UnitedHealth Group Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; filed August 4, 2017. UnitedHealth Group operates health benefits through UnitedHealthcare and health services through Optum. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $50.1 billion | $46.5 billion | $98.8 billion | $91.0 billion |
| Operating earnings | $3.73 billion | $3.20 billion | $7.14 billion | $6.16 billion |
| Net earnings attributable to common shareholders | $2.28 billion | $1.75 billion | $4.46 billion | $3.37 billion |
| Diluted EPS | $2.32 | $1.81 | $4.55 | $3.48 |
| Operating margin | 7.5% | 6.9% | 7.2% | 6.8% |
| Medical care ratio | 82.2% | 82.0% | 82.3% | 81.9% |
| Effective tax rate | 31.5% | 40.0% | 30.8% | 39.9% |
- Q2 revenue increased 8%, operating earnings 16%, common-shareholder earnings 30% and diluted EPS 28% year over year. Six-month revenue rose 9%, operating earnings 16%, earnings attributable to common shareholders 32% and diluted EPS 31%.
- For the six months, operating cash flow was $8.63 billion, compared with $4.00 billion in 2016. Investing activities used $3.66 billion and financing activities used $812 million. Cash and cash equivalents ended June at $14.58 billion, versus $10.43 billion at year-end 2016.
- The company said higher operating cash flow was aided by receiving its $4.5 billion July CMS premium payment in June. Cash, cash equivalents and available-for-sale investments totaled $43.2 billion; only $0.6 billion of cash and cash equivalents was available for general corporate use.
- At June 30, current liabilities were $57.12 billion and long-term debt, less current maturities, was $26.20 billion. Commercial paper outstanding was $2.25 billion. The company reported a defined debt-to-debt-plus-equity ratio of about 40%, below its 55% covenant limit, and no draws on its $6.0 billion revolving credit facilities.
Business trends and changes versus prior period
- UnitedHealthcare revenue rose 9% in Q2; Optum revenue rose 10%. Operating earnings increased 14% at UnitedHealthcare and 21% at Optum.
- UnitedHealthcare served 1.5 million more people overall year over year. Medicare Advantage membership grew 22% and Medicaid membership 12%; individual membership fell 64%, reflecting reduced participation in ACA-compliant products.
- OptumHealth revenue grew 26% in Q2, with management citing organic and acquisition-related care-delivery growth. OptumRx revenue grew 5%, and adjusted scripts increased to 322 million from 306 million.
- The medical care ratio increased 0.2 percentage points in Q2. Management attributed the increase to effects of the health insurance industry tax moratorium, partly offset by reduced individual ACA business and more favorable medical-cost reserve development.
- The lower effective tax rate primarily reflected the 2017 one-year moratorium on the health insurance industry tax and increased tax benefits from share-based payments.
Outlook, risks and unusual items
- Management reported final 2018 Medicare Advantage base-rate growth of approximately 0.45%, versus an industry forward medical-cost trend of 3%, creating continued program pressure. The company said the impact may affect plan benefits, pricing, growth and earnings. It expected at least 85% of its Medicare Advantage members to be in plans rated four stars or higher for 2018 payment year, compared with approximately 80% for 2017.
- Management said pricing for contracts covering part of 2018 would reflect the return of the health insurance industry tax. Medical-cost pressures include unit costs, utilization and prescription drugs, including high-cost specialty therapies.
- The Department of Justice pursued claims in two whistleblower cases alleging improper Medicare Advantage risk-adjustment submissions and False Claims Act violations. The company said it could not reasonably estimate the outcomes.
- A California claims-processing matter remained pending: a March 2017 tentative ruling would reverse penalties of approximately $174 million and remand certain issues; a final order was expected later in 2017. The company could not estimate any loss.
- Acquisitions increased OptumHealth goodwill by $4.9 billion during the first half. The company also issued $1.867 billion of common stock for an acquisition, as disclosed in supplemental cash-flow information.
- Management identified risks including medical-cost estimation, government reimbursement and regulation, CMS quality ratings and risk-adjustment audits, cybersecurity and privacy, litigation, acquisitions, credit ratings and investment performance. It reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether Medicare Advantage rate pressure and the return of the industry tax affect 2018 pricing, membership and margins as management anticipates.
- Developments and potential financial exposure in the DOJ Medicare Advantage risk-adjustment cases and the California claims-processing matter.
- Underlying operating cash generation after accounting for the timing benefit from the $4.5 billion July CMS payment received in June, and the amount of cash available for general corporate use.
- Medical-cost trends, reserve development and the reported medical care ratio in subsequent periods.
- Acquisition-related goodwill, debt levels and the company’s ability to maintain credit ratings, liquidity and shareholder distributions.