UnitedHealth Group Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; balance-sheet comparisons are against December 31, 2016. Figures below are in U.S. dollars; financial statement amounts are in billions unless otherwise noted.
Business context and financial performance
UnitedHealth Group operates health benefits through UnitedHealthcare and health services through Optum, which includes OptumHealth, OptumInsight and OptumRx.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $50.322 | $46.293 | $149.098 | $137.305 |
| Operating earnings | $4.088 | $3.580 | $11.232 | $9.743 |
| Net earnings attributable to UHG shareholders | $2.485 | $1.968 | $6.941 | $5.333 |
| Diluted EPS | $2.51 | $2.03 | $7.06 | $5.51 |
| Operating margin | 8.1% | 7.7% | 7.5% | 7.1% |
| Medical care ratio | 81.4% | 80.3% | 82.0% | 81.3% |
- Q3 revenue increased 9%; operating earnings increased 14%; diluted EPS increased 24%. For the nine-month period, revenue rose 9%, operating earnings 15%, and diluted EPS 28%.
- Q3 UnitedHealthcare revenue was $40.734 billion, up 10%; Optum revenue was $22.885 billion, up 8% before consolidated eliminations. OptumHealth revenue grew 21% and OptumRx revenue 5%.
- Medical costs rose 11% in both Q3 and the nine-month period. Management attributed the increase to risk-based membership growth and medical cost trends. Favorable reserve development partly offset MCR pressure.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $16.173 billion, versus $11.204 billion in 2016. Management said the increase was aided by receipt in September of a $4.6 billion October CMS premium payment, higher earnings and the 2017 health-insurance-industry-tax moratorium.
- Cash and cash equivalents were $16.269 billion at September 30, 2017, versus $10.430 billion at year-end 2016. Cash, cash equivalents and available-for-sale investments totaled $46.1 billion; management stated only $1.0 billion of cash was available for general corporate use.
- Operating cash flow funded $5.895 billion of investing outflows and $4.457 billion of financing outflows; cash increased $5.839 billion during the nine months. The company paid $2.046 billion in dividends and repurchased $1.173 billion of shares.
- At September 30, commercial paper and current maturities of debt were $4.539 billion and long-term debt was $24.723 billion on the balance sheet. The company had no borrowings under its revolving credit facilities and was compliant with its debt covenants; its defined debt-to-debt-plus-equity ratio was approximately 37%, against a 55% maximum.
- In October 2017, after quarter-end, the company issued $4.0 billion of senior unsecured notes, intending to use proceeds partly to repay commercial paper and for general corporate purposes.
Material changes and management commentary
- Growth reflected more people served across benefits businesses and expansion across Optum. UnitedHealthcare served about 1.0 million more people overall year over year; Medicare Advantage membership rose 22% and Medicaid membership 10%.
- Individual-market membership declined 65% year over year as the company reduced participation in ACA-compliant products. Employer & Individual revenue declined 1% in Q3, while Medicare & Retirement revenue rose 17%.
- OptumHealth growth reflected organic and acquisition-related care-delivery expansion. Its goodwill increased by $5.1 billion during the nine months, primarily due to acquisitions; total goodwill rose to $53.402 billion from $47.584 billion.
- The 2017 moratorium on the health insurance industry tax lowered the effective tax rate: 32.5% in Q3 versus 40.3%, and 31.4% for nine months versus 40.0%. Management noted that 2018 contract pricing would reflect the tax’s return.
- The filing provides no specific company-wide earnings or revenue guidance. Management reported 2018 Medicare Advantage industry base-rate growth of approximately 0.45%, below an estimated 3% industry medical-cost trend. It expected at least 85% of its Medicare Advantage members to be in plans rated four stars or higher for 2018 payment, versus approximately 80% for 2017.
Risks, contingencies and unusual items
- Medicare Advantage funding, CMS Star ratings and risk-adjustment audits may affect benefits, pricing, membership, revenue and earnings. Other stated risks include medical-cost estimation, regulation, competition, cybersecurity and privacy, litigation and government reviews, acquisitions, foreign exchange, investment performance, credit ratings and access to capital.
- DOJ pursued claims in two whistleblower matters concerning Medicare Advantage risk-adjustment submissions. In one case, the court dismissed some claims with prejudice and the remaining claims with leave to amend; DOJ then dismissed that case without prejudice. The other case remained pending. The company said it could not reasonably estimate outcomes.
- In a California claims-processing matter, a September 2017 court ruling reversed all penalties imposed and remanded certain issues to the Commissioner. The company said any remaining loss could not be reasonably estimated.
- Management reported no material changes to the risk factors in its 2016 Form 10-K. It concluded disclosure controls were effective and reported no materially affecting changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether operating performance and medical-cost reserve development remain consistent with the strong year-to-date results, given the higher MCR.
- The sustainability and timing of cash generation, particularly the effect of the $4.6 billion CMS payment received before its normal October period.
- Effects of the returning health insurance industry tax and constrained Medicare Advantage rate increases on 2018 pricing, membership and margins.
- Acquisition spending, integration results and the resulting growth in OptumHealth goodwill and overall debt obligations.
- Developments in Medicare risk-adjustment audits and litigation, including the pending DOJ matter and California remand.