UnitedHealth Group Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. UnitedHealth Group operates health benefits through UnitedHealthcare and health services through Optum. Financial amounts below are in U.S. dollars; comparisons are year over year unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $60.4B | $56.6B | $181.3B | $167.8B |
| Earnings from operations | $5.0B | $4.6B | $14.6B | $12.8B |
| Net earnings attributable to common shareholders | $3.5B | $3.2B | $10.3B | $8.9B |
| Diluted EPS | $3.67 | $3.24 | $10.65 | $9.09 |
| Operating margin | 8.3% | 8.1% | 8.0% | 7.7% |
| Medical care ratio | 82.4% | 81.0% | 82.5% | 81.4% |
| Operating cost ratio | 14.8% | 15.0% | 14.3% | 15.1% |
- Q3 revenue grew 7%, operating earnings 9%, net earnings attributable to shareholders 11%, and diluted EPS 13%. For the first nine months, the respective increases were 8%, 14%, 15%, and 17%.
- Operating cash flow was $12.3B for the first nine months, down from $13.3B. Cash and cash equivalents were $12.4B at September 30, versus $10.9B at year-end 2018; management reported approximately $1.5B available for general corporate use.
- At September 30, total assets were $173.7B and total liabilities were $114.0B. Balance-sheet commercial paper and current maturities were $6.4B; long-term debt was $38.5B. The company also reported $4.1B of commercial paper outstanding in its debt note. Its covenant-defined debt-to-debt-plus-equity ratio was approximately 41%, below the 60% limit; it was in compliance with covenants.
- Current assets were $43.5B against current liabilities of $62.6B. Liquidity also includes investment holdings and revolving credit facilities; none of the facilities was drawn at quarter-end.
Material changes and operating drivers
- Revenue growth reflected Medicare Advantage enrollment, pricing, and Optum organic and acquisition growth, particularly pharmacy services and care delivery. The 2019 moratorium on the Health Insurance Industry Tax also affected year-over-year comparisons.
- UnitedHealthcare revenue rose 5% in Q3; operating earnings rose 4%. Medicare Advantage revenue increased 10%. Total UnitedHealthcare medical membership increased 415,000 year over year, including growth in commercial and Medicare Advantage membership, partly offset by Medicaid and international declines.
- Optum Q3 revenue increased 13% and operating earnings 16%. OptumHealth revenue grew 34%, with organic and acquired growth in care delivery, care services, and behavioral health. OptumInsight revenue grew 16%, mainly from managed-services growth. OptumRx revenue grew 6%; an expected large client transition contributed to lower adjusted scripts, 325 million versus 331 million.
- The medical care ratio increased 1.4 percentage points in Q3 and 1.1 points year to date. Management attributed the increase primarily to revenue effects of the Health Insurance Industry Tax moratorium; medical costs also rose with Medicare Advantage membership and medical cost trends, partly offset by favorable prior-year reserve development. The operating cost ratio improved, supported by the tax moratorium and cost management.
- Interest expense rose 27% in Q3 and 23% year to date. Nine-month operating cash flow declined, primarily due to working-capital changes, partly offset by higher earnings.
Outlook, risks, and unusual items
- The filing does not provide a clear numerical earnings or revenue guidance range. Management noted that 2020 contract pricing reflects the return of the Health Insurance Industry Tax after its 2019 moratorium. Final 2020 Medicare Advantage base rates increased approximately 2.5%, which management said was below industry medical-cost trend, including the tax’s return, and would pressure the program.
- The company completed several acquisitions for $9.7B total cash consideration during the first nine months. Net cash paid for acquisitions in the cash-flow statement was $8.2B. Acquisitions added $6.6B of goodwill; acquired businesses’ reported contribution to revenue and earnings was not material through September 30.
- Medical costs payable were $20.9B, including $14.2B for incurred-but-not-reported claims. Reserve estimates and goodwill are identified as significant estimates. Prior-year medical cost development was favorable by $460M for the first nine months.
- Legal and regulatory matters include CMS risk-adjustment data validation audits and a DOJ False Claims Act case alleging improper risk-adjustment submissions. The company said it could not reasonably estimate the outcome of that case. It also faces ongoing government investigations, audits, reviews, and other litigation; loss estimates may be difficult to determine.
- Other stated risks include medical-cost estimation and pricing, healthcare regulation and government-program rates, quality scores, cybersecurity and privacy, pharmacy-benefit competition, contract awards, litigation, acquisitions, credit ratings, and investment performance. The company reported no material change to risk factors in its 2018 Form 10-K.
- Operating lease accounting was adopted January 1, 2019, adding $3.3B of right-of-use assets and lease liabilities; the adoption was immaterial to results, equity, and cash flows. The company repurchased $5.1B of shares and paid $2.9B in dividends in the first nine months; the annual dividend rate was raised to $4.32 per share.
Investor verification points
- Review subsequent medical-cost development and assumptions supporting the $20.9B medical-cost reserve, especially incurred-but-not-reported claims.
- Assess the impact of the 2020 Health Insurance Industry Tax return and Medicare Advantage reimbursement rates on pricing, margins, and membership.
- Track the DOJ risk-adjustment litigation, CMS audits, and other regulatory matters for new estimates, settlements, or business impacts.
- Monitor acquisition integration, goodwill and intangible-asset valuations, and whether acquired operations contribute materially to growth and returns.
- Reconcile cash availability and funding needs with elevated debt and commercial paper, acquisition spending, share repurchases, and dividends.