UNITEDHEALTH GROUP INC quarterly report, Q3 FY2018

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UnitedHealth Group Inc. — Q3 2018 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2018. UnitedHealth Group operates health benefits through UnitedHealthcare and health services through Optum. Amounts are in U.S. dollars; financial amounts are in billions unless otherwise noted.

Financial performance

  • Q3 revenue: $56.6 billion, up 12% year over year. Revenue for the first nine months was $167.8 billion, up 13%.
  • Q3 earnings: Operating earnings were $4.59 billion, up 12%; net earnings attributable to shareholders were $3.19 billion, up 28%; diluted EPS was $3.24, up 29%. Nine-month diluted EPS was $9.09 versus $7.06.
  • Margins and costs: Q3 operating margin was 8.1%, unchanged year over year; net earnings margin was 5.6%, versus 4.9%. The medical care ratio (medical costs divided by premium revenue) was 81.0%, down 0.4 percentage points. Nine-month MCR was 81.4%, down 0.6 points.
  • Cash flow: Operating cash flow for the first nine months was $13.3 billion, versus $16.2 billion in 2017. Cash and equivalents fell to $10.3 billion from $12.0 billion at year-end 2017.
  • Liquidity and debt: Cash, cash equivalents and available-for-sale debt and equity securities totaled approximately $44 billion; only about $0.9 billion of cash was available for general corporate use. Balance-sheet commercial paper and debt totaled approximately $33.6 billion, including current maturities. No revolving credit facilities were drawn; the company reported compliance with its debt covenants and a defined debt-to-capital ratio of approximately 37%, versus a 55% limit.
  • Capital returns and investment: Nine-month share repurchases were $3.65 billion and dividends paid were $2.45 billion. Acquisition cash outflows were $5.82 billion, versus $0.91 billion in the prior-year period.

Changes versus prior period and business drivers

  • Q3 revenue and operating earnings rose across UnitedHealthcare and Optum. Optum operating earnings increased 20% in Q3; UnitedHealthcare operating earnings increased 7%.
  • Within Optum, Q3 revenue grew 15% at OptumHealth, 12% at OptumInsight and 9% at OptumRx. Management cited care delivery, behavioral health, pharmacy services, outsourcing and advisory services, and productivity initiatives as drivers.
  • UnitedHealthcare served 75,000 fewer people overall year over year. The end of its TRICARE commitment reduced membership by 2.9 million, partly offset by acquisition-related additions of 2.2 million and other growth. Medicare Advantage, Medicaid and international membership increased.
  • The effective tax rate fell to 22.5% in Q3 from 32.5%, primarily due to U.S. tax reform. The 2018 return of the Health Insurance Industry Tax partly offset that benefit and affects year-over-year revenue, MCR, operating-cost ratio and tax-rate comparisons.
  • Nine-month operating cash flow declined largely because the prior-year period included a $4.6 billion October CMS premium payment received in September 2017, as well as the 2018 industry tax impact. The company paid its $2.6 billion share of the 2018 tax in October.

Outlook, risks and unusual items

  • The filing discusses no specific earnings or EPS guidance figure. Management expects overall healthcare spending to continue growing, while noting exposure to economic conditions, competition, medical-cost trends and regulation.
  • A one-year moratorium on collection of the Health Insurance Industry Tax applies in 2019; management states pricing for contracts covering part of 2019 will reflect the moratorium. Final 2019 Medicare Advantage industry base rates increased approximately 3.4%, below the industry’s forward medical-cost trend, which management said creates program pressure.
  • Medical costs payable were $19.85 billion at September 30, including $13.8 billion of incurred-but-not-reported claim reserves. Management reported no individually significant factor in nine-month 2018 reserve development; prior-year favorable development was primarily associated with lower-than-expected utilization. Reserve estimates are a significant accounting judgment.
  • The company faces ongoing legal and regulatory matters, including CMS risk-adjustment data validation audits and a DOJ False Claims Act case alleging improper risk-adjustment submissions. Motions were argued in September 2018; the company said it could not reasonably estimate the outcome.
  • Other disclosed risks include changes in government-program payments and rules, medical-cost estimation, cybersecurity and privacy, pharmacy benefit management regulation, acquisitions, foreign exchange, investment performance, credit ratings and access to capital. Management reported no material change to the risk factors in its 2017 Form 10-K.
  • Unrealized losses on available-for-sale debt securities were attributed primarily to interest-rate increases; the company said it intended to hold the securities and expected to collect principal and interest. Disclosure controls were assessed as effective, with no material quarter-to-quarter change in internal control over financial reporting.

Important facts for investors to verify

  • How much of the revenue and EPS growth reflects underlying volume and operations versus the industry tax, tax reform, acquisitions and membership mix.
  • Whether medical-cost trends, reserve development and the $19.85 billion medical-cost payable balance develop as estimated.
  • The cash-flow outlook after the 2018 industry-tax payment, acquisition spending and the prior-year CMS payment timing difference.
  • The effects of 2019 Medicare Advantage rates and the Health Insurance Industry Tax moratorium on pricing, margins and cash flow.
  • Developments in CMS audits and the DOJ risk-adjustment litigation, including any financial or operational consequences.
  • Debt maturities, liquidity available for general corporate use, and the company’s capacity to sustain dividends and repurchases while funding acquisitions.