UnitedHealth Group Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; filed November 3, 2010. Financial statements are unaudited. UnitedHealth Group operates health benefits and health services businesses, reported in four segments: Health Benefits, OptumHealth, Ingenix and Prescription Solutions.
Financial performance
Amounts below are in millions, except per-share data and ratios.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $23,668 | $21,695 | $70,125 | $65,354 |
| Operating earnings | $2,145 | $1,676 | $6,062 | $4,784 |
| Net earnings | $1,277 | $1,035 | $3,591 | $2,878 |
| Diluted EPS | $1.14 | $0.89 | $3.15 | $2.43 |
| Operating margin | 9.1% | 7.7% | 8.6% | 7.3% |
| Net margin | 5.4% | 4.8% | 5.1% | 4.4% |
| Medical care ratio | 80.1% | 82.0% | 81.0% | 82.7% |
| Operating cost ratio | 15.0% | 14.5% | 14.5% | 14.3% |
- Q3 revenue rose 9%, net earnings 23% and diluted EPS 28% year over year. For the first nine months, revenue rose 7%, net earnings 25% and diluted EPS 30%.
- Nine-month operating cash flow was $4,832, versus $4,345 in 2009. Investing activities used $3,634, including $2,072 for acquisitions; financing activities used $1,421. Cash and cash equivalents ended at $9,577, down from $9,800 at year-end 2009.
- At September 30, cash, cash equivalents and available-for-sale investments totaled about $25.5 billion. Total debt carrying value was $11,005; debt-to-total-capital was 30.1%, versus 32.1% at year-end. The $2.5 billion revolving credit facility was undrawn, and the company reported compliance with its debt covenant.
- Total assets were $63,023 and shareholders’ equity $25,611. Current assets were $18,256 and current liabilities $24,442.
Material changes and drivers
- Growth was led by public and senior health benefits, commercial premium rate increases, pharmacy benefit management, and health technology and services. Total Health Benefits membership increased 2% to 32.7 million; public and senior membership increased 11%, while commercial membership was approximately flat.
- Health Benefits operating earnings rose 44% in Q3 and 38% for the nine months. Management cited revenue growth, lower-than-expected utilization and favorable development of prior-period medical costs.
- Favorable medical-cost development was $660 for the first nine months of 2010, compared with $300 in 2009. Q3 included $80 related to prior fiscal years and $150 related to the first half of 2010. Management attributed favorable development primarily to lower utilization and more efficient claims handling. This contributed to the lower medical care ratio and stronger earnings.
- Segment results were mixed: Q3 operating earnings declined 17% at OptumHealth and 29% at Prescription Solutions, while Ingenix earnings increased 9%. Prescription Solutions faced changes in performance-based Medicare Part D contracts; OptumHealth cited business mix, start-up costs and mental health parity implementation costs.
- The effective tax rate increased to 37.0% in Q3 and for the nine-month period, from 32.7% and 34.2%, respectively, in 2009. The filing cites a prior-year benefit from state tax matters and limits on deductibility of certain compensation under health reform legislation.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management said the effects of health reform were difficult to project because implementing regulations and guidance were incomplete.
- Health reform may raise medical or administrative costs, constrain premium increases or enrollment growth, require rebates under minimum medical care ratios, reduce Medicare Advantage payments, and change Medicaid and commercial markets. The company also identified possible growth opportunities in health services, wellness and care management.
- Management cited recession-related pressure on employer enrollment and commercial membership, potential reductions in government program funding, medical-cost estimation risk, regulatory and litigation exposure, competition, credit-rating risk and potential impairment of goodwill or intangible assets.
- In October 2010, after quarter-end, the company issued $750 million of senior notes: $450 million due 2020 at 3.875% and $300 million due 2040 at 5.700%. It also paid the $350 million AMA-related settlement, plus interest, into escrow; some class members indicated an intent to appeal approval.
- Acquisitions increased goodwill from $20,727 at year-end 2009 to $22,855 at September 30, 2010, including $2,083 of goodwill recorded for acquisitions. The company repurchased 59 million shares for $1.9 billion in the first nine months and paid $313 million in dividends; it moved to quarterly dividends in 2010.
- Other contingencies include provider reimbursement litigation and a California claims-processing administrative matter. The filing warns that adverse legal or regulatory outcomes could materially affect results, but does not provide a clear quantified exposure for these matters.
Important facts for investors to verify
- How much of earnings growth and the reduced medical care ratio reflects sustainable current-period performance versus favorable reserve development; monitor subsequent claims experience and reserve estimates.
- Whether health reform rules, medical-cost ratio calculations and Medicare Advantage payment changes alter pricing, rebates, membership, margins or product participation.
- Whether lower operating margins at OptumHealth, Ingenix and Prescription Solutions persist, and whether acquisitions deliver expected returns relative to their cash cost and added goodwill.
- Liquidity and capital allocation after the October debt issuance, settlement payment, share repurchases and increased quarterly dividends; also monitor credit ratings and regulated-subsidiary dividend capacity.
- Developments in the AMA settlement appeal, provider litigation, California claims-processing proceeding and other government reviews, including any material financial or operating impact.