UnitedHealth Group Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results. UnitedHealth Group operates UnitedHealthcare and Optum, reported across UnitedHealthcare, OptumHealth, OptumInsight and OptumRx.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $72.3B (+11%) | $65.1B | $213.9B (+12%) | $191.7B |
| Operating earnings | $5.7B (+23%) | $4.7B | $18.4B (-2%) | $18.9B |
| Net earnings attributable to common shareholders | $4.1B (+29%) | $3.2B | $13.2B (roughly flat) | $13.2B |
| Diluted EPS | $4.28 (+30%) | $3.30 | $13.82 (+1%) | $13.73 |
| Medical care ratio | 83.0% | 81.9% | 82.3% | 77.7% |
| Operating margin | 7.9% | 7.1% | 8.6% | 9.9% |
Q3 revenue growth reflected membership growth, pricing and Optum organic and acquisition growth. Q3 operating earnings increased in both UnitedHealthcare and Optum. For the nine-month period, Optum operating earnings rose 24%, while UnitedHealthcare operating earnings fell 18%; consolidated operating earnings declined 2%.
- Cash flow: Nine-month operating cash flow was $19.1B, versus $16.1B. Cash and cash equivalents were $21.1B at September 30, 2021, including $3.7B available for general corporate use. Investing cash outflow was $11.1B and financing cash outflow was $3.8B.
- Debt and liquidity: Short-term borrowings and current maturities were $3.6B; long-term debt was $43.3B. The company issued $7.0B of senior notes in May. Its credit-facility debt-to-debt-plus-shareholders’ equity ratio was approximately 38%, below the 60% covenant limit.
- Balance sheet: Total assets were $213.0B and total liabilities were $138.4B at quarter-end. Medical costs payable were $25.9B, including $17.6B of incurred-but-not-reported claims reserves.
Material changes and operating drivers
- UnitedHealthcare served 2.0 million more people domestically year over year, led by Medicaid (+1.1 million) and Medicare Advantage (+785,000). Domestic medical membership reached 44.9 million.
- Optum revenue grew 14% in Q3. OptumHealth revenue rose 32%, OptumInsight 13%, and OptumRx 6%. OptumRx adjusted scripts increased to 344 million from 325 million.
- The Q3 medical care ratio increased 1.1 percentage points year over year, reflecting COVID-19 care and testing costs and the repeal of the Health Insurance Tax, partly offset by deferred care. The nine-month ratio also reflects comparatively lower prior-year utilization and reserve development.
- Prior-year favorable medical reserve development was $1.3B for the first nine months of 2021, compared with $0.8B in the comparable 2020 period. Management said development was primarily driven by lower-than-expected health system utilization.
- The Health Insurance Tax repeal, effective January 1, 2021, affects year-over-year comparability of revenue, costs, margins, tax rate and operating cash flow. Management also cited operating efficiency gains as a factor in the lower operating cost ratio.
Outlook, risks and contingencies
- Outlook: The filing provides no clear consolidated earnings or revenue guidance. Management said COVID-19’s effects remain uncertain; deferred care could return to or exceed normal levels, potentially with higher acuity, while pandemic-related costs, policy responses and economic effects remain variable. Final 2022 Medicare Advantage industry base rates were reported to increase approximately 4.1%, below industry forward medical cost trend.
- COVID-19: During Q3, increased care activity included both deferred care and COVID-19-related treatment and testing. UnitedHealthcare results were affected by care costs, rebate requirements and other revenue impacts; Optum businesses experienced varying effects on risk-based care, fee-for-service volumes and volume-based services.
- Acquisitions: Pending healthcare acquisitions, most notably Change Healthcare, were subject to regulatory approval and customary closing conditions. Anticipated capital required was approximately $9B, excluding acquired debt repayment.
- Legal and regulatory: The company faces ongoing government investigations, audits and reviews, including Medicare risk-adjustment data validation audits. A DOJ False Claims Act matter alleges improper risk-adjustment submissions; the company said it could not reasonably estimate the outcome. Loss estimates for some legal matters are also not reasonably estimable.
- Other risks: Medical-cost estimation, Medicare and Medicaid policy, risk adjustment, cybersecurity and privacy, competition, litigation, credit ratings, acquisitions and investment performance are among the risks identified. The company reported no material changes to the risk factors in its 2020 Form 10-K.
- Capital returns: The annualized quarterly dividend rate increased to $5.80 per share from $5.00. Nine-month repurchases totaled $3.95B; authorization remained for up to 48 million shares. Future dividends remain at the board’s discretion.
Important facts for investors to verify
- Whether medical utilization, COVID-19 costs and deferred-care patterns develop as management expects, and how they affect the medical care ratio and reserve estimates.
- Whether favorable prior-year reserve development persists and how much of reported earnings and operating cash flow depends on reserve timing and working-capital movements.
- Progress, regulatory approvals, financing needs and expected benefits of the Change Healthcare transaction and other pending acquisitions.
- Developments in the DOJ risk-adjustment litigation, CMS audits and other regulatory matters, including any financial exposure not currently estimable.
- Debt and cash availability, including the portion of cash not available for general corporate use, against planned acquisitions, dividends and repurchases.