UnitedHealth Group Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 12, 2019. This is an annual report, not a standalone Q4 filing. The filing separately reports unaudited fourth-quarter results.
Business context
UnitedHealth Group operates two aligned platforms: UnitedHealthcare, providing health benefits, and Optum, providing care, pharmacy, technology and health services. Its four reportable segments are UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. At year-end, UnitedHealthcare served 49.1 million people medically, including international members; OptumRx served 65 million people in the U.S.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $226.247 billion | $201.159 billion | +12% |
| Operating earnings | $17.344 billion | $15.209 billion | +14% |
| Net earnings attributable to common shareholders | $11.986 billion | $10.558 billion | +14% |
| Diluted EPS | $12.19 | $10.72 | +14% |
| Operating cash flow | $15.713 billion | $13.596 billion | +16% |
| Medical care ratio | 81.6% | 82.1% | Down 0.5 percentage point |
| Operating margin | 7.7% | 7.6% | Up 0.1 percentage point |
| Net earnings margin | 5.3% | 5.2% | Up 0.1 percentage point |
| Effective tax rate | 22.3% | 22.8% | Down 0.5 percentage point |
FY2018 revenue comprised $178.087 billion in premiums, $29.601 billion in products, $17.183 billion in services and $1.376 billion in investment and other income. Interest expense was $1.400 billion. Medical costs were $145.403 billion, up 12% year over year.
Segment revenue and operating earnings: UnitedHealthcare $183.476 billion and $9.113 billion; Optum $101.280 billion and $8.231 billion before intersegment eliminations. Optum earnings rose 23%; UnitedHealthcare earnings rose 7%. OptumInsight had the highest segment operating margin at 24.9%.
Fourth quarter: Revenue was $58.417 billion, operating earnings $4.497 billion, net earnings attributable to common shareholders $3.040 billion and diluted EPS $3.10. The comparable 2017 quarter reported $3.617 billion attributable earnings and $3.65 diluted EPS; the 2017 comparison benefited from a tax-reform-related deferred-tax benefit.
At December 31, 2018, cash and cash equivalents were $10.866 billion; cash and investments totaled $46.834 billion. The company stated that $925 million of cash and cash equivalents was available for general corporate use. Total assets were $152.221 billion, total equity $54.319 billion and commercial paper plus long-term debt $36.554 billion, up from $31.692 billion a year earlier. Operating cash flow funded operations, acquisitions and shareholder returns; acquisitions consumed $5.997 billion, repurchases $4.500 billion and dividends $3.320 billion. The defined debt-to-debt-plus-equity covenant ratio was 38%, against a 60% maximum; no revolving credit facility borrowings were outstanding.
Material changes versus prior year
- Revenue growth reflected more people in risk-based benefit plans, pricing and growth across Optum. OptumHealth revenue grew 17%, OptumInsight 11% and OptumRx 9%.
- UnitedHealthcare revenue increased 12%; Medicare Advantage membership rose 12% to 4.945 million. Total domestic medical membership fell 6%, substantially reflecting completion of the TRICARE commitment, which reduced commercial membership by 2.85 million.
- Medical care ratio improved partly because the 2018 Health Insurance Industry Tax increased premium revenue; the tax also affected year-over-year margin comparisons. The company’s share of the tax was $2.6 billion in 2018; collection is subject to a one-year moratorium in 2019.
- Favorable prior-year medical-cost reserve development was $320 million in 2018 versus $690 million in 2017, a smaller benefit to current-year results.
- Acquisition cash spending increased to $5.997 billion from $2.131 billion. Goodwill rose to $58.910 billion from $54.556 billion; no goodwill or intangible-asset impairment was reported for 2018.
Outlook, management commentary and risks
The filing provides no explicit full-year 2019 revenue or EPS guidance. Management expected continued overall health-care spending growth and Medicaid revenue growth, while warning that Medicaid payment rates could pressure margins. Final 2019 Medicare Advantage industry base rates increased 3.4%, below the cited forward medical-cost trend, adding funding pressure. Management described medical management and administrative efficiency as important responses.
Management cited continued movement toward value-based care: nearly 17 million people were served through aligned contractual arrangements, and contracts with value-based elements represented $74 billion in annual spending, including $18 billion under risk-transfer agreements. The company said this shift creates opportunities for Optum, alongside investment needs in clinical and administrative systems.
- Medical-cost estimation: Results depend on claims reserves and assumptions about utilization, unit costs and trends. A hypothetical 1% difference between estimated and actual medical costs payable would change 2018 net earnings by approximately $140 million, before specified exclusions and potential offsets.
- Government programs and regulation: Medicare and Medicaid funding, bids, risk adjustments, quality ratings, audits, contract renewals and changing laws may affect enrollment, revenue, costs and margins. CMS risk-adjustment audits could result in retrospective payment adjustments or other actions.
- Legal contingency: DOJ pursued certain False Claims Act allegations concerning risk-adjustment submissions in a whistleblower lawsuit. The company said it could not reasonably estimate the outcome. The filing also describes ongoing governmental investigations, audits and reviews and says losses in some legal matters cannot be estimated.
- Other exposures: The company highlights cyber and privacy incidents, pharmacy-benefit regulation, provider contracting, competition, acquisition integration, investment and interest-rate risk, foreign currency exposure, and restrictions on dividends from regulated subsidiaries.
- A December 2017 agreement to acquire a health-care-sector company for approximately $4.3 billion remained pending and was excluded from the contractual-obligations table.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2018.
Key facts for investors to verify
- Review the 2017 tax-reform benefit and the 2018 Health Insurance Industry Tax when comparing earnings, margins and quarterly results.
- Track medical-cost reserve development, claims estimates and the medical care ratio; these depend on estimates and can materially affect earnings.
- Monitor Medicare Advantage rate adequacy, quality bonuses, Medicaid contract economics and the status and financial implications of risk-adjustment audits and the DOJ matter.
- Assess acquisition spending, the pending approximately $4.3 billion transaction, goodwill growth and the resulting debt and integration exposure.
- Distinguish consolidated cash and investments from funds available for corporate use, considering regulated-subsidiary capital and dividend restrictions.