
diversity of our other businesses, the geographic diversity of our risk-based business and our disciplined
underwriting and pricing processes, which seek to match premium rate increases with future health care costs.
In 2003, a hypothetical 1% increase in commercial insured medical costs would have reduced net earnings by
approximately $75 million.

The availability of Ñnancing in the form of debt or equity is inÖuenced by many factors, including our
proÑtability, operating cash Öows, debt levels, debt ratings, contractual restrictions, regulatory requirements
and market conditions. We believe that our strategies and actions toward maintaining Ñnancial Öexibility
mitigate much of this risk.

Cash and Investments

Cash Öows from operating activities were nearly $2.9 billion in the nine months ended September 30, 2004,
representing an increase over the comparable 2003 period of $752 million, or 35%. This increase in operating
cash Öows resulted primarily from an increase of $573 million in net income excluding depreciation,
amortization and other noncash items. Operating cash Öows increased by $179 million due to cash generated
by working capital changes. As premium revenues and related medical costs increase, we typically generate
incremental operating cash Öows because we collect premium revenues in advance of the claim payments for
related medical costs.

We maintained a strong Ñnancial condition and liquidity position, with cash and investments of $12.5 billion at
September 30, 2004. Total cash and investments increased by $3.0 billion since December 31, 2003, primarily
due to cash and investments acquired in the Oxford and MAMSI acquisitions in 2004 and strong operating
cash Öows, partially oÅset by capital expenditures, cash paid for business acquisitions and common stock
repurchases.

As further described under quot;quot;Regulatory Capital and Dividend Restrictions,'' many of our subsidiaries are
subject to various government regulations that restrict the timing and amount of dividends and other
distributions that may be paid to their parent companies. At September 30, 2004, approximately $310 million
of our $12.5 billion of cash and investments was held by non-regulated subsidiaries and was available for
general corporate use, including acquisitions and share repurchases.

Financing and Investing Activities

In addition to our strong cash Öows generated by operating activities, we use commercial paper and debt to
maintain adequate operating and Ñnancial Öexibility. As of September 30, 2004 and December 31, 2003, we
had commercial paper and debt outstanding of approximately $3.9 billion and $2.0 billion, respectively. Our
debt-to-total-capital ratio was 26.1% and 27.8% as of September 30, 2004 and December 31, 2003,

25

United Health Group [PDF Document] Form 10-Q

United Health Group [PDF Document] Form 10-Q

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