UnitedHealth Group Incorporated — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. UnitedHealth Group provides health coverage and benefits through UnitedHealthcare and information- and technology-enabled health services through Optum. Dollar amounts are in millions unless otherwise stated.
Financial performance and condition
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $27,282 | $25,432; up 7% |
| Earnings from operations | $2,317 | $2,221; up 4% |
| Net earnings | $1,388 | $1,346; up 3% |
| Diluted EPS | $1.31 | $1.22; up 7% |
| Medical care ratio | 81.0% | 81.4%; improved 0.4 percentage points |
| Operating margin | 8.5% | 8.7% |
| Net margin | 5.1% | 5.3% |
| Operating cash flow | $3,586 | $1,224 |
Revenue growth reflected more individuals served, commercial premium-rate increases, and Optum growth. Medical costs rose 6% to $19,939, while operating costs rose 13% to $4,096. Management attributed medical-cost pressure primarily to higher unit prices, especially hospital prices, and growth in public and senior risk-based membership. Q1 results included $530 of favorable prior-year medical-cost development, compared with $440 in Q1 2011. Interest expense increased to $148 from $118; the tax rate was 36% in both periods.
UnitedHealthcare revenue was $25,533, up 7%, and operating earnings were $2,065, up 9%. Optum revenue was $7,331, up 8%, while operating earnings declined to $252 from $322. OptumHealth revenue grew strongly, but its operating earnings fell to $92 from $109; OptumRx earnings declined to $71 from $130, reflecting investment spending and lower Medicare Part D prescription volumes.
At March 31, 2012, cash and cash equivalents were $11,661, total assets $72,690, and total liabilities $43,834. Commercial paper and long-term debt had a carrying value of $12,854. Debt-to-total-capital was 30.8%, versus 29.1% at December 31, 2011; the company reported compliance with its covenant requiring a ratio below 50%. It had a $3.0 billion revolving credit facility with no borrowings outstanding. Cash, cash equivalents and available-for-sale investments totaled approximately $30.4 billion, including $1.1 billion held by non-regulated entities.
Material changes and cash flows
- Operating cash flow increased substantially, chiefly because CMS paid approximately $2.5 billion for April premiums early, on March 30. The payment was recorded as unearned revenue, not earned Q1 revenue. Management expected lower year-over-year operating cash flow for 2012, including payment of 2011 premium rebates in Q3.
- Investing cash outflow included $1,935 for acquisitions, compared with $541 a year earlier. XL Health Corporation contributed approximately 120,000 Medicare Advantage members following its February acquisition.
- The company issued $1.0 billion of senior notes in March and repurchased 19 million shares for $991 at an average $53.50 per share. Dividends paid were $168; the quarterly dividend declared was $0.1625 per share.
- UnitedHealthcare medical membership increased by 1.575 million year over year. Medicare Advantage membership rose 15% to 2.495 million; stand-alone Medicare Part D membership fell 505,000 to 4.240 million, including a significant loss of auto-assigned low-income subsidy beneficiaries.
Outlook, risks and contingencies
- Management expected increasing unit costs to remain the main driver of medical-cost trends in 2012, with medical utilization rising over the year and prescription drug costs higher than in 2011. It anticipated a slight increase in the Medicare Advantage medical care ratio in 2012 as government reimbursement rates remain pressured.
- Management described commercial pricing as highly competitive and reported increased state regulatory challenges to premium-rate increases, which could constrain pricing and compress margins. Premium rebates under health reform continued to affect revenue estimates; Q1 included a $130 benefit from updating estimates and regulatory clarifications for 2011 rebates.
- Medicare Advantage benchmark reductions were taking effect in 2012; management also cited possible Medicare sequestration cuts averaging 2% of program costs beginning in 2013. The Supreme Court’s pending health reform decision and possible congressional action added uncertainty around costs, coverage and market opportunities.
- California regulators had reduced alleged claims-processing violations to 919,574 and indicated they were seeking approximately $325 million in penalties. The company disputed the allegations and said it could not reasonably estimate a loss range.
- Potential guaranty-fund assessments related to Penn Treaty were estimated at $350–$450 million if liquidation occurs; timing and actual impact were uncertain. The filing also describes other litigation, government audits and regulatory reviews, including Medicare risk-adjustment audits, for which outcomes or loss ranges could not be reliably estimated.
- Other risks identified include medical-cost estimation, regulatory and reimbursement changes, competition, litigation, credit ratings, investment values, acquisitions, and access to cash from regulated subsidiaries. The filing provides no specific consolidated earnings or revenue guidance for the year.
Important facts for investors to verify
- How much Q1 cash flow reflects the early CMS payment, and the timing of the related Q2 cash reversal and Q3 premium-rebate payments.
- Whether favorable prior-period medical-cost development continues, and how utilization and provider unit-cost trends affect the medical care ratio.
- Medicare Advantage and Part D membership, reimbursement and risk-adjustment audit developments, including the impact of lost low-income subsidy enrollment.
- Developments in the California penalty proceeding and Penn Treaty liquidation, including any change in estimated exposure or recognition of liabilities.
- OptumRx and OptumHealth margin recovery as investments continue, and the effect of acquisition spending, debt issuance and shareholder returns on leverage and liquidity.