UnitedHealth Group Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2009, compared with the same 2008 periods. UnitedHealth Group operates health benefits and health services businesses, serving more than 70 million Americans. Its reporting segments are Health Care Services, OptumHealth, Ingenix and Prescription Solutions.
Financial performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Revenue | $21.655B | $20.272B | $43.659B | $40.576B |
| Operating earnings | $1.440B | $673M | $3.108B | $2.386B |
| Operating margin | 6.6% | 3.3% | 7.1% | 5.9% |
| Net earnings | $859M | $337M | $1.843B | $1.331B |
| Diluted EPS | $0.73 | $0.27 | $1.54 | $1.05 |
| Medical care ratio | 83.6% | 83.2% | 83.0% | 82.8% |
- Revenue growth was led by premiums, up 8% in Q2 and 9% for the first half, supported by public- and senior-market growth and premium rate increases. Product revenue also rose with prescription volume. Investment and other income fell 36% in Q2 and 40% for the first half, reflecting lower yields and realized gains.
- Medical costs rose 8% in Q2 and 9% year over year for the first half. Management cited growth in public and senior risk-based business, medical-cost inflation and higher service utilization. The Q2 medical care ratio also reflected elevated UnitedHealthcare costs related to H1N1.
- Operating cash flow was $1.604B for the first half, versus $880M in 2008. Cash and cash equivalents were $7.247B at June 30. Cash, cash equivalents and investments totaled approximately $21.3B; $665M was held by non-regulated subsidiaries and available for general corporate use.
- Debt was $11.7B at June 30, down from $12.8B at December 31, 2008. The debt-to-total-capital ratio was 35.2%, within the covenant limit of below 50%. The company had $60M of commercial paper outstanding and $2.5B available under its revolving credit facility, with no amount drawn.
- Current liabilities were $19.652B and current assets were $15.684B at June 30. Regulated subsidiaries face limits on dividends to the parent, which can constrain access to some cash.
- For the first half, the company repurchased 64.1 million shares for $1.5B and paid $36M in dividends. Capital spending was $311M and acquisition cash payments were $400M.
Material changes versus the prior comparable period
- Net earnings increased 155% in Q2 and 38% for the first half. The year-over-year operating improvement is not fully comparable: Q2 2008 included $922M of costs for two class-action settlements and related legal costs, plus $46M of severance and other items. A $185M gain from an asset and membership sale partly offset those prior-year costs.
- Commercial membership fell 6% year over year, including an 8% decline in commercial risk-based membership. Public and senior membership grew 15%, including increases in Medicare Advantage and Medicaid.
- Operating cash flow improved by $724M year over year for the first half, while the cash decline narrowed to $179M from $3.592B. Lower acquisition spending was a major factor in the reduction in investing cash outflows.
- Long-term debt declined, and interest expense fell 15% for both Q2 and the first half. The company terminated $4.9B of interest-rate swaps in January and received $513M; the related debt carrying-value adjustment is being amortized as a reduction of interest expense.
- On June 1, the company acquired AIM Healthcare Services for approximately $440M in cash. The preliminary allocation included $259M of goodwill and $166M of finite-lived intangible assets.
Outlook, management commentary, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management expected elevated employment-related pressure on commercial membership to continue until employment stabilizes and warned that a prolonged recession could slow growth, increase provider financial stress and raise medical-cost trends.
- CMS announced an approximately 5% reduction in Medicare Advantage reimbursement for 2010. Management said benefit and premium adjustments, geographic participation decisions and cost management could partly offset the impact, but gave no assurance of success. Health care reform proposals, government funding pressure and possible new taxes or reimbursement changes are additional uncertainties.
- Management cited pricing and estimating medical costs, regulation, competition, investment performance, credit ratings, access to regulated-subsidiary cash and litigation as risks. A CMS review identified deficiencies in the Ovations Medicare Advantage and prescription-plan broker oversight program; the company said it was working to address CMS concerns.
- Historical stock-option matters remain relevant: the SEC settlement was approved and the case closed, while an appeal was filed concerning attorneys’ fees in the federal derivative settlement. A securities class-action settlement involving an $895M fund was awaiting final court approval; a separate ERISA settlement was also awaiting final approval.
- The company proposed a $350M settlement of litigation over out-of-network reimbursement, subject to court approval. Under an agreement with the New York Attorney General, it agreed to pay $50M toward an independent replacement database. California claims-processing allegations were being contested in an administrative proceeding.
- Investment-related items included $37M of other-than-temporary impairment losses recognized in earnings for the first half. Management said it did not intend to sell securities in unrealized-loss positions and expected to collect principal and interest; the portfolio included $15M of commercial mortgage loans in default.
- The company reported effective disclosure controls as of June 30 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether premium growth and public- and senior-market expansion can offset continuing commercial membership declines and medical-cost inflation.
- How much of the earnings increase reflects underlying performance versus the unusually high 2008 settlement and other costs.
- The eventual impact of the 2010 Medicare Advantage reimbursement reduction and any further health care policy changes.
- Final outcomes and potential additional costs from pending legal matters, regulatory reviews and settlements.
- Availability of cash held in regulated subsidiaries, debt refinancing needs, and the effect of interest rates and investment valuations on earnings and liquidity.