UnitedHealth Group Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparative period is Q1 2021. Amounts are in U.S. dollars.
Business context
UnitedHealth Group operates through UnitedHealthcare and Optum, with reportable segments UnitedHealthcare, Optum Health, Optum Insight and Optum Rx. The company describes its businesses as serving U.S., South American and other international health markets.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Total revenue | $80.1 billion | $70.2 billion; up 14% |
| Operating earnings | $7.0 billion | $6.7 billion; up 3% |
| Net earnings attributable to shareholders | $5.0 billion | $4.9 billion; up 3% |
| Diluted EPS | $5.27 | $5.08; up 4% |
| Operating margin | 8.7% | 9.6% |
| Medical care ratio | 82.0% | 80.9% |
| Operating cash flow | $5.3 billion | $6.0 billion |
| Cash and cash equivalents | $25.5 billion | $21.4 billion at Dec. 31, 2021 |
| Total debt per balance-sheet current and long-term debt lines | $47.5 billion | $46.0 billion at Dec. 31, 2021 |
Revenue growth reflected more people served in Medicare Advantage, Medicaid and commercial offerings, pricing trends and growth across Optum. Consolidated operating costs rose 15%, faster than revenue, while medical costs increased 17%. Management attributed the higher medical care ratio to business mix and less favorable reserve development. The operating cost ratio improved to 14.2% from 14.6%, which management linked primarily to COVID-related revenue effects, efficiency gains and mix. Return on equity was 27.8%, versus 29.5%.
At March 31, cash, cash equivalents and investment securities totaled $68.8 billion, including $25.5 billion in cash and cash equivalents; approximately $2.5 billion of cash and cash equivalents was available for general corporate use. The company reported a 37% debt-to-debt-plus-shareholders’ equity ratio under its credit-facility definition, below its 60% covenant limit. Operating cash flow declined mainly because of working-capital changes. Financing included $3.1 billion of net short-term borrowings, $2.5 billion of share repurchases and $1.4 billion of dividends.
Material changes and segment trends
- UnitedHealthcare revenue grew 14% to $62.6 billion, but operating earnings fell 8% to $3.8 billion and operating margin declined to 6.1% from 7.5%. Membership grew by 1.49 million year over year, led by Medicaid and Medicare Advantage.
- Optum revenue grew 19% to $43.3 billion and operating earnings grew 20% to $3.2 billion. Optum Health revenue rose 34% and operating earnings 42%; Optum Insight revenue rose 13%; Optum Rx revenue rose 11%, with adjusted scripts increasing to 352 million from 329 million.
- Q1 2022 prior-year medical reserve development reduced reported medical costs by $290 million; the comparable favorable development in Q1 2021 was $1.01 billion. The company said no individual factors were significant in the 2022 prior-year development.
- Available-for-sale debt securities had $1.6 billion of gross unrealized losses at quarter-end, compared with $274 million at year-end 2021. Management attributed losses primarily to rising interest rates, said it did not intend to sell the securities in loss positions, and considered the losses temporary.
Outlook, risks and contingencies
The filing does not provide a clear numerical earnings or revenue guidance target. Management said care was near normal baseline levels in Q1 2022 and warned that deferred care could cause future utilization or acuity to exceed normal baselines. The pandemic’s duration, variants, treatments, vaccination and economic effects remain uncertain and could affect medical costs, reserve estimates, risk-adjusted revenue and care patterns.
The company had agreements to acquire Change Healthcare and LHC Group, subject to regulatory approval and customary closing conditions. Anticipated capital required was approximately $15 billion, excluding disposition proceeds and acquired-debt repayment. It stated that capital resources were sufficient for expected liquidity needs.
Legal and regulatory matters include government reviews and audits, including Medicare risk-adjustment coding and documentation audits. A DOJ-pursued False Claims Act matter alleges improper Medicare risk-adjustment submissions; the company said it could not reasonably estimate the outcome. The filing also identifies risks involving medical-cost estimation, regulation, cybersecurity and privacy, litigation, competition, acquisitions, credit ratings and investment performance. No material changes to the risk factors in the 2021 10-K were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether utilization and medical acuity rise as deferred care is obtained, and how that affects the medical care ratio and reserve development.
- Progress, regulatory approvals, financing and expected benefits for the Change Healthcare and LHC Group transactions.
- Developments in the DOJ Medicare risk-adjustment matter and CMS risk-adjustment data validation audits; outcomes and potential losses were not estimable in the filing.
- Cash availability: the filing reports $25.5 billion of cash and cash equivalents but only approximately $2.5 billion available for general corporate use.
- Interest-rate effects on the investment portfolio and the reported unrealized losses, alongside any change in credit quality or management’s intent to hold the securities.