UnitedHealth Group Inc. — 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; quarterly figures below are for the quarter ended December 31, 2014. UnitedHealth Group operates UnitedHealthcare, its health benefits platform, and Optum, its health services platform. The four reportable segments are UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. Results are audited, and the auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance and position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $130.474 billion | $122.489 billion | +7% |
| Earnings from operations | $10.274 billion | $9.623 billion | +7% |
| Net earnings attributable to common shareholders | $5.619 billion | $5.625 billion | Approximately flat |
| Diluted EPS | $5.70 | $5.50 | +4% |
| Operating cash flow | $8.051 billion | $6.991 billion | +$1.060 billion |
| Cash and cash equivalents at year-end | $7.495 billion | $7.276 billion | +$219 million |
| Commercial paper and long-term debt | $17.406 billion | $16.860 billion | +$546 million |
- Annual medical costs were $93.257 billion, up 4%; the medical care ratio (medical costs divided by premiums) improved to 80.9% from 81.5%. Operating cost ratio rose to 16.6% from 15.8%; operating margin was 7.9% in both years, while net earnings margin declined to 4.3% from 4.6%. The effective tax rate increased to 41.8% from 36.4%.
- Fourth-quarter revenue was $33.433 billion versus $31.117 billion; operating earnings were $2.765 billion versus $2.452 billion; net earnings attributable to common shareholders were $1.510 billion versus $1.427 billion; diluted EPS was $1.55 versus $1.41.
- Segment revenue and operating earnings: UnitedHealthcare, $119.798 billion and $6.992 billion; Optum, $47.746 billion and $3.282 billion, before intersegment eliminations. Optum revenue grew 25% and operating earnings 32%; UnitedHealthcare revenue grew 5%, while operating earnings declined 2%.
- Total assets were $86.382 billion and shareholders’ equity $32.454 billion. Debt-to-debt-plus-equity was 34.9%, below the 50% bank-facility covenant. Only $738 million of year-end cash and cash equivalents was available for general corporate use; regulated-subsidiary dividends and other funds are subject to restrictions.
- The company repurchased $4.008 billion of shares, paid $1.362 billion in dividends and spent $1.923 billion on acquisitions, net of cash acquired. The annual dividend rate was raised to $1.50 per share in June 2014.
Material changes versus 2013
- Revenue growth reflected expansion in public and senior markets and across Optum, including OptumRx. OptumRx revenue rose 33%, helped by commercial pharmacy benefit programs moved in-house, external-client growth and specialty pharmacy.
- UnitedHealthcare commercial risk-based enrollment fell 8%, and commercial fee-based enrollment fell 4%. Public and senior enrollment grew 13%, including 25% Medicaid growth and 5% Medicare Advantage growth. Total UnitedHealthcare medical enrollment declined 1%.
- UnitedHealthcare earnings were pressured by Affordable Care Act (ACA) fees, Medicare Advantage funding reductions, increased hepatitis C specialty-drug spending and less favorable prior-period medical reserve development. Growth in public and senior markets and lower inpatient utilization partly offset these pressures.
- The ACA industry tax and related fees favorably affected the medical care ratio by 110 basis points, but raised the operating cost ratio by 120 basis points and the effective tax rate by 510 basis points. The filing attributes approximately $1.00 of negative year-over-year diluted EPS impact to ACA fees, Medicare rate cuts and other ACA effects.
- Favorable medical-cost reserve development was $420 million in 2014, compared with $680 million in 2013. The company also realigned certain technology and business-processing operations into OptumInsight; comparative segment figures were recast.
Outlook, commentary and key risks
- Management expected 2015 health-plan pricing to return to a more normal inflation rate after 2014 ACA-related cost step-ups. It expected continued Medicaid revenue growth, while warning that reimbursement rates could pressure Medicaid margins.
- Management expected the 2015 Medicare medical care ratio to be slightly higher than in 2014 and expected overall Medicare Advantage membership growth despite benefit, premium and network adjustments. Only plans rated four stars or higher qualify for quality bonus payments in 2015; more than 37% of company Medicare Advantage members were in plans rated at least four stars for the 2015 payment year.
- The company estimated its share of the ACA industry tax at $1.8 billion for 2015, compared with $1.3 billion in 2014. Medicare Advantage funding reductions and federal and state program rules, audits, risk-adjustment payments and contract renewals remain significant uncertainties.
- Material risks include estimating and managing medical costs and unpaid claims; changes in health-care regulation and government funding; competition and provider contracting; privacy, cybersecurity and systems risks; investment and interest-rate exposure; and the ability to realize OptumInsight’s contract backlog. Its $8.6 billion backlog included $4.8 billion expected within 12 months, but realization is not assured.
- Notable contingencies include a California insurance commissioner’s approximately $174 million fine, which the company challenged in court and for which it could not estimate a loss range; ongoing government reviews, including Medicare risk-adjustment audits with uncertain potential adjustments; and possible insurer guaranty-fund assessments relating to Penn Treaty. A separate hepatitis C-related litigation settlement in 2014 was described as not material.
- The company reported no material off-balance-sheet arrangements. Goodwill and other intangible assets totaled $36.6 billion, or 42% of total assets; no material impairment was recorded in 2014.
Important facts for investors to verify
- Whether 2015 guidance and subsequent results support the expected Medicare Advantage membership growth, slightly higher Medicare medical care ratio, and anticipated Medicaid growth and margins.
- The realized cost of ACA taxes and fees, Medicare funding changes, and any related premium, benefit or membership effects.
- UnitedHealthcare’s commercial enrollment trends and whether Optum’s growth, particularly in pharmacy services, translates into sustained earnings and margins.
- Medical-cost reserve development, current claim estimates and risk-adjustment submissions; a hypothetical 1% difference in year-end medical-cost estimates would change 2014 net earnings by approximately $67 million, before potential premium-rebate effects.
- Outcomes and financial exposure from the California fine, Medicare and other government audits, and potential guaranty-fund assessments.
- Liquidity available to the parent company, regulatory limits on subsidiary dividends, debt maturities and the effects of interest-rate or foreign-exchange movements.