UnitedHealth Group Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone Q4 filing; selected Q4 figures are shown below. Amounts are U.S. dollars unless noted.
Business context
UnitedHealth Group operates two aligned platforms: UnitedHealthcare, its health benefits business, and Optum, its health services business. Its four reportable segments are UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. The company reported serving nearly 50 million people through UnitedHealthcare medical plans and 96 million through OptumHealth at year-end, using the filing’s distinct segment measures.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $242.2B | $226.2B | +7% |
| Earnings from operations | $19.7B | $17.3B | +13% |
| Net earnings attributable to common shareholders | $13.8B | $12.0B | +15% |
| Diluted EPS | $14.33 | $12.19 | +18% |
| Operating margin | 8.1% | 7.7% | +0.4 percentage points |
| Medical care ratio (medical costs/premiums) | 82.5% | 81.6% | +0.9 percentage points |
| Net earnings margin | 5.7% | 5.3% | +0.4 percentage points |
| Operating cash flow | $18.5B | $15.7B | +18% |
For Q4 2019, revenue was $60.9B, operating earnings were $5.1B, net earnings attributable to common shareholders were $3.5B and diluted EPS was $3.68. The comparable Q4 2018 figures were $58.4B, $4.5B, $3.0B and $3.10, respectively.
At December 31, 2019, cash and investments were $51.5B in selected financial data; reported cash and cash equivalents were $11.0B, of which $584M was available for general corporate use. Commercial paper and long-term debt totaled $40.7B, versus $36.6B a year earlier. The company reported total assets of $173.9B and equity of $60.4B. Its debt-to-debt-plus-equity ratio under credit-facility definitions was 39%, against a 60% covenant limit.
Material changes and segment results
- Optum revenue increased 12% and operating earnings increased 14%; UnitedHealthcare revenue and operating earnings each increased 6% and 13%, respectively.
- OptumHealth revenue grew 26%, principally from care-delivery growth and acquisitions. OptumInsight revenue increased 11%, with growth in managed services. OptumRx revenue increased 7%; earnings benefited partly from improved supply-chain management.
- UnitedHealthcare Medicare Advantage membership rose 325,000 to 5.3 million. Medicaid membership fell 550,000, primarily following withdrawal from Iowa and changes in state programs and eligibility.
- Medical costs rose 8%, faster than premium revenue growth of 7%. Management attributed the higher medical care ratio in part to the 2019 health-insurance-industry-tax moratorium’s revenue effect.
- Cash paid for acquisitions was $8.3B, compared with $6.0B in 2018. The company reported completing acquisitions for total consideration of $9.9B.
Outlook, risks and unusual items
- The filing provides no specific numerical company-wide earnings or revenue guidance. Management expected continued health-care spending growth, while emphasizing medical-cost management, affordability and operating efficiency.
- Management cited continued Medicare Advantage rate pressure: final 2020 industry base rates rose approximately 2.5%, below the industry forward medical-cost trend. The health-insurance-industry tax was scheduled to return in 2020; the company expected its share to be approximately $3.0B. Congress repealed the tax effective January 1, 2021.
- Key risks include medical-cost estimation and utilization, government reimbursement and contract changes, regulatory and political developments affecting Medicare, Medicaid and the ACA, audits and risk-adjustment reviews, litigation, competition, provider relationships, cybersecurity and privacy, and interest-rate and foreign-currency exposure.
- Medical costs included $580M of favorable development related to prior years. Management’s medical-cost payable estimate was a significant accounting judgment; a hypothetical 1% difference from the year-end estimate could change 2019 net earnings by approximately $160M, excluding specified potential offsets.
- A DOJ-pursued whistleblower lawsuit alleges improper Medicare risk-adjustment submissions and False Claims Act violations. The company said it could not reasonably estimate the outcome. Goodwill was $65.7B; no impairment was recognized, and annual testing found reporting-unit fair values substantially above carrying values.
- Operating cash flow funded acquisitions, capital spending, dividends and repurchases. The company paid $3.9B in dividends and repurchased $5.5B of shares in 2019; the annualized dividend rate was raised to $4.32 per share in June.
Important facts for investors to verify
- Whether Medicare Advantage rate changes, quality ratings and the 2020 industry tax affect margins and membership as management anticipated.
- Medical-cost trend, claims-reserve development and the assumptions behind the $21.7B year-end medical costs payable balance.
- Acquisition performance and integration, particularly given $8.3B of acquisition cash outflow and growth in goodwill.
- Developments in the DOJ risk-adjustment litigation, CMS audits and other government investigations or regulatory changes.
- Debt maturities, cash availability at the parent versus regulated subsidiaries, and the sustainability of capital returns alongside acquisition spending.