UnitedHealth Group Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results; it is an annual report, not a quarterly filing. UnitedHealth Group operates health benefits through UnitedHealthcare and health services through Optum.
Financial results
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $184.840 billion | $157.107 billion | +18% |
| Earnings from operations | $12.930 billion | $11.021 billion | +17% |
| Net earnings attributable to common shareholders | $7.017 billion | $5.813 billion | +21% |
| Diluted EPS | $7.25 | $6.01 | +21% |
| Operating cash flow | $9.795 billion | $9.740 billion | +$55 million |
| Medical care ratio | 81.2% | 81.7% | Down 0.5 percentage point |
| Operating margin | 7.0% | 7.0% | No change |
| Net earnings margin | 3.8% | 3.7% | Up 0.1 percentage point |
Medical costs were $117.038 billion, up 13%; operating costs were $28.401 billion, up 17%; and cost of products sold was $24.416 billion, up 51%. Interest expense increased 35% to $1.067 billion. The effective tax rate declined to 40.4% from 42.6%, primarily reflecting adoption of a share-based compensation accounting standard.
Fourth-quarter 2016 revenue was $47.535 billion, operating earnings were $3.187 billion, net earnings attributable to common shareholders were $1.684 billion, and diluted EPS was $1.74. Fourth-quarter 2015 comparatives were $43.599 billion, $2.468 billion, $1.218 billion, and $1.26, respectively.
Balance sheet, debt and liquidity
- At year-end, total assets were $122.810 billion, total equity was $38.177 billion, and commercial paper and long-term debt totaled approximately $32.970 billion.
- Cash and cash equivalents were $10.430 billion; short- and long-term investments totaled $26.713 billion. The company said approximately $700 million of cash and cash equivalents was available for general corporate use, reflecting restrictions on regulated subsidiaries.
- Operating cash flow was $9.795 billion; investing cash outflow was $9.355 billion; financing cash outflow was $1.011 billion. The year-end debt-to-debt-plus-equity ratio under the credit facilities was approximately 44%, against a 55% maximum. No amounts were drawn on revolving bank facilities.
- Contractual obligations totaled $60.017 billion, including $48.502 billion of debt obligations inclusive of interest payments and maturities.
Material changes and operating performance
- Optum revenue grew 24% and operating earnings rose 32%; UnitedHealthcare revenue grew 13% and operating earnings rose 8%. OptumRx growth reflected the full-year impact of the 2015 Catamaran acquisition and organic growth. Consolidated comparisons are affected by Catamaran’s acquisition in 2015.
- UnitedHealthcare served 2.1 million more people domestically. Medicare Advantage membership rose 12% to 3.63 million; Medicaid membership rose 11% to 5.89 million.
- UnitedHealthcare’s operating margin declined to 4.9% from 5.1%. OptumRx’s operating margin rose to 4.4% from 3.6%; OptumHealth’s declined to 8.4% from 8.9%; OptumInsight remained 20.6%.
- Cash dividends paid increased to $2.261 billion from $1.786 billion. The Board raised the annualized dividend rate to $2.50 per share in June 2016. The company repurchased $1.280 billion of shares during the year.
Outlook, risks and unusual items
- Management reported a $350 million charge in fourth-quarter and full-year 2016 for estimated guaranty association assessments related to the liquidation of Penn Treaty. Funding is expected over several years, with premium tax credits affecting the ultimate cost.
- For 2017, UnitedHealthcare Employer & Individual planned to participate in individual public exchanges in three states, down from 34 in 2016. The company expected to serve nearly 1 million fewer people through individual insurance plans, reducing premium revenue by more than $4 billion.
- Management said final 2017 Medicare Advantage industry base rates rose approximately 0.85%, below the cited 3% medical cost trend, creating funding pressure. It expected at least 80% of its Medicare Advantage members to be in plans rated four stars or higher for 2017 payment, versus approximately 57% in 2016.
- The health insurance industry tax was suspended for 2017 but was scheduled to resume in 2018. The company paid $1.8 billion of the tax in 2016. The transitional reinsurance and temporary risk corridors programs expired at the end of 2016.
- Material risks include changes to or repeal and replacement of the ACA, government program funding and audits, medical-cost estimation and pricing, privacy and cybersecurity, regulatory compliance, competition, provider contracting, investment and interest-rate exposure, and access to cash held by regulated subsidiaries. The filing describes ongoing government reviews of Medicare risk-adjustment and chart-review processes; potential losses could not be reasonably estimated. It also describes a California claims-processing dispute for which the company could not estimate a loss range.
- The filing provides no clear numerical company-wide earnings guidance for 2017. Management cited continued medical-cost management, affordability, coordinated care and value-based provider arrangements as priorities.
Important facts for investors to verify
- Whether medical-cost payable estimates and favorable prior-year reserve development remain appropriate; 2016 included $220 million of favorable development.
- Progress and potential financial consequences of government risk-adjustment reviews, audits, and the California claims-processing litigation.
- Actual 2017 exchange membership and revenue reductions, Medicare Advantage rates and quality bonuses, and Medicaid rate adequacy.
- Debt maturities, credit ratings, covenant headroom, and the amount of cash available for parent-company use after regulatory restrictions.
- The effect of Catamaran and other acquisitions on underlying growth and segment margins, separately from acquisition-related comparisons.