UnitedHealth Group — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020. UnitedHealth Group operates UnitedHealthcare and Optum, with reportable segments UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance and position
- Revenue: $64.4 billion, up 7% year over year. Premium revenue was $50.6 billion (+7%); products revenue $8.4 billion (+4%); and services revenue $5.0 billion (+15%).
- Profit: Operating earnings were $5.0 billion (+3%), while net earnings attributable to UnitedHealth Group shareholders were $3.4 billion, down 2%. Diluted EPS was $3.52 versus $3.56, down 1%.
- Margins and costs: Operating margin was 7.8% versus 8.0%; net earnings margin was 5.2% versus 5.7%. Medical care ratio (medical costs divided by premium revenue) improved to 81.0% from 82.0%. Operating cost ratio increased to 15.5% from 14.1%; the effective tax rate rose to 24.0% from 19.7%.
- Cash flow: Operating cash flow was $2.9 billion, down from $3.2 billion, primarily due to working-capital changes. Cash and cash equivalents ended the quarter at $21.6 billion, versus $11.0 billion at year-end 2019. Management said $10.9 billion was available for general corporate use and that cash was intentionally elevated in response to market volatility.
- Debt and liquidity: Balance-sheet short-term borrowings and current maturities were $15.8 billion; long-term debt was $35.8 billion. The debt table reports $50.5 billion of short-term borrowings and long-term debt carrying value, and separately identifies about $1.1 billion of other financing obligations. The company had drawn $10.0 billion under revolving bank credit facilities and reported a covenant-defined debt-to-debt-plus-equity ratio of approximately 44%, below its 60% maximum.
- Capital returns: The company repurchased 6 million shares for $1.7 billion and paid $1.0 billion in dividends. Its quarterly dividend equated to an annual rate of $4.32 per share.
Material changes and segment results
- UnitedHealthcare revenue rose 4% to $51.1 billion, but operating earnings fell 2% to $2.9 billion. Domestic medical membership declined by 670,000 year over year, including a 545,000 decline in Medicaid; Medicare Advantage membership grew 8% to 5.6 million.
- Optum revenue increased 25% to $32.8 billion and operating earnings increased 12% to $2.1 billion. OptumHealth revenue rose 37%, OptumInsight 14%, and OptumRx 21%. OptumRx reported 339 million adjusted scripts, unchanged year over year.
- The medical care ratio improvement reflected, among other factors, the return of the Health Insurance Tax to 2020 and lower-than-expected prior-year medical costs. The company recorded $580 million of favorable prior-year medical cost development, primarily due to lower-than-expected health system utilization.
- Other significant year-over-year movements included higher operating costs (+18%), interest expense (+9%), and income tax provision (+25%). Comprehensive income attributable to shareholders fell to $1.6 billion from $3.9 billion, including $1.5 billion of foreign currency translation losses.
Outlook, commentary and risks
- COVID-19: Management said the pandemic’s ultimate effects were uncertain and difficult to predict. Deferred elective and routine care reduced utilization and affected Optum services, while later resumption of deferred care could increase medical costs. Possible additional effects include commercial membership losses from unemployment, premium collection delays, provider financial stress, changing demand, supply-chain disruption, and increased operating and cybersecurity risks from remote work.
- UnitedHealthcare expanded COVID-19 coverage, telemedicine and pharmacy benefits, extended some premium payment terms, and accelerated certain provider payments. Management said near-term costs and membership changes could be affected by deferred care, with potential future costs as care resumes.
- The 2020 Health Insurance Tax was approximately $3.0 billion for the company; management said its return affected comparability of revenues, costs, ratios, taxes and cash flow. Congress permanently repealed the tax effective January 1, 2021.
- Final 2021 Medicare Advantage industry base rates increased approximately 1.7%, which management said was below forward medical cost trend and continued to pressure the program. The filing provides no specific company earnings or EPS guidance.
- Risks include uncertainty in medical cost estimates and reserve development, regulatory changes and audits, competition, litigation and government investigations, investment and foreign currency volatility, credit access, cybersecurity and pandemic-related disruption. A DOJ False Claims Act case concerning risk-adjustment submissions remains unresolved; the company said it could not reasonably estimate the outcome.
- Management reported effective disclosure controls as of March 31, 2020 and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How COVID-19-related deferred care, subsequent utilization and membership changes affect medical costs, pricing and reserve development in later quarters.
- Whether the $580 million favorable prior-year reserve development and Q1 medical care ratio are representative of ongoing trends.
- Membership and profitability trends in Medicaid and commercial plans versus growth in Medicare Advantage and Optum.
- Liquidity, borrowing levels and refinancing needs, including the significant increase in short-term borrowing during Q1.
- Developments in the DOJ risk-adjustment litigation, CMS audits and other regulatory matters, and any resulting financial exposure.