UnitedHealth Group Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. UnitedHealth Group operates through UnitedHealthcare, its health benefits platform, and Optum, its health services platform. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $56,086 (+12%) | $50,053 | $111,274 (+13%) | $98,776 |
| Operating earnings | $4,204 (+13%) | $3,731 | $8,257 (+16%) | $7,144 |
| Net earnings attributable to common shareholders | $2,922 (+28%) | $2,284 | $5,758 (+29%) | $4,456 |
| Diluted EPS | $2.98 (+28%) | $2.32 | $5.85 (+29%) | $4.55 |
| Medical care ratio | 81.9% | 82.2% | 81.6% | 82.3% |
| Operating cost ratio | 15.0% | 14.6% | 15.2% | 14.5% |
| Operating margin | 7.5% | 7.5% | 7.4% | 7.2% |
| Effective tax rate | 22.0% | 31.5% | 21.8% | 30.8% |
Revenue growth reflected more people in risk-based products, pricing—including the return of the Health Insurance Industry Tax in 2018—and Optum growth. Medical costs rose with membership and medical cost trends; the reported medical care ratio improved partly because of the tax’s revenue effects. Tax Reform was the primary reason for the lower effective tax rate, partly offset by the nondeductible industry tax.
Segments and operating trends
- Q2 UnitedHealthcare revenue was $45,846, up 12%; operating earnings were $2,357, up 7%. Its operating margin fell to 5.1% from 5.4%.
- Q2 Optum revenue was $24,726, up 9%; operating earnings were $1,847, up 22%, with a 7.5% operating margin versus 6.7%.
- Within Optum, Q2 revenue rose 16% at OptumHealth, 10% at OptumInsight and 7% at OptumRx. Management cited organic and acquisition-related growth, productivity, cost management and customer growth.
- UnitedHealthcare served 640,000 fewer medical members year over year, primarily after completing its TRICARE commitment; growth in Medicare Advantage, Medicaid and international membership partly offset declines.
Cash flow, liquidity and debt
- Six-month operating cash flow was $12,376, versus $8,627 a year earlier. It included the early receipt of $5.2 billion of July CMS premiums, compared with $4.5 billion in the prior-year period.
- Six-month investing cash outflow was $6,698, including $2,636 paid for acquisitions and $960 for property, equipment and capitalized software. Financing cash inflow was $787.
- Cash and cash equivalents at June 30 were $18,368, up from $11,981 at year-end. Management said $1.7 billion was available for general corporate use. Cash, available-for-sale debt securities and equity securities totaled about $51 billion.
- Balance-sheet current assets were $46,634 and current liabilities $62,052. Medical costs payable were $19,339, including $13.5 billion of reserves for incurred-but-not-reported claims.
- Commercial paper and long-term debt had $33,688 carrying value in the debt note; balance-sheet debt, including other financing obligations, was $35,055 ($2,959 current and $32,096 long term). Debt to debt-plus-shareholders’ equity under the credit facilities was approximately 38.8%, below the 55% covenant limit; no credit-facility amounts were drawn.
- Six-month share repurchases totaled $3,150 and dividends paid $1,588. The Board renewed authorization for up to 100 million shares and raised the annualized dividend rate to $3.60 per share.
Outlook, risks and notable items
- The filing gives no clear quantified full-year earnings or revenue guidance. Management noted 2019’s one-year moratorium on the Health Insurance Industry Tax and said pricing on contracts covering part of 2019 would reflect it.
- Final 2019 Medicare Advantage industry base rates rose approximately 3.4%, below industry medical cost trend, creating continued program pressure.
- The DOJ is pursuing claims in a whistleblower False Claims Act lawsuit alleging improper Medicare risk-adjustment submissions. The court ruled on a motion to dismiss in February 2018; DOJ motions were scheduled to be argued in September 2018. The company said it could not reasonably estimate the outcome.
- Other risks include medical-cost estimation and pricing, government payment and regulatory changes, CMS risk-adjustment audits and quality ratings, cybersecurity and privacy, competition, litigation, acquisitions, foreign exchange and access to capital. The filing reported no material change to the risk factors in the 2017 Form 10-K.
- Available-for-sale debt securities had $520 of gross unrealized losses, which management attributed primarily to higher interest rates; it said it did not intend to sell the securities and expected to collect principal and interest.
Important facts for investors to verify
- Whether medical-cost trends and medical costs payable develop in line with management’s estimates, including incurred-but-not-reported claims.
- The sustainability and drivers of Optum growth and UnitedHealthcare margins, membership and pricing.
- The effect of the 2019 industry-tax moratorium and Medicare Advantage reimbursement rates on pricing, reported ratios and earnings.
- Developments and potential financial exposure in the DOJ risk-adjustment litigation and CMS audits; the filing provides no clear loss estimate.
- Debt and liquidity needs after acquisitions, repurchases and dividends, and the extent to which reported cash is available for general corporate use.