UnitedHealth Group Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited results; amounts in U.S. dollars unless stated otherwise. UnitedHealth Group operates UnitedHealthcare, providing health coverage and benefits services, and Optum, providing pharmacy and health services.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $44.527 billion | $35.756 billion | +25% |
| Operating earnings | $2.960 billion | $2.640 billion | +12% |
| Net earnings attributable to common shareholders | $1.611 billion | $1.413 billion | +14% |
| Diluted EPS | $1.67 | $1.46 | +14% |
| Operating margin | 6.6% | 7.4% | Down 0.8 percentage points |
| Medical care ratio | 81.7% | 81.4% | Up 0.3 percentage points |
| Operating cash flow | $2.318 billion | $2.269 billion | + $49 million |
Products revenue rose to $6.393 billion from $1.230 billion, principally reflecting the Catamaran acquisition. Premium revenue increased 10% to $34.811 billion. The effective tax rate was 39.8%, versus 43.3%; management attributed the reduction primarily to early adoption of share-based compensation accounting guidance. Full-year 2016 tax rate was expected to be approximately 41%.
Segment results: UnitedHealthcare revenue increased 10% to $35.900 billion, while operating earnings declined 2% to $1.854 billion. Optum revenue increased 54% to $19.684 billion and operating earnings rose 49% to $1.106 billion, substantially reflecting Catamaran and growth across Optum businesses. Catamaran’s pharmacy-services mix weighed on Optum’s operating margin.
At March 31, 2016, cash and cash equivalents were $10.596 billion; current assets were $33.745 billion and current liabilities $46.285 billion. Total assets were $117.855 billion. Commercial paper, term loan and long-term debt totaled $33.552 billion carrying value; the balance sheet separately reported $6.504 billion of commercial paper and current debt maturities and $27.218 billion of long-term debt. The credit-facility debt-to-debt-plus-equity ratio was approximately 47%, below the 55% covenant limit. No bank credit facilities were drawn. Operating cash flow was $2.318 billion; investing activities used $4.181 billion and financing activities provided $1.502 billion. Cash decreased $327 million during the quarter.
Material changes and management commentary
- Consolidated revenue growth was driven by Catamaran, organic growth in people served, and growth across Optum. UnitedHealthcare served 2.0 million more people domestically year over year; total medical membership increased 4% to 47.670 million.
- The medical care ratio increased amid membership growth, exchange losses and an extra day in the leap-year quarter. Higher favorable reserve development and improved core performance partly offset these pressures. Favorable medical-cost reserve development was $360 million, versus $140 million in Q1 2015.
- Operating cost ratio improved to 15.2% from 16.3%, partly reflecting Catamaran. Operating margin fell to 6.6% from 7.4%, including lower UnitedHealthcare results and a greater pharmacy-services mix.
- Cash used for acquisitions was $1.697 billion, versus $575 million a year earlier. The company issued $2.485 billion of long-term debt and repaid $601 million of long-term debt during the quarter.
- Common dividends paid were $477 million; the declared quarterly dividend was $0.50 per share. The company repurchased 4 million shares for $500 million, with authorization for up to 57 million additional shares at quarter-end.
Outlook, risks and contingencies
- Management cited final 2017 Medicare Advantage base-rate growth of approximately 0.85%, below its cited industry medical-cost trend of 3%, as a source of continuing program pressure. It expected at least 63% of Medicare Advantage members to be in plans rated four stars or higher for the 2017 payment year, versus approximately 57% for 2016.
- The company participated in individual public exchanges in 34 states in 2016 and recorded a premium deficiency reserve for estimated 2016 exchange losses. It planned to participate in a substantially smaller number of exchanges in 2017.
- Management expected to pay approximately $1.8 billion as its share of the 2016 health insurance industry tax in September 2016. A one-year moratorium applies to payment of the 2017 tax, with premiums for policies covering part of 2017 reflecting the moratorium’s impact.
- Risks highlighted include medical-cost estimation and pricing, government reimbursement and regulation, exchange performance, Medicare risk-adjustment audits, privacy and cybersecurity, pharmacy-benefit competition, acquisitions, litigation and investigations, foreign currency, credit ratings, and investment and goodwill valuations.
- Legal and regulatory matters include a California claims-processing dispute with an approximately $174 million administrative fine under challenge; the company stated it could not reasonably estimate any resulting loss. DOJ review of Medicare risk-adjustment processes and CMS risk-adjustment data validation audits were also disclosed; potential losses were not reasonably estimable. Possible state guaranty-fund assessments relating to Penn Treaty were likewise not estimable.
- Debt ratings had negative outlooks from Moody’s, S&P and Fitch; A.M. Best’s outlook was stable. The filing reported no material changes to the risk factors in the 2015 Form 10-K.
Most important facts for investors to verify
- How much of the 25% revenue growth and OptumRx expansion reflects Catamaran versus sustainable organic growth, and the resulting effect on margins.
- Exchange losses, the adequacy of the premium deficiency reserve, and the planned reduction in exchange participation for 2017.
- Medical-cost trends, reserve development, and the effect of Medicare Advantage rate pressure and quality ratings on future earnings.
- Potential financial exposure from the California claims matter, Medicare risk-adjustment reviews and audits, and Penn Treaty assessments, none of which had a clear estimated loss in the filing.
- Debt levels, negative credit-rating outlooks, and the availability of cash for general corporate use; the filing stated that only $500 million of reported cash and cash equivalents was available for general corporate use.