UnitedHealth Group Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. UnitedHealth Group operates UnitedHealthcare, providing health coverage and benefits services, and Optum, providing information- and technology-enabled health services.
Financial performance and condition
- Revenue: $30.34 billion, up 11% from $27.28 billion. Premium revenue increased 11% to $27.27 billion; service revenue rose 18% to $2.11 billion.
- Profit: Operating earnings were $2.14 billion, down 8%; net earnings were $1.24 billion, down 11%. Earnings attributable to common shareholders were $1.19 billion, down 14%. Diluted EPS was $1.16 versus $1.31.
- Margins: Medical care ratio was 82.7%, up 1.7 percentage points. Operating margin fell to 7.1% from 8.5%; net margin was 4.1% versus 5.1%. Tax rate was 36.8% versus 36.0%.
- Cash flow: Operating cash flow was $1.05 billion versus $3.59 billion. Management attributed most of the decrease to a $2.5 billion CMS payment received in March 2012 rather than April that year. Investing activities used $904 million; financing provided $1.50 billion. Cash and cash equivalents increased $1.63 billion to $10.04 billion.
- Liquidity and investments: Current assets were $22.72 billion and current liabilities $27.18 billion. Cash, cash equivalents and available-for-sale investments totaled approximately $30.2 billion; $3.0 billion of cash was available for general corporate use at quarter-end. The company had $4.0 billion of revolving credit facilities undrawn.
- Debt: Commercial paper and long-term debt had a combined carrying value of $18.05 billion, up from $16.75 billion at year-end 2012. The company issued $2.25 billion of senior notes during the quarter and reported compliance with its debt covenants. Debt-to-debt-plus-equity was 36.2%, against a 50% covenant limit.
- Capital returns: The company repurchased $543 million of stock and paid $216 million in dividends. Dividends declared were $0.2125 per share.
Material changes and segment results
- Revenue growth reflected acquisitions, increased enrollment and Optum growth, partly offset by the conversion of 1.1 million members of a large customer from risk-based to fee-based coverage. That change reduced quarterly revenue by about $2.5 billion compared with the prior arrangement, with negligible expected effect on operating earnings and cash flow.
- UnitedHealthcare revenue increased 11% to $28.28 billion, while operating earnings declined 20% to $1.64 billion. Its operating margin was 5.8%, down from 8.1%.
- Optum revenue increased 15% to $8.41 billion, including intersegment revenue; operating earnings rose 96% to $495 million. The three Optum segments reported higher operating earnings.
- The consolidated medical care ratio increased partly because favorable prior-period medical reserve development was lower: $280 million in Q1 2013 versus $530 million in Q1 2012. Management also cited prior-year rebate true-ups and Medicare Part D revenue timing.
- UnitedHealthcare medical enrollment rose 18% to 42.0 million, including 4.6 million people in Brazil following the Amil acquisition. Medicare Advantage membership increased 18% to 2.9 million; stand-alone Medicare Part D membership rose 11% to 4.7 million.
Outlook, commentary and risks
- Management described continued pricing pressure in commercial markets and funding pressure in Medicare Advantage and Medicaid. It expected pressure on gross margin percentages in Medicare and Medicaid for the rest of 2013, and a slight increase in medical cost trend from 2012.
- Management estimated that Medicare sequestration would reduce consolidated pre-tax earnings by $250 million to $300 million over the balance of 2013. It also cited 2014 Medicare Advantage rate reductions and the Affordable Care Act insurance industry tax as pressures on revenue, costs and margins. No consolidated earnings or EPS guidance is provided in the supplied filing text.
- UnitedHealthcare began the TRICARE West contract on April 1, 2013, adding 2.9 million beneficiaries. OptumRx expected to add approximately 12 million members during 2013 as pharmacy benefit programs transitioned from Medco; about one million had moved in Q1 and another two million in April.
- In April 2013, the company paid $1.4 billion to acquire an additional 25% of Amil; 1% of Amil’s shares remained publicly traded, with the company expecting to acquire the remainder in Q2. The filing said $1.5 billion of quarter-end general-purpose cash was subsequently used for the Amil tender and debt redemption.
- Contingencies: A Nevada jury in April 2013 awarded $24 million in compensatory and $500 million in punitive damages in litigation related to an endoscopy center; the company said it would defend the matter and could not reasonably estimate any eventual loss. Separately, California regulators sought approximately $325 million in penalties in a claims-processing matter; the company disputed the allegations and could not estimate a loss. The company also described other litigation, government audits and reviews, including Medicare risk-adjustment audits, for which potential losses were not reasonably estimable.
- Other identified exposures include medical cost and reserve estimates, health reform implementation and regulation, credit and interest-rate changes, Brazilian real currency movements, litigation and government actions, and execution of acquisitions and integration plans. Management stated disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether medical cost trends, reserve development and the medical care ratio support recovery in UnitedHealthcare margins.
- The realized earnings impact of Medicare sequestration, 2014 payment changes, the insurance industry tax and exchange-market participation.
- Cash flow normalization after the prior-year CMS payment timing difference, and liquidity after the Amil tender and debt redemptions.
- Amil integration, remaining share acquisition and any updates to the purchase-price allocation.
- Developments in the Nevada verdict, California regulatory matter and CMS risk-adjustment audits, including any changes in estimated exposure.