UnitedHealth Group Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. UnitedHealth Group operates health benefits through UnitedHealthcare and health services through Optum. Figures below are in U.S. dollars; financial statement amounts are in billions unless otherwise noted.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $60.3 billion | $55.2 billion | +9% |
| Earnings from operations | $4.8 billion | $4.1 billion | +19% |
| Net earnings attributable to common shareholders | $3.5 billion | $2.8 billion | +22% |
| Diluted EPS | $3.56 | $2.87 | +24% |
| Operating margin | 8.0% | 7.3% | +0.7 percentage points |
| Medical care ratio (MCR) | 82.0% | 81.4% | +0.6 percentage points |
| Operating cost ratio | 14.1% | 15.4% | -1.3 percentage points |
| Cash from operations | $3.2 billion | $8.4 billion | -$5.1 billion |
Medical costs rose 9% to $38.9 billion, while total operating costs increased 8% to $55.5 billion. The effective tax rate fell to 19.7% from 21.5%. Return on equity was 26.8%, versus 23.8%.
Business and segment trends
- UnitedHealthcare revenue increased 8% to $48.9 billion; operating earnings rose 23% to $3.0 billion. Membership grew by 880,000 year over year to 49.7 million medical members, led by Medicare Advantage and fee-based commercial business. Medicaid membership declined by 270,000.
- Optum revenue increased 12% to $26.4 billion and operating earnings rose 14% to $1.9 billion. OptumHealth revenue grew 17%, OptumInsight 6%, and OptumRx 11%. OptumRx fulfilled 339 million adjusted scripts, up from 332 million.
- Management attributed growth to Medicare enrollment, pricing, Optum pharmacy and care-delivery expansion, business combinations, and productivity and cost-management initiatives.
Cash, liquidity and debt
- Cash and cash equivalents were $12.4 billion at March 31, 2019, up from $10.9 billion at year-end. Cash, available-for-sale debt securities and equity securities totaled approximately $47.0 billion; the company said about $800 million of cash was available for general corporate use.
- Operating cash flow was $3.2 billion, compared with $8.4 billion a year earlier. Management said the decline largely reflected the prior-year early receipt of a $5.1 billion April CMS premium payment, as well as the Health Insurance Industry Tax moratorium, partly offset by higher earnings.
- Current and long-term debt on the balance sheet totaled approximately $38.3 billion. Commercial paper outstanding was $3.1 billion; no revolving bank credit facilities were drawn. The defined debt-to-debt-plus-equity ratio was approximately 40%, below the 60% covenant limit, and the company reported covenant compliance.
- Q1 capital returns included $3.0 billion of share repurchases and $860 million of dividends. The quarterly dividend was $0.90 per share; authorization remained for repurchases of up to 83 million shares.
Outlook, risks and notable items
- The filing provides no specific full-year earnings or revenue guidance. Management noted that 2020 pricing will reflect the return of the Health Insurance Industry Tax after its 2019 moratorium. The 2019 moratorium affects year-over-year revenue, costs, MCR, operating-cost ratio, tax rate and operating cash flow comparisons.
- Management said final 2020 Medicare Advantage base rates increased approximately 2.5%, below the industry’s forward medical-cost trend including the returning tax, creating continued program pressure. Commercial markets remain competitive; medical-cost trends include unit costs, utilization and prescription drugs.
- A DOJ False Claims Act lawsuit alleges improper Medicare risk-adjustment submissions. In March 2019, the court denied the government’s motion for partial summary judgment and dismissed the company’s counterclaims without prejudice. The company said it could not reasonably estimate the outcome.
- The company is subject to ongoing legal matters and government investigations, audits and reviews, including CMS risk-adjustment data validation audits; potential losses may be difficult to estimate. Key risks also include medical-cost estimates, regulatory and reimbursement changes, cybersecurity and privacy, competition, litigation, acquisitions and capital-market access.
- Adoption of the new lease standard on January 1, 2019 added $3.3 billion of operating lease right-of-use assets and liabilities and was immaterial to reported earnings, equity and cash flows. Management identified medical-cost payable and goodwill as critical accounting estimates.
- Unrealized losses on investment securities were attributed primarily to interest-rate changes; management considered them temporary and reported no intent to sell the securities in loss positions.
Most important facts for investors to verify
- Whether earnings growth and margin improvement persist as the 2019 tax moratorium creates comparability effects and the tax returns for 2020 pricing.
- Drivers of the higher MCR and trends in medical costs, Medicare Advantage rates, membership mix and Medicaid enrollment.
- Underlying operating cash generation after adjusting for the prior-year CMS premium timing and other working-capital movements.
- Available-for-corporate-use liquidity, commercial-paper funding and debt levels, alongside ongoing buybacks and dividends.
- Developments in the DOJ risk-adjustment case, CMS audits and other regulatory or legal matters, for which outcomes or potential losses are not clearly quantified in the filing.