UnitedHealth Group Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are U.S. dollars; financial figures are in billions unless noted. The company operates UnitedHealthcare and Optum, with four reportable segments: UnitedHealthcare, Optum Health, Optum Insight and Optum Rx.
Financial results and key metrics
- Q3 revenue: $80.9 billion, up 12% year over year. Premiums were $64.5 billion, products $9.2 billion and services $6.7 billion.
- Q3 earnings: Operating earnings were $7.5 billion, up 31%; net earnings attributable to UnitedHealth Group shareholders were $5.3 billion, up 29%. Diluted EPS was $5.55, up 30%.
- Q3 margins: Medical care ratio (medical costs divided by premium revenue) was 81.6%, down 1.4 percentage points. Operating margin was 9.2%, up 1.3 points; shareholder net earnings margin was 6.5%, up 0.9 points.
- First nine months: Revenue was $241.4 billion, up 13%; operating earnings were $21.5 billion, up 17%; shareholder net earnings were $15.4 billion, up 16%; diluted EPS was $16.15, up 17%. MCR was 81.7%, operating margin 8.9%, and return on equity 28.1%.
- Cash flow: Operating cash flow for the nine months was $30.7 billion, versus $19.1 billion a year earlier. Cash and cash equivalents were $38.8 billion at September 30, versus $21.4 billion at year-end 2021. The company said $3.7 billion of cash was available for general corporate use.
- Debt and liquidity: Current borrowings and maturities were $3.2 billion and long-term debt was $45.4 billion at September 30. The credit-facility debt-to-debt-plus-equity ratio was approximately 35%, below its 60% covenant limit. Current liabilities totaled $100.9 billion; total assets were $243.1 billion.
- Capital returns and investment: The company repurchased $6.0 billion of shares and paid $4.5 billion in dividends in the first nine months. The annualized dividend rate was raised to $6.60 per share in June. Cash paid for acquisitions, net of cash acquired, was $7.2 billion.
Material changes and operating drivers
- Revenue growth reflected more people served through Medicare Advantage and Medicaid, pricing trends and growth across Optum. UnitedHealthcare served 910,000 more medical customers year over year, including growth in Medicare Advantage and Medicaid.
- Optum revenue rose 17% in Q3; segment revenue growth was led by Optum Health, up 34%, while Optum Insight rose 18% and Optum Rx rose 8%. UnitedHealthcare revenue grew 11%.
- Q3 MCR declined year over year, which management attributed to COVID-19 effects, partly offset by business mix. Management noted that 2021 had benefited from lower-than-expected prior-year medical costs; that favorable reserve development was lower in 2022.
- Operating cost ratio improved to 14.4% in Q3 from 14.8%, primarily reflecting productivity gains, partly offset by business mix and investment. Management also cited COVID-related revenue effects in the nine-month comparison.
- Operating cash flow benefited from a $9.8 billion October CMS premium payment received in September and higher net earnings. The company also cited increased customer funds administered, primarily due to Medicare Part D timing.
- Available-for-sale debt securities had $4.1 billion of gross unrealized losses at quarter-end, versus $274 million at year-end 2021. The filing attributed these losses principally to interest-rate increases, said it had no intent to sell securities in unrealized-loss positions, and assessed the losses as temporary.
Outlook, risks and unusual items
- The filing provides no clear numerical full-year earnings or revenue guidance. Management stated that capital resources were sufficient for expected short- and long-term liquidity needs.
- Management said care levels during the first nine months were near normal baseline overall, but future care patterns and acuity could change, including with new COVID-19 variants or catch-up care.
- Key disclosed risks include estimating and managing medical costs, changes in health-care laws and government-program payments, Medicare risk-adjustment audits and quality scores, cybersecurity and privacy incidents, litigation and regulatory reviews, competition, credit-rating changes, and investment performance. The company reported no material changes to the risk factors in its 2021 Form 10-K.
- The company is subject to a DOJ-pursued False Claims Act matter alleging improper Medicare risk-adjustment submissions; it said it could not reasonably estimate the outcome. CMS risk-adjustment data validation audits may also result in retrospective payment adjustments. The filing notes that losses in some legal and regulatory matters cannot be reasonably estimated.
- Business combinations completed in the first nine months totaled $8.2 billion in consideration. The Change Healthcare acquisition closed October 3, 2022, after quarter-end; the filing estimated approximately $14 billion of anticipated capital for pending transactions, including Change Healthcare and LHC Group, before specified offsets. In October, the company also issued $9.0 billion of senior unsecured notes.
- Medical costs payable were $29.1 billion at September 30, including $20.0 billion of incurred-but-not-reported claims. The company identifies medical costs payable and goodwill as significant estimates; acquired goodwill was $8.4 billion in the first nine months, with most not deductible for tax purposes.
Important facts for investors to verify
- How medical utilization, acuity, COVID-related care and reserve development affect MCR in subsequent quarters.
- Whether operating cash flow remains strong after the timing benefit from the September CMS premium payment and Medicare Part D customer funds.
- The financing, integration and expected returns of Change Healthcare and LHC Group, including the impact of the October $9.0 billion debt issuance.
- Developments in the DOJ Medicare risk-adjustment litigation, CMS audits and other government reviews, including any financial or operational consequences.
- Whether acquisition-related goodwill and medical-cost estimates change materially as purchase-price allocations and claims experience develop.