Business context and reporting period
UnitedHealth Group’s Form 10-K covers the fiscal year ended December 31, 2011; it is an annual filing, not a standalone fourth-quarter report. The company operates UnitedHealthcare health-benefits businesses and Optum health-services businesses, across four reportable segments: UnitedHealthcare, OptumHealth, OptumInsight and OptumRx.
Quarterly figures below identify the fourth quarter where available. Unless noted otherwise, financial amounts are in U.S. dollars.
Financial performance and condition
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $101.862 billion | $94.155 billion | +8% |
| Earnings from operations | $8.464 billion | $7.864 billion | +8% |
| Net earnings | $5.142 billion | $4.634 billion | +11% |
| Diluted EPS | $4.73 | $4.10 | +15% |
| Operating cash flow | $6.968 billion | $6.273 billion | +11% |
| Medical care ratio | 80.8% | 80.6% | +0.2 percentage points |
| Operating margin | 8.3% | 8.4% | -0.1 percentage points |
| Net margin | 5.0% | 4.9% | +0.1 percentage points |
Medical costs were $74.332 billion, up 8%; operating costs were $15.557 billion, up 9%. The effective tax rate declined to 35.4% from 37.2%, in part due to favorable resolution of historical tax matters. Return on equity was 18.9%, versus 18.7%.
At year-end, cash and investments were $28.172 billion, total assets $67.889 billion and shareholders’ equity $28.292 billion. Commercial paper and long-term debt totaled $11.638 billion, versus $11.142 billion; the debt-to-debt-plus-equity ratio improved to 29.1% from 30.1%. The company had no commercial paper outstanding and no borrowings under its renewed $3 billion revolving credit facility, which matures in December 2016.
Fourth-quarter 2011 revenue was $25.916 billion, operating earnings $2.074 billion, net earnings $1.258 billion and diluted EPS $1.17. Fourth-quarter 2010 comparatives were $24.030 billion, $1.802 billion, $1.043 billion and $0.94, respectively.
Material changes versus the prior comparable period
- UnitedHealthcare revenue increased 7% to $95.336 billion; medical enrollment grew by 1.6 million to 34.57 million. Growth reflected membership gains and commercial premium-rate increases.
- Optum revenue increased 21% to $28.653 billion, including acquisition and customer growth. Optum operating earnings rose to $1.261 billion from $1.124 billion, but its operating margin fell to 4.4% from 4.8%.
- OptumHealth revenue rose 47% to $6.704 billion, while operating earnings declined 17% to $423 million and margin fell to 6.3% from 11.2%, reflecting business mix and internal realignments.
- OptumInsight operating earnings increased to $381 million from $84 million; 2010 included a $172 million goodwill impairment and disposition-related charges. A clinical-trial-services business was divested in 2011.
- OptumRx revenue rose 15% to $19.278 billion, while operating earnings declined 14% to $457 million, pressured by lower-margin business mix and investment in bringing pharmacy-benefit operations in-house.
- Prior-period medical-cost estimates produced $720 million of favorable development in 2011, compared with $800 million in 2010. This reduced reported 2011 medical costs and is relevant to assessing underlying performance.
- The company repurchased 65 million shares for approximately $3.0 billion and paid $651 million in dividends. The annual dividend rate was raised to $0.65 per share.
Outlook, commentary, risks and unusual items
- Management expected increasing unit costs to remain the main driver of medical-cost trends in 2012, with utilization and prescription-drug costs also expected to rise. It planned to pursue cost management, care coordination and provider incentive arrangements.
- The company anticipated lower year-over-year operating cash flow in 2012, including payment in the third quarter of 2011 premium-rebate obligations. It also expected higher acquisition spending in 2012 than in 2011.
- Medicare Advantage benchmark reductions were expected to pressure reimbursement. The filing also describes approximately 2% Medicare spending sequestration cuts scheduled to begin in 2013, and the 2014 health-insurance industry assessment. No specific full-year 2012 revenue or EPS guidance is provided in the filing text.
- OptumRx expected to absorb approximately $115 million of $150 million in consolidated 2012 costs related to bringing commercial pharmacy-benefit operations in-house; approximately 12 million commercial members were expected to transition in 2013. Management cautioned that execution problems could affect retention and results.
- UnitedHealthcare entered January 2012 with an estimated 625,000 fewer stand-alone Part D members, including about 470,000 low-income members reassigned through the CMS bid process. In February 2012 it added 117,000 Medicare Advantage members through the XLHealth acquisition.
- Material regulatory uncertainties include implementation and possible court or legislative changes to the Affordable Care Act, premium-rate review, medical-loss-ratio rebates, Medicare and Medicaid funding, and CMS risk-adjustment audits. CMS had audited the company’s Medicare Advantage and Part D business in late 2011; it was responding to preliminary findings.
- In a California claims-processing proceeding, the regulator had reduced alleged violations to 919,574 and indicated it was seeking approximately $325 million in penalties; the company disputed the claims and could not estimate a loss range. A potential Penn Treaty guaranty-fund assessment was estimated at $250 million to $350 million, but would be accrued if and when the relevant court decision is made.
- The filing reports $27.695 billion of contractual obligations, including $20.097 billion of debt obligations with interest and maturities. The company stated it had no material off-balance-sheet arrangements.
Important facts for investors to verify
- Review the sustainability of earnings growth given the slight rise in the medical care ratio and the $720 million of favorable prior-year medical-cost development.
- Track premium rebates, rate approvals and medical-cost trends, particularly against the filing’s expectation of higher unit costs, utilization and drug spending.
- Assess the outcome and financial exposure from CMS audits and the California claims-processing matter; also monitor whether Penn Treaty results in an assessment.
- Verify execution and costs of the OptumRx transition, including the expected 2012 expense and 2013 member migration, and monitor Part D enrollment following the CMS reassignment losses.
- Monitor Medicare Advantage payment reductions, sequestration, and the expected 2014 industry assessment for effects on margins, cash flow and capital needs.
- Confirm that liquidity, regulated-subsidiary dividend capacity and debt maturities remain manageable. The filing reports compliance with debt covenants and regulated-subsidiary capital above state minimums.