UnitedHealth Group Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. UnitedHealth Group operates UnitedHealthcare and Optum, which includes Optum Health, Optum Insight and Optum Rx. Financial statements are unaudited.
Financial performance
- Revenue: $91.9 billion, up 15% year over year. Premium revenue was $72.8 billion; products $10.3 billion; services $8.1 billion.
- Earnings: Operating earnings were $8.1 billion, up 16%; net earnings attributable to common shareholders were $5.6 billion, up 12%. Diluted EPS was $5.95, up 13%.
- Margins and medical costs: Medical care ratio (medical costs divided by premium revenue) was 82.2%, versus 82.0%. Operating margin was 8.8%, versus 8.7%; net earnings margin was 6.1%, versus 6.3%. Management attributed the higher medical care ratio primarily to business mix and higher medical costs to growth in Medicare Advantage and Medicaid membership.
- Cash flow: Operating cash flow was $16.3 billion, compared with $5.3 billion. The increase was primarily driven by receipt in March of $11.2 billion in April CMS premium payments and higher earnings. Cash and cash equivalents were $41.9 billion at quarter-end, up from $23.4 billion at year-end.
- Debt and liquidity: Short- and long-term debt totaled approximately $70.6 billion, versus $57.6 billion at December 31, 2022. The company issued $6.5 billion of senior notes and had $8.2 billion of commercial paper outstanding. Cash, cash equivalents, available-for-sale debt securities and equity securities totaled $91.2 billion; $7.0 billion of cash and equivalents was available for general corporate use. Its defined debt-to-debt-plus-equity ratio was approximately 42%, below the 60% covenant limit.
- Capital returns: Share repurchases were $2.0 billion; dividends paid were $1.5 billion. The quarterly dividend equated to an annual rate of $6.60 per share.
Material changes and business performance
- UnitedHealthcare revenue grew 13% and operating earnings 14%; membership increased by 1.9 million people year over year. Medicare Advantage membership rose 10% and Medicaid membership 7%.
- Optum revenue grew 25% and operating earnings 19%. Optum Health revenue increased 38%, Optum Insight 40%, and Optum Rx 15%. Optum Insight’s operating margin fell to 20.2% from 26.3%; Optum Health’s declined to 7.7% from 8.2%. Optum Rx fulfilled 378 million adjusted scripts, up from 352 million.
- Growth reflected membership increases, pricing trends, expansion across Optum, and acquisitions. Q1 acquisitions involved $8.0 billion of consideration, including $6.6 billion of goodwill; acquired entities’ contribution to revenue and net earnings through March 31 was not material.
- Interest expense rose 74% to $754 million. Operating costs grew 20%, faster than revenue, with management citing business mix and investments to support growth, partly offset by productivity gains.
Outlook, commentary and risks
- The filing provides no specific numerical full-year earnings or revenue guidance in the supplied text. Management expects healthcare spending to grow over time, while results remain exposed to medical-cost trends, inflation, labor costs, competition and regulation.
- Management highlighted 2024 Medicare Advantage rate pressure: the final rate notice produced an industry base-rate decrease below expected medical-cost trends, and changes to the risk-adjustment model are expected to reduce funding. Potential responses include cost management, provider-network and benefit changes, premiums, and decisions about where to offer plans.
- Medical costs payable were $31.8 billion, including $21.7 billion for incurred-but-not-reported claims. Reserve estimates and goodwill are identified as critical accounting estimates; actual results may differ from assumptions.
- The company reported approximately $3.1 billion of gross unrealized losses on available-for-sale debt securities, primarily attributed to interest-rate increases. It said it had no intent to sell securities in unrealized-loss positions and considered the losses temporary; the credit-loss allowance was not material.
- Legal and regulatory matters include CMS risk-adjustment data-validation audits and a DOJ False Claims Act case concerning risk-adjustment submissions. The company said it could not reasonably estimate the outcome of that case. The filing also identifies broader legal, government-review, cybersecurity, technology, credit-rating and operating risks.
- The company stated there were no material changes to the risk factors in its 2022 Form 10-K and no material changes to previously disclosed cash requirements outside the ordinary course of business. Disclosure controls were reported effective as of March 31, 2023.
Important facts for investors to verify
- Whether medical-cost trends and the medical care ratio remain consistent with pricing and management’s assumptions.
- The timing and scale of Medicare Advantage rate and risk-adjustment impacts, and the effect on benefits, membership and profitability.
- How operating cash flow develops after the unusually large advance CMS premium receipt, and how acquisition spending affects liquidity and debt.
- Progress on Optum segment margins, particularly the lower Optum Insight and Optum Health margins.
- Developments in the DOJ risk-adjustment litigation, CMS audits and other regulatory reviews, including any potential financial or operational consequences.