UnitedHealth Group Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; compared with the corresponding 2018 periods. Unless noted otherwise, amounts are in U.S. dollars and millions. UnitedHealth Group operates UnitedHealthcare (health benefits) and Optum (health services).
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $60,595 | $56,086 | $120,903 | $111,274 |
| Operating earnings | $4,744 | $4,204 | $9,576 | $8,257 |
| Net earnings attributable to UHG shareholders | $3,293 | $2,922 | $6,760 | $5,758 |
| Diluted EPS | $3.42 | $2.98 | $6.97 | $5.85 |
| Medical care ratio (MCR) | 83.1% | 81.9% | 82.5% | 81.6% |
| Operating cost ratio | 13.9% | 15.0% | 14.0% | 15.2% |
| Operating margin | 7.8% | 7.5% | 7.9% | 7.4% |
- Q2 revenue grew 8%, operating earnings 13%, shareholder net earnings 13%, and diluted EPS 15% year over year. For the first half, the respective growth rates were 9%, 16%, 17%, and 19%.
- Q2 revenue growth included UnitedHealthcare growth of 6% and Optum growth of 13%. OptumHealth revenue rose 20%, OptumInsight 7%, and OptumRx 12%.
- Q2 operating earnings increased 12% at UnitedHealthcare and 14% at Optum. The company reported return on equity of 25.1% for Q2 and 25.9% for the first half.
- For the first half, operating cash flow was $9,108, versus $12,376 in 2018. Investing activities used $6,878; financing activities provided $643. Cash and equivalents increased $2,879 to $13,745.
- At June 30, cash, cash equivalents, available-for-sale debt securities and equity securities totaled $50.7 billion. Total assets were $167.2 billion; total liabilities were $109.1 billion.
- Commercial paper and current debt maturities were $7.8 billion; long-term debt, less current maturities, was $34.5 billion. Commercial paper outstanding was $6.97 billion. The defined debt-to-debt-plus-equity covenant ratio was approximately 41%, below the 60% maximum; no bank credit facilities were drawn.
Material changes and management commentary
- Management attributed revenue growth mainly to more people served through Medicare products, pricing, and Optum growth, particularly pharmacy care and care delivery. UnitedHealthcare served 705,000 more people year over year, primarily from acquisitions and growth in self-funded employer and senior services.
- The MCR rose 1.2 percentage points in Q2. Management cited the 2019 Health Insurance Industry Tax moratorium’s revenue effect and higher medical costs from Medicare growth and medical trends; favorable prior-year medical cost development partially offset the increase. The operating cost ratio improved, which management attributed to the tax moratorium and cost management.
- Operating cash flow fell year over year partly because the company received a $5.2 billion July CMS premium payment early in June 2018, increasing the prior-year comparison. Higher acquisition spending also affected cash use: $4.75 billion in the first half of 2019, versus $2.64 billion a year earlier.
- Medical costs payable were $20.9 billion at June 30, including $14.5 billion for incurred-but-not-reported claims. Management identifies medical costs payable and goodwill as significant estimates.
- The company repurchased $4.50 billion of shares and paid $1.88 billion in dividends in the first half. It repurchased 18 million shares at an average $246.84 and had authorization for up to 76 million additional shares. The annual dividend rate was raised to $4.32 per share.
Outlook, risks and unusual items
- The filing provides no specific full-year earnings or EPS guidance. Management said 2020 contract pricing would reflect the return of the Health Insurance Industry Tax after its 2019 moratorium. The moratorium affects year-over-year revenue, costs, MCR, operating cost ratio, tax rate and operating cash flow comparisons.
- Final 2020 Medicare Advantage industry base rates increased approximately 2.5%, which management said was below forward medical cost trend, including the tax’s return, and would create continued program pressure.
- In July 2019, after quarter-end, the company issued $5.5 billion of senior unsecured notes, intended for general corporate purposes, including refinancing commercial paper or repaying other securities.
- The DOJ is pursuing claims alleging improper Medicare risk-adjustment submissions and False Claims Act violations. The court denied the government’s motion for partial summary judgment in March 2019; the company said it could not reasonably estimate the outcome. CMS risk-adjustment data validation audits may also lead to retrospective payment adjustments.
- Other principal risks include medical-cost estimation and pricing, regulatory and government-program changes, competition, cybersecurity and privacy incidents, litigation and investigations, acquisition execution, credit-market access, and impairment of goodwill or intangible assets. The company reported no material changes to the risk factors in its 2018 Form 10-K.
- Adoption of the new lease standard resulted in $3.3 billion of operating lease right-of-use assets and liabilities; the effect on earnings, equity and cash flows was immaterial. Disclosure controls were deemed effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether medical-cost trends and the higher MCR persist, and how medical-cost reserve estimates develop.
- The effect of the Health Insurance Industry Tax’s return in 2020 and Medicare Advantage rate adequacy on pricing and margins.
- Operating cash flow trends after accounting for the unusually large early CMS payment in the 2018 comparison period.
- Acquisition spending, acquired goodwill and intangible assets, and the returns from Optum and care-delivery expansion.
- Developments and potential financial consequences of the DOJ risk-adjustment case and CMS audits; the filing does not provide a clear loss estimate.
- Debt and commercial-paper refinancing needs, including the use of proceeds from the July 2019 notes issuance.