UnitedHealth Group Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. The company operates health benefits through UnitedHealthcare and health services through Optum.
Financial performance
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $122.5 billion | $110.6 billion | +11% |
| Earnings from operations | $9.6 billion | $9.3 billion | +4% |
| Net earnings attributable to common shareholders | $5.6 billion | $5.5 billion | +2% |
| Diluted EPS | $5.50 | $5.28 | +4% |
| Medical care ratio | 81.5% | 80.4% | +1.1 percentage points |
| Operating margin | 7.9% | 8.4% | -0.5 percentage points |
| Operating cash flow | $7.0 billion | $7.2 billion | -$0.2 billion |
Medical costs rose 11% to $89.3 billion; the higher medical care ratio reflected Medicare Advantage funding reductions, business mix and lower favorable prior-year reserve development ($680 million versus $860 million in 2012). The effective tax rate increased to 36.4% from 35.9%.
Fourth quarter: Revenue was $31.1 billion, operating earnings $2.45 billion, net earnings attributable to common shareholders $1.43 billion and diluted EPS $1.41. In Q4 2012, the corresponding figures were $28.8 billion, $2.10 billion, $1.24 billion and $1.20.
Liquidity, debt and capital
- At year-end, cash and cash equivalents were $7.3 billion; cash and investments totaled approximately $28.8 billion. Only $1.0 billion of cash was available for general corporate use, reflecting restrictions on regulated subsidiaries.
- Commercial paper and long-term debt totaled $16.9 billion, versus $16.8 billion in 2012. Debt-to-debt-plus-equity was 34.4%, and the company reported compliance with its 50% credit-facility covenant.
- Operating cash flow was $7.0 billion; investing activities used $3.1 billion and financing activities used $4.9 billion. The company repurchased $3.2 billion of shares and paid $1.1 billion in dividends.
- The board raised the annual dividend rate to $1.12 per share in June 2013. A June authorization permits repurchases of up to 110 million shares; 83 million remained authorized at year-end.
Material changes and business developments
- Optum revenue grew 26% and operating earnings 61%; UnitedHealthcare revenue grew 10%, but its operating earnings declined 6%.
- OptumRx revenue increased 31%, supported by bringing pharmacy services for 12 million new or migrating UnitedHealthcare members onto its platform. UnitedHealthcare medical enrollment increased by 4.5 million, including 2.9 million TRICARE beneficiaries.
- Growth also reflected a full year of the 2012 Amil acquisition and expansion in public and senior markets. UnitedHealth Group acquired Amil’s remaining publicly traded shares in 2013 and reported 90% ownership.
- A large commercial customer conversion from risk-based to fee-based coverage affected 1.1 million members and reduced 2013 revenue by $2.3 billion, with negligible impact on operating earnings and cash flow.
- Effective January 1, 2014, certain corporate technology and business-processing activities moved to OptumInsight; future filings were to restate historical segment results.
Outlook, risks and contingencies
- Management expected 2014 commercial medical cost trend of approximately 6.0%, plus or minus 0.5 percentage points, versus approximately 5% in 2013. It anticipated ongoing pricing pressure and Medicare Advantage margin pressure.
- Management estimated Medicare Advantage funding reductions and related industry-tax effects would reduce 2014 after-tax earnings by approximately $0.9 billion before mitigation. The company planned changes to benefits, provider networks, costs and market participation; it exited plans and markets serving about 150,000 2013 Medicare Advantage members.
- The 2014 non-deductible health-insurer industry fee was estimated at $1.3–$1.4 billion for UnitedHealth Group, with an estimated approximately 500-basis-point increase in the effective tax rate. The company expected to reflect reform costs in pricing, adding an estimated $1.4–$1.6 billion in premiums.
- Key risks include medical-cost estimation and utilization, government reimbursement and contract renewals, implementation of health reform and exchanges, risk-adjustment audits, privacy and cybersecurity, regulation, provider relationships, competition, investment and currency fluctuations, and acquisition integration.
- Contingencies include a California claims-processing regulatory matter for which the company could not estimate a loss range, and Nevada litigation involving a jury award reduced by the trial court to $366 million; the company appealed and reported related additional suits. It also disclosed ongoing government audits and investigations, including Medicare risk-adjustment reviews, whose potential losses could not be reasonably estimated.
- The company reported no material off-balance-sheet arrangements. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether medical costs and reserves develop in line with estimates: management said a hypothetical 1% difference in year-end medical-cost-payable estimates would change 2013 net earnings by about $65 million.
- Actual 2014 Medicare Advantage, insurer-fee and health-reform impacts versus management estimates, including premium-rate approvals and member retention.
- Progress in Optum growth and margins, and whether UnitedHealthcare can offset government reimbursement pressure and its higher medical care ratio.
- Outcomes of the Nevada appeal, California regulatory proceeding and Medicare risk-adjustment audits; the filing does not provide clear, reasonably estimable loss ranges for these matters.
- Accessible liquidity after accounting for regulatory capital and dividend restrictions at subsidiaries, and the company’s capital-return plans relative to debt and cash flow.