Business context and reporting period
UnitedHealth Group Incorporated filed this unaudited Form 10-Q for the quarter ended September 30, 2012. The company operates through UnitedHealthcare, which provides health coverage and benefits services, and Optum, which provides health services, information and technology solutions.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Revenue | $27.30 billion | $25.28 billion | $81.85 billion | $75.95 billion |
| Operating earnings | $2.61 billion | $2.07 billion | $7.15 billion | $6.39 billion |
| Net earnings | $1.56 billion | $1.27 billion | $4.28 billion | $3.88 billion |
| Diluted EPS | $1.50 | $1.17 | $4.08 | $3.56 |
| Medical care ratio | 79.0% | 80.7% | 80.4% | 81.2% |
| Operating margin | 9.6% | 8.2% | 8.7% | 8.4% |
For the first nine months, operating cash flow was $5.47 billion, compared with $7.38 billion in 2011. Investing activities used $4.46 billion, including $2.55 billion for acquisitions; financing activities used $1.53 billion. Cash and cash equivalents declined $513 million from year-end 2011 to $8.92 billion.
At September 30, cash, cash equivalents and available-for-sale investments totaled $28.7 billion. Debt, including commercial paper, had a carrying value of $13.0 billion; commercial paper outstanding was $540 million. The debt-to-capital measure approximating the bank covenant ratio was 30.1%, and the company reported covenant compliance. Current assets were $20.33 billion and current liabilities were $24.85 billion. The company had a $3.0 billion revolving credit facility with no borrowings outstanding.
Material changes versus the prior comparable period
- Third-quarter revenue rose 8%, operating earnings 26%, net earnings 23% and diluted EPS 28% year over year. For the first nine months, revenue increased 8%, net earnings 10% and diluted EPS 15%.
- The lower medical care ratio supported earnings growth. Management attributed the improvement to medical cost management and favorable medical reserve development; favorable development related to prior years was $790 million for the first nine months, versus $650 million in 2011.
- UnitedHealthcare medical membership increased 2.15 million year over year to 36.55 million. Medicare Advantage membership increased 18% to 2.62 million; commercial risk-based membership declined 2%, while commercial fee-based membership grew 8%. Stand-alone Medicare Part D membership fell 12%.
- Optum’s nine-month operating earnings were approximately flat at $980 million versus $982 million. OptumRx revenue declined, primarily reflecting lower Medicare Part D enrollment; its nine-month operating earnings declined 21%.
- Nine-month operating cash flow fell $1.91 billion. Management cited the prior-year period’s early receipt of an October CMS payment and payment in 2012 of 2011 premium rebates, partly offset by higher net income.
- The company repurchased 48 million shares for $2.6 billion during the first nine months. The annual dividend rate was raised from $0.65 to $0.85 per share in June 2012.
Outlook, commentary, risks and unusual items
The filing gives qualitative, not quantified, 2013 expectations. Management anticipated continued competitive pressure on commercial risk-based membership and margins, and pressure on Medicare and Medicaid margins from government payment rates. It noted rising prescription drug costs, moderating utilization growth, and expected further emphasis on medical and administrative cost management. The filing does not provide a clear numerical earnings or revenue guidance range.
Health reform implementation, premium rebate requirements, state review of rate increases, Medicare Advantage payment reductions and possible 2013 sequestration cuts were identified as uncertainties. The company also discussed the 2014 health insurance industry fee, exchanges, expanded Medicaid coverage and market reforms. CMS risk-adjustment data validation audits may result in retrospective payment adjustments, but the company said potential losses could not be reasonably estimated.
In October 2012, after quarter-end, the company acquired approximately 60% of Brazil-based Amil and intended to acquire approximately 30% more in a tender offer in the first half of 2013, targeting 90% ownership. It issued $2.5 billion of notes in October, primarily to fund the acquisition. The transaction and related financing were not reflected in September 30 balances. The company also reported an August debt exchange intended to improve financial flexibility and reduce interest expense.
Contingencies include a California Department of Insurance proceeding in which the regulator sought a penalty of approximately $325 million; the company contested the claim and could not reasonably estimate a potential loss. Other out-of-network reimbursement litigation and ongoing governmental reviews were disclosed, with outcomes or losses not reasonably estimable in certain matters. No material changes to previously disclosed risk factors were reported. Management identified medical-cost estimates, premium rebates, goodwill and intangible valuations, investments, taxes and contingencies as key estimates. Disclosure controls were concluded effective as of September 30, 2012.
Important facts for investors to verify
- Whether favorable medical reserve development continues and how underlying utilization and unit-cost trends affect the medical care ratio.
- The effect of Medicare and Medicaid rate pressure, commercial competition and health reform implementation on 2013 margins and membership.
- Amil acquisition completion, total funding needs, integration risks and expected financial contribution; acquisition-related amounts are not included in the quarter-end balance sheet.
- Potential outcomes of the California regulatory proceeding, CMS audits and other litigation or investigations, for which some exposures remain unquantified.
- The sustainability of operating cash flow, particularly given the year-over-year decline and the timing of CMS receipts and premium rebate payments.
- Debt and liquidity after the October 2012 note issuance, including the effect of the acquisition and the October downgrade of Moody’s outlook to Negative.