UnitedHealth Group Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. UnitedHealth Group operates health-benefit businesses under UnitedHealthcare and health-services businesses under Optum. Segment results were recast for 2011 business realignments.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $25.280 billion | $23.668 billion | $75.946 billion | $70.125 billion |
| Operating earnings | $2.070 billion | $2.145 billion | $6.390 billion | $6.062 billion |
| Net earnings | $1.271 billion | $1.277 billion | $3.884 billion | $3.591 billion |
| Diluted EPS | $1.17 | $1.14 | $3.56 | $3.15 |
| Medical care ratio | 80.7% | 80.1% | 81.2% | 81.0% |
| Operating cost ratio | 15.4% | 15.0% | 14.8% | 14.5% |
| Operating margin | 8.2% | 9.1% | 8.4% | 8.6% |
- Q3 revenue increased 7%, while operating earnings declined 3% and net earnings were essentially flat. Diluted EPS rose 3%, supported in part by fewer weighted-average shares.
- Nine-month revenue grew 8%, operating earnings 5%, net earnings 8%, and diluted EPS 13%.
- Q3 medical costs were $18.408 billion, up 7% year over year; operating costs rose 10% to $3.899 billion. Management cited membership growth, higher cost per service and modestly higher utilization, partly offset by favorable claims development.
- Effective tax rates were 34.5% in Q3 and 35.5% for nine months, down from 37.0% in both 2010 comparisons; management attributed the decline to favorable resolution of tax matters and higher 2010 rates following health-reform changes.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $7.383 billion, versus $4.832 billion in 2010. Management said the increase primarily reflected receipt of approximately $2.3 billion of October CMS premiums before quarter-end, as well as higher earnings and related tax accruals. The advance was recorded as unearned revenue.
- Cash and cash equivalents were $13.679 billion at September 30, 2011, versus $9.123 billion at December 31, 2010. Cash, cash equivalents and available-for-sale investments totaled $31.6 billion.
- Investing cash outflow was $2.923 billion; financing cash inflow was $96 million. Capital spending was $806 million, acquisitions net of cash assumed were $1.478 billion, and share repurchases were $2.094 billion for the nine months.
- Debt carrying value was $11.919 billion, including $1.753 billion of commercial paper; shareholders’ equity was $27.872 billion. The disclosed debt-to-total-capital ratio was 30.0%, and the company reported compliance with its debt covenants. A $2.5 billion revolving credit facility had no borrowings and expires in May 2012.
- The board increased the annual dividend rate to $0.65 per share. The company repurchased 46 million shares year to date at an average price of about $46; 84 million shares remained authorized at quarter-end.
Material changes and segment trends
- UnitedHealthcare revenue rose 6% in Q3 and 7% year to date. Q3 operating earnings fell 5%, with margin declining to 7.4%; management cited new premium-rebate obligations, low Medicaid rate increases and lower favorable reserve development. Medical enrollment grew 5% year over year to 34.4 million.
- Optum revenue rose 22% in Q3 and 20% year to date, but total Optum operating earnings were nearly flat in Q3 and up only 1% year to date. OptumInsight earnings improved with a higher mix of higher-margin services; OptumRx earnings declined as lower-margin specialty and Medicaid business and growth investments offset revenue gains.
- For the nine months, medical costs included $650 million of favorable prior-year reserve development, versus $660 million in 2010. Q3 included $90 million of favorable prior-fiscal-year development and $110 million related to the first half of 2011. Management linked favorable development to claims-processing efficiencies and lower-than-expected utilization.
- OptumHealth goodwill increased primarily due to acquisitions; the company also recorded goodwill reductions associated with dispositions.
Outlook, risks and contingencies
- The filing provides no specific consolidated earnings or revenue guidance. Management expected continued health-care spending growth but noted uncertainty around regulation, market changes and implementation of health reform.
- Health reform creates potential premium rebates when fully insured medical-loss ratios fall below statutory targets, increases rate-review scrutiny and imposes future insurer fees beginning in 2014. Management warned of possible margin pressure, product and distribution changes, and market disruption. Medicare Advantage payment changes and Medicaid policy changes could also affect enrollment, reimbursement and profitability.
- CMS conducted an audit of the company’s Medicare Advantage and Part D business in October 2011 and communicated issues under review. Risk-adjustment data-validation audits and a proposed methodology allowing extrapolated retrospective payment adjustments could have a material adverse effect depending on the final approach; the company could not predict the outcome of OIG discussions.
- The company estimated a potential $250 million to $350 million guaranty-fund assessment in 2012 related to Penn Treaty, if insolvency is declared; it would accrue an assessment if and when the state court makes such a decision. The amount and timing depend on insolvency, offsets and other factors.
- Out-of-network reimbursement litigation involving other insurers and the Ingenix database remains pending; the company said it could not reasonably estimate any loss. A California claims-processing administrative matter alleges 992,936 violations; the company disputes the allegations and could not estimate a loss range.
- Other key risks include medical-cost estimation and utilization, regulatory and legal actions, reimbursement reductions, investment-market exposure, credit ratings, acquisitions, data security and the ability to obtain dividends from regulated subsidiaries. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Assess how much reported operating cash flow reflects the $2.3 billion early CMS premium payment and related subsidy receipts, rather than recurring cash generation.
- Track medical care ratios, reserve development and utilization; favorable prior-period development materially affected reported medical costs.
- Review premium rebates, state rate approvals and Medicare Advantage reimbursement changes for effects on margins and membership.
- Monitor CMS and OIG audit outcomes, the California proceeding, and the potential Penn Treaty assessment; several exposures are not presently estimable.
- Evaluate Optum growth and segment margins, especially the profitability of OptumRx and OptumHealth following business realignments and acquisitions.
- Confirm the company’s liquidity and capital allocation, including debt maturities, credit-facility renewal, repurchases and future dividend decisions.