UnitedHealth Group Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. UnitedHealth Group operates UnitedHealthcare, its health benefits business, and Optum, its health services, technology and pharmacy business.
Financial and operating performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $257.1 billion | $242.2 billion | +6% |
| Earnings from operations | $22.4 billion | $19.7 billion | +14% |
| Net earnings attributable to common shareholders | $15.4 billion | $13.8 billion | +11% |
| Diluted EPS | $16.03 | $14.33 | +12% |
| Cash from operating activities | $22.2 billion | $18.5 billion | +20% |
| Medical care ratio (MCR) | 79.1% | 82.5% | Down 3.4 percentage points |
| Operating cost ratio | 16.2% | 14.5% | Up 1.7 percentage points |
| Operating margin | 8.7% | 8.1% | Up 0.6 percentage points |
| Net earnings margin | 6.0% | 5.7% | Up 0.3 percentage points |
| Return on equity | 24.9% | 25.7% | Down 0.8 percentage points |
All figures are in U.S. dollars. Total operating costs rose 6% to $234.7 billion. The effective tax rate increased to 24.0% from 20.8%, largely reflecting the return of the nondeductible health insurance industry tax in 2020.
Segments and material year-over-year changes
- UnitedHealthcare: Revenue rose 4% to $200.9 billion and operating earnings rose 20% to $12.4 billion. Medicare Advantage membership increased 8% to 5.7 million and Medicaid membership increased 12% to 6.6 million. Commercial membership declined 6% to 26.2 million, primarily amid pandemic-related unemployment and attrition; Global medical membership fell 5%.
- Optum: Revenue increased 21% to $136.3 billion; operating earnings increased 7% to $10.0 billion. OptumHealth revenue grew 31%, OptumInsight 8%, and OptumRx 18%. OptumRx operating earnings were essentially flat at $3.9 billion, with lower script volumes and a large client transition offsetting growth.
- Consolidated revenue growth was driven by Medicare Advantage and Medicaid membership, pricing, and Optum organic and acquisition growth. OptumRx product revenue also reflected a change to recognizing retail pharmacy co-payments on a gross basis; the filing says this had no impact on earnings.
- MCR fell mainly because care was deferred during the pandemic and because of the return of the industry tax’s revenue effects. The reduction was partly offset by COVID-19 treatment and testing costs, customer assistance and rebate requirements. The operating cost ratio rose with the industry tax, pandemic response costs and business mix, partly offset by efficiency gains.
Cash, debt and liquidity
- Cash and cash equivalents were $16.9 billion at year-end, up from $11.0 billion. Cash, cash equivalents and investment balances totaled $59.0 billion; only $1.3 billion of cash and cash equivalents was available for general corporate use.
- Operating cash flow was $22.2 billion. The company used $7.1 billion for acquisitions, paid $4.6 billion in dividends, repurchased $4.3 billion of shares and spent $2.1 billion on property, equipment and capitalized software.
- Current assets were $53.7 billion and current liabilities were $72.4 billion. Liquidity also includes operating cash flows, commercial paper supported by committed bank facilities, and access to debt markets.
- Balance-sheet short-term borrowings and current maturities of long-term debt were $4.8 billion; long-term debt was $38.6 billion. The debt-to-debt-plus-equity covenant ratio was 38%, below the 60% limit. The company reported compliance with debt covenants.
- The board increased the annualized dividend rate to $5.00 per share in June 2020. The filing states that future dividends remain at the board’s discretion.
Management outlook, risks and unusual items
- Management said care patterns recovered toward seasonal levels in the second half of 2020 and exceeded baselines late in the fourth quarter. Deferred care could lift utilization and medical costs in future periods; the pandemic’s duration, care patterns and financial impact remained uncertain.
- Management anticipated Medicaid revenue growth from membership and mix, while warning that payment rates could pressure Medicaid margins. Medicare Advantage funding remained pressured: 2021 industry base rates increased approximately 1.7%, below the industry’s forward medical cost trend. Quality ratings and related CMS bonuses may affect future results.
- The ACA health insurance industry tax was approximately $3.0 billion for UnitedHealth Group in 2020 and was permanently repealed effective January 1, 2021. The 2020 tax affected year-over-year revenue, costs, MCR, operating cost ratio, tax rate and cash-flow comparisons.
- The company expected acquisitions announced in late 2020 and January 2021 to require approximately $13 billion of capital, excluding acquired debt. The proposed Change Healthcare acquisition was subject to shareholder and regulatory approvals and other closing conditions.
- Key exposures include medical-cost pricing and reserve estimation, government program rates and audits, extensive health care regulation, cybersecurity and privacy, competition, provider relationships, litigation, and interest-rate and foreign-currency movements. The company reported $880 million of favorable prior-year medical cost development in 2020. A hypothetical 1% difference between estimated and actual year-end medical costs payable could change 2020 net earnings by approximately $157 million.
- The filing describes a DOJ antitrust indictment issued in January 2021 against Surgical Care Affiliates concerning alleged conduct predating its acquisition; the company said it was defending the matter. It also disclosed a pending False Claims Act matter involving alleged Medicare risk-adjustment submissions, for which the outcome could not be reasonably estimated.
Important facts for investors to verify
- How 2021 and subsequent medical utilization, COVID-19 care and deferred care affect claims costs, MCR and reserve development.
- Whether Medicare Advantage rates, CMS risk-adjustment audits and Star ratings support expected reimbursement and quality bonuses; also track Medicaid contract renewals and rate adequacy.
- Whether Optum’s growth and acquisition integration translate into earnings and cash flow, particularly given OptumRx’s flat operating earnings in 2020.
- Acquisition funding, regulatory approvals, integration risks and the final cost and terms of the proposed Change Healthcare transaction.
- Developments and potential financial or operational effects from the disclosed DOJ and False Claims Act matters, as well as other government audits and litigation.
- Medical cost payable estimates and liquidity available to the parent company, including the distinction between reported cash balances and cash available for general corporate use.