UnitedHealth Group Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; compared with the three months ended March 31, 2017, unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. UnitedHealth Group operates through UnitedHealthcare (health benefits) and Optum (health services).
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $55.188 billion | $48.723 billion | +13% |
| Operating earnings | $4.053 billion | $3.413 billion | +19% |
| Net earnings attributable to shareholders | $2.836 billion | $2.172 billion | +31% |
| Diluted EPS | $2.87 | $2.23 | +29% |
| Operating margin | 7.3% | 7.0% | +0.3 percentage points |
| Medical care ratio (medical costs / premium revenue) | 81.4% | 82.4% | −1.0 percentage point |
| Operating cost ratio | 15.4% | 14.4% | +1.0 percentage point |
| Effective tax rate | 21.5% | 30.0% | −8.5 percentage points |
| Operating cash flow | $8.369 billion | $6.456 billion | +$1.913 billion |
Cash and cash equivalents were $18.243 billion at quarter-end, up from $11.981 billion at year-end 2017. Management said only about $1 billion of the reported cash balance was available for general corporate use. Cash, cash equivalents, available-for-sale debt securities and equity securities totaled about $50 billion. Total assets were $155.569 billion and equity was $50.036 billion.
At March 31, current and long-term debt on the balance sheet totaled $35.585 billion ($7.379 billion current and $28.206 billion long-term). The debt note separately reports $34.166 billion carrying value for commercial paper and long-term debt; investors should reconcile this presentation with balance-sheet classifications. Commercial paper outstanding was $4.423 billion, with a 2.0% weighted-average annual rate. No revolving credit facilities were drawn; the company reported covenant compliance and a defined debt-to-capital ratio of about 40% versus a 55% limit.
Operating cash flow benefited from a $5.1 billion March receipt of the April CMS premium payment, compared with $4.4 billion in the prior-year quarter. Investing cash outflow was $4.517 billion, including $2.583 billion for acquisitions. Financing cash inflow was $2.422 billion; the company repurchased $2.650 billion of shares and paid $722 million in dividends.
Material changes and business performance
- Revenue growth reflected more people in risk-based products, pricing, the return of the Health Insurance Industry Tax in 2018, and Optum growth. UnitedHealthcare revenue rose 13% and Optum revenue rose 11%.
- UnitedHealthcare operating earnings increased 12%; Optum operating earnings increased 29%. OptumHealth revenue grew 22%, OptumInsight 12%, and OptumRx 8%. Management cited business growth, acquisitions, productivity and cost management.
- UnitedHealthcare medical membership was down 465,000 year over year, largely because the company completed its commitment to serve 2.9 million TRICARE members. International growth and enrollment gains in Medicare Advantage and Medicaid partly offset declines elsewhere.
- Medical costs rose 12%, alongside growth in risk-based membership and medical cost trends. The lower medical care ratio reflected revenue effects from the returning industry tax, partly offset by elevated flu-related costs.
- Interest expense increased 16% to $329 million. The effective tax rate fell primarily due to U.S. tax reform, partly offset by the nondeductible Health Insurance Industry Tax.
Outlook, risks and unusual items
- Management expected a 2018 effective tax rate of approximately 24%, reflecting tax reform partly offset by the industry tax. The filing states the 2018 industry-wide tax is $14.3 billion and estimates UnitedHealth Group’s portion at approximately $2.8 billion. A one-year moratorium on collection is expected in 2019.
- Final 2019 Medicare Advantage industry base rates increased approximately 3.4%, below expected industry medical cost trends; management said this creates continuing program pressure and may affect plan benefits, pricing, growth and earnings.
- Management identified medical cost estimation and pricing, regulation and government-program funding, CMS quality ratings and risk-adjustment audits, cybersecurity and privacy, competition, litigation and investigations, acquisitions, and access to capital as risks to results. The filing said risk factors had not materially changed from the 2017 Form 10-K.
- A DOJ False Claims Act action alleges improper Medicare risk-adjustment submissions. The court partly granted and partly denied the company’s motion to dismiss in February 2018. The company said it could not reasonably estimate the outcome. CMS risk-adjustment data validation audits may also lead to retrospective payment adjustments.
- Medical costs payable were $19.589 billion at quarter-end, including $13.3 billion in reserves for incurred but unreported claims. The filing reported $290 million of favorable prior-year medical cost development in Q1 2018, versus $450 million in Q1 2017; management said no individual reserve-development factors were significant.
- Available-for-sale securities had $445 million of gross unrealized losses, which management attributed primarily to interest-rate increases and considered temporary; it stated it did not intend to sell those securities. Adoption of ASU 2016-01 resulted in a $24 million reclassification from accumulated other comprehensive income to retained earnings.
Key facts for investors to verify
- Whether the lower medical care ratio and earnings growth persist after considering flu costs, pricing, and the industry tax’s effects on revenue and ratios.
- The sustainability and timing of operating cash flow, particularly the effect of the CMS advance premium receipt and other working-capital movements.
- Debt classification and refinancing needs, including commercial paper and near-term maturities, alongside capital returns and acquisition spending.
- Developments in the DOJ risk-adjustment litigation, CMS audits, and any related reserve or payment consequences.
- Medicare Advantage rate adequacy, membership trends, and the company’s expected full-year tax rate versus the approximately 24% outlook.