UnitedHealth Group Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. UnitedHealth Group operates health benefits through UnitedHealthcare and health services through Optum. Amounts are in U.S. dollars; financial figures are in billions unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $62.1 | $60.6 | $126.6 | $120.9 |
| Operating earnings | $9.2 | $4.7 | $14.2 | $9.6 |
| Net earnings attributable to common shareholders | $6.6 | $3.3 | $10.0 | $6.8 |
| Diluted EPS | $6.91 | $3.42 | $10.43 | $6.97 |
| Medical care ratio | 70.2% | 83.1% | 75.7% | 82.5% |
| Operating margin | 14.9% | 7.8% | 11.2% | 7.9% |
- Q2 revenue rose 3%; operating earnings and diluted EPS each increased 95% and 102%, respectively. First-half revenue grew 5% and diluted EPS increased 50%.
- First-half operating cash flow was $12.9 billion, versus $9.1 billion. Capital spending was $0.9 billion. Cash and cash equivalents were $22.3 billion at June 30, up from $11.0 billion at year-end; $4.2 billion was available for general corporate use.
- At June 30, total assets were $192.5 billion, current liabilities $69.9 billion, and total equity $66.5 billion. Balance-sheet short- and long-term debt totaled approximately $46.1 billion. The company reported a 39% debt-to-debt-plus-equity ratio under its credit facilities, compliance with covenants, and no borrowings under its revolving bank credit facilities.
- First-half cash uses included $4.0 billion for acquisitions, $2.2 billion in dividends and $1.7 billion for share repurchases. No shares were repurchased in Q2. The annualized dividend rate was raised to $5.00 per share from $4.32.
Material changes and segment performance
- Management attributed the sharp Q2 earnings increase primarily to COVID-19-related deferral of care, which reduced medical costs and lifted UnitedHealthcare earnings. Favorable medical-cost reserve development was $1.4 billion in Q2; first-half development on prior-year claims was $660 million.
- UnitedHealthcare Q2 revenue increased 1% to $49.1 billion and operating earnings rose to $7.0 billion from $2.6 billion. Its domestic medical membership declined by 425,000 year over year, mainly reflecting commercial unemployment and attrition and a Medicaid market withdrawal; Medicare Advantage membership grew 8%.
- Optum Q2 revenue increased 17% to $32.7 billion, including intersegment activity, while operating earnings rose 6% to $2.2 billion. OptumHealth and OptumInsight earnings increased; OptumRx earnings fell 6% as adjusted scripts declined to 316 million from 343 million, partly due to a large client transition and care deferrals.
- Operating costs rose 19% in Q2, and the operating cost ratio increased to 16.1% from 13.9%. Management cited the return of the Health Insurance Tax and COVID-19 response programs. Investment and other income declined 41% in Q2.
Outlook, risks and unusual items
- The filing provides no clear numerical full-year earnings or EPS guidance. Management said care activity began recovering in May and approached more typical levels by quarter-end; deferred care could cause utilization to moderately exceed normal baselines in the second half, increasing medical costs. The pace and intensity of the pandemic and its financial effects remain uncertain.
- COVID-19 affected all businesses: UnitedHealthcare expanded coverage and assistance, waived some copayments, extended payment terms and accelerated provider payments. Optum reported lower fee-for-service care, managed-services and prescription volumes. These programs and COVID-19 treatment and testing costs partly offset lower claims.
- The Health Insurance Tax returned in 2020, with the company estimating its share at approximately $3.0 billion; the tax was permanently repealed effective January 1, 2021. Final 2021 Medicare Advantage industry base-rate increases were approximately 1.7%, below the industry’s forward medical-cost trend.
- Contingencies include government audits and investigations, Medicare risk-adjustment validation reviews, and a DOJ False Claims Act case alleging improper risk-adjustment submissions. The company said it could not reasonably estimate the outcome of the DOJ matter. Potential losses from certain legal and regulatory matters are not estimable.
- Other risks highlighted include medical-cost estimation and reserve variability, changes in regulation and government-program payments, cyber and privacy incidents, competition, credit-rating changes, and execution of acquisitions. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track medical utilization recovery, reserve development and whether the Q2 medical care ratio is sustainable as deferred care returns.
- Assess the effects of COVID-19 assistance, treatment costs and membership changes on UnitedHealthcare margins and cash flows.
- Verify OptumRx prescription volumes and the earnings impact of the client transition; distinguish organic growth from acquisitions and intersegment revenue.
- Monitor debt maturities, cash available for corporate use, and the timing and impact of the Health Insurance Tax and its repeal.
- Review subsequent disclosures on the DOJ risk-adjustment litigation, CMS audits and other contingencies; outcomes and potential financial exposure are not clearly quantified in this filing.