UnitedHealth Group Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are with the same 2013 periods. UnitedHealth Group operates UnitedHealthcare, which provides health coverage and benefits, and Optum, which provides health services and technology. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $32.759 billion, up 7% | $97.041 billion, up 6% |
| Operating earnings | $2.903 billion, up 10% | $7.509 billion, up 5% |
| Net earnings attributable to common shareholders | $1.602 billion, up 2% | $4.109 billion, down 2% |
| Diluted EPS | $1.63, up 7% | $4.15, up 1% |
| Medical care ratio | 79.7%, versus 80.6% | 81.3%, versus 81.6% |
| Operating cost ratio | 16.6%, versus 15.9% | 16.3%, versus 15.7% |
| Operating margin | 8.9%, versus 8.6% | 7.7%, versus 7.8% |
| Net earnings margin | 4.9%, versus 5.1% | 4.2%, versus 4.6% |
| Effective tax rate | 41.8%, versus 36.0% | 41.7%, versus 36.0% |
For the nine months, cash from operations was $5.622 billion, down from $5.923 billion. Investing activities used $1.858 billion and financing activities used $3.810 billion. Cash and cash equivalents were $7.233 billion at quarter-end, including about $1.0 billion available for general corporate use; cash, cash equivalents and available-for-sale investments totaled approximately $28.0 billion.
At September 30, current assets were $22.963 billion and current liabilities were $31.130 billion. Commercial paper and current debt maturities were $2.925 billion; long-term debt was $14.592 billion. The company reported a 34.9% debt-to-debt-plus-equity ratio and compliance with debt covenants. Its $4.0 billion revolving credit facilities had no amounts drawn.
Material changes and business drivers
- UnitedHealthcare revenue rose 6% in Q3 and 5% year to date. Community & State revenue grew 34% in Q3, while Employer & Individual revenue fell 6%. Medical enrollment declined 1% overall: commercial enrollment fell 5%, while public and senior enrollment increased 12%, led by Medicaid growth.
- Optum revenue increased 21% in Q3 and 26% year to date. OptumRx revenue grew 27% in Q3 and 37% year to date, with growth from public and senior markets, external clients, pharmacy program insourcing and specialty drugs. Optum operating earnings rose 27% in Q3 and 24% year to date.
- Q3 consolidated earnings per share included an estimated negative year-over-year impact of $0.25 from ACA fees, Medicare rate reductions and other ACA effects. The ACA fees improved the reported medical care ratio by about 110 basis points, increased the operating cost ratio by about 120 basis points, and increased the effective tax rate by about 5 percentage points.
- Year-to-date favorable medical-cost reserve development was $380 million, versus $580 million in 2013; Q3 development was $120 million, versus $180 million. The 2014 favorable development reflected multiple individually immaterial factors.
- In June, the company increased its annualized dividend rate to $1.50 per share. It repurchased 38 million shares for $3.0 billion in the first nine months, at an average $79.35 per share.
Outlook, commentary and risks
- The filing does not provide a clear consolidated full-year earnings or revenue guidance figure. Management expected Medicare Advantage funding reductions to continue affecting results in the balance of 2014 and 2015. It estimated that 2014 industry-wide Medicare funding reductions and the Industry Tax, before company mitigation, would reduce full-year net earnings by more than $1.3 billion versus 2013.
- The company paid $1.3 billion in 2014 Industry Tax in September and estimated an approximately 500-basis-point increase in its 2014 effective tax rate from the nondeductible tax. It expected about $0.5 billion of 2014 Reinsurance Program expense, payable in 2015, and approximately $1.5 billion of additional annual premiums to reflect ACA fees and related tax impacts.
- Management cited competitive pricing, declining commercial risk-based membership, government reimbursement pressure, rising provider unit costs, mandated benefits and out-of-pocket limits, and growth in expensive specialty drugs—including hepatitis C therapies. It also noted that lower utilization had moderated medical-cost trends.
- For Medicare Advantage, management cited further 2015 rate reductions and changes to quality bonus eligibility. It expected more than 37% of members to be in plans rated at least four stars for the 2015 payment year, and described actions including cost management, benefit and network changes, and selective market exits.
- Contingencies include a California insurance regulator’s approximately $174 million fine, which the company challenged in court, and a Nevada endoscopy-center case with a reduced $366 million award under appeal, plus related lawsuits. The company said it could not reasonably estimate a loss range for these matters. Government audits and reviews, including Medicare risk-adjustment data validation, may also result in adjustments; potential losses could not be reasonably estimated.
- Other risks include regulatory changes and ACA implementation, Medicare and Medicaid payment levels, medical-cost estimation, litigation and investigations, cybersecurity and privacy, foreign exchange, investment valuations, and access to capital. The company reported no material change to the risk factors in its 2013 Form 10-K and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Medicare Advantage rate reductions, ACA fees and related pricing changes affect 2014–2015 earnings as management expected, and the actual net effect after mitigation.
- Whether commercial enrollment and competitive pricing stabilize, and whether Medicaid, Medicare and Optum growth can offset declines or margin pressure elsewhere.
- How medical utilization, specialty-drug costs and reserve development evolve; the reported medical care ratio benefited from ACA fee treatment and differs from underlying claims experience.
- The timing and possible financial outcomes of the California fine, Nevada litigation and government audits, for which loss ranges were not estimable in the filing.
- Cash generation and corporate liquidity: operating cash flow declined year over year, and only about $1.0 billion of reported cash was identified as available for general corporate use.