UnitedHealth Group Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013; filed November 7, 2013. Amounts are in U.S. dollars. UnitedHealth Group operates UnitedHealthcare, providing health coverage and benefits services, and Optum, providing health services, information and technology solutions.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $30.624 billion | $27.302 billion | $91.372 billion | $81.849 billion |
| Operating earnings | $2.631 billion | $2.610 billion | $7.171 billion | $7.153 billion |
| Net earnings attributable to common shareholders | $1.570 billion | $1.557 billion | $4.198 billion | $4.282 billion |
| Diluted EPS | $1.53 | $1.50 | $4.09 | $4.08 |
| Medical care ratio | 80.6% | 79.0% | 81.6% | 80.4% |
| Operating margin | 8.6% | 9.6% | 7.8% | 8.7% |
| Net margin | 5.1% | 5.7% | 4.6% | 5.2% |
Revenue rose 12% year over year in both periods. Q3 common earnings increased 1%; nine-month common earnings declined 2%. The medical care ratio is medical costs divided by premium revenue. The filing does not report a separate gross margin.
For the first nine months, operating cash flow was $5.923 billion, compared with $5.473 billion in 2012. Investing activities used $2.273 billion and financing activities used $3.683 billion. Cash and cash equivalents were $8.286 billion at quarter-end, of which $1.1 billion was available for general corporate use. Cash, cash equivalents and available-for-sale investments totaled $28.7 billion. Commercial paper and long-term debt had a carrying value of $16.783 billion; $1.1 billion of commercial paper was outstanding. The company reported $4.0 billion of undrawn revolving credit facilities and compliance with debt covenants.
Material changes and operating drivers
- Growth reflected the 2012 Amil acquisition, expansion in the number of people served, and organic growth across Optum. UnitedHealthcare revenue increased 11% in Q3; Optum revenue increased 33%.
- UnitedHealthcare’s Q3 operating earnings fell 9%, while Optum’s rose 54%. UnitedHealthcare’s margin pressure reflected Medicare Advantage funding reductions, business mix and lower favorable medical cost development.
- OptumRx revenue grew 41% in Q3, supported by pharmacy business brought in-house and membership growth. More than 11 million members had transitioned to its platform by October 31; management expected about 12 million members from the transition.
- Medical membership increased by 8.7 million year over year, including 4.8 million international members, primarily from Brazil, and 2.9 million TRICARE beneficiaries. Medicare Advantage membership grew 17%, or 430,000 people; stand-alone Medicare Part D membership grew 665,000.
- A large commercial customer shifted 1.1 million members from risk-based to fee-based coverage, reducing 2013 revenue by an estimated $2.5 billion with negligible impact on operating earnings and cash flow. Amil’s remaining public shares were acquired for $1.5 billion, bringing ownership to 90%.
- Nine-month favorable medical cost development was $580 million related to prior years, versus $790 million in 2012. Management attributed favorable development primarily to lower-than-expected utilization.
Outlook, risks and contingencies
- Management expected 2013 commercial medical cost trend toward the lower end of 5.5%, plus or minus 50 basis points; pharmacy trend was expected to be consistent with 2012. These are operating expectations, not a formal consolidated earnings forecast.
- Management estimated that Medicare sequestration would reduce 2013 consolidated pretax earnings by about $250 million. It cited further Medicare Advantage payment reductions and the non-deductible health insurance industry tax beginning in 2014. The company planned to exit 2014 Medicare Advantage plans and markets serving approximately 150,000 beneficiaries.
- Management described competitive commercial pricing, government payment rates, exchange implementation, premium rate review and evolving health reform requirements as uncertainties that could pressure revenue or margins. Participation was planned in 13 state exchanges for 2014.
- Legal matters include a Nevada jury award, reduced by the trial court to $366 million, involving an alleged failure to credential and monitor an independent endoscopy center. The company is defending the matter and related lawsuits; it could not estimate a loss range. In a separate California regulatory matter, the regulator had advocated a penalty of about $325 million, while a non-binding proposed decision recommended a non-material penalty; the final outcome remained unresolved.
- The company also cited government audits and reviews, including Medicare risk-adjustment data validation, as contingencies for which potential losses could not be reasonably estimated. Other principal risks include medical-cost estimation, regulation, litigation, privacy and data security, foreign exchange, investment values and access to capital.
- Cash and investment values are exposed to interest rates, Brazilian real movements and equity markets. A hypothetical 10% U.S. dollar appreciation against the Brazilian real would reduce reported net assets by an estimated $465 million.
Most important facts for investors to verify
- Whether the elevated medical care ratio and lower favorable reserve development persist, and how they affect UnitedHealthcare profitability.
- Actual effects of 2014 Medicare Advantage rate changes, the insurance industry tax, exchange participation and planned market exits.
- OptumRx transition performance, including member retention, execution costs and realized operating margins.
- Resolution and financial exposure in the Nevada litigation, California regulatory proceeding and Medicare risk-adjustment audits.
- Availability of corporate liquidity versus cash held in regulated subsidiaries, and debt maturities, borrowing costs and covenant headroom.