UnitedHealth Group Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; filed August 5, 2010. UnitedHealth Group is a diversified health benefits and health services company serving more than 75 million people worldwide. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $23,264 | $21,655 | $46,457 | $43,659 |
| Operating earnings | $1,901 | $1,440 | $3,917 | $3,108 |
| Operating margin | 8.2% | 6.6% | 8.4% | 7.1% |
| Net earnings | $1,123 | $859 | $2,314 | $1,843 |
| Diluted EPS | $0.99 | $0.73 | $2.02 | $1.54 |
| Medical care ratio | 81.5% | 83.6% | 81.4% | 83.0% |
- Q2 revenue rose 7%, net earnings 31%, and diluted EPS 36% year over year. For the six months, revenue increased 6%, net earnings 26%, and diluted EPS 31%.
- Q2 net margin was 4.8% versus 4.0%; six-month net margin was 5.0% versus 4.2%. The effective tax rate increased to 37.0% from 34.0% in Q2 and from 35.1% for the first half of 2009.
- Operating cash flow for the first half was $1,928, up from $1,604. Investing activities used $818 and financing activities used $927. Cash increased $183 to $9,983.
- At June 30, cash and cash equivalents were $9,983; short- and long-term investments totaled $15,109. Total assets were $60,424 and shareholders’ equity was $24,829.
- Commercial paper and long-term debt had a carrying value of $10,712. The debt-to-total-capital ratio was 30.1%, versus 32.1% at year-end 2009; the company reported compliance with its covenant requiring a ratio below 50%. Its $2.5 billion revolving credit facility had no borrowings outstanding.
- First-half capital returns included $1,241 of share repurchases (39 million shares, average price about $32) and $174 of dividends. The Board authorized repurchases of up to 120 million shares; 85 million remained authorized at June 30. The company moved to quarterly dividends and paid $0.125 per share in June.
Material changes and segment performance
- Growth reflected stronger public- and senior-market health benefits, pharmacy benefit management, and health technology and services. Health Benefits membership reached 32.54 million, up 1% overall: public and senior membership rose 12%, while commercial membership declined 2%.
- Health Benefits operating earnings increased 44% in Q2 to $1,544, with a 7.1% margin versus 5.3%. OptumHealth Q2 earnings rose 13% to $161. Ingenix earnings were nearly flat at $60, while its margin declined to 11.3% from 14.0%. Prescription Solutions earnings fell 18% to $136, with margin declining to 3.2% from 4.7%.
- The lower medical care ratio supported results, but medical costs still rose 4% year over year in both the quarter and first half. Management attributed growth to public and senior business and medical cost inflation, partly offset by lower commercial membership and favorable prior-period cost development.
- Medical costs included $90 of favorable development related to prior fiscal years and $180 related to Q1 2010 in Q2; first-half costs included $580 of favorable development related to prior fiscal years, versus $200 in the first half of 2009. The filing attributes 2010 development primarily to more efficient claims processing and lower-than-expected health system utilization.
Outlook, risks, contingencies and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management said interest expense was expected to be lower in 2010 following $775 of fixed-rate debt tender offers. It incorporated anticipated Part D drug-discount effects into 2011 bids and expected mental health parity changes to affect behavioral health costs beginning in 2011, with pricing actions expected to mitigate some impact.
- Management said the effects of 2010 health reform legislation were not yet fully estimable, pending regulations and guidance. Potential effects include higher medical and administrative costs, premium rebates under minimum medical cost ratios, Medicare Advantage payment reductions, new assessments, limits on growth, and increased liability. The company noted potential growth opportunities in health services as well.
- Management cited recession-related employment losses as a drag on commercial membership and revenue; Medicaid membership was growing. A prolonged downturn could also pressure government funding and provider finances, potentially increasing medical cost trends.
- Legal matters include provider reimbursement litigation: in July 2010, an appellate court reversed dismissal of seven cases and remanded them for further proceedings. A proposed $350 settlement of AMA-related out-of-network reimbursement claims remained subject to final court approval, scheduled for September 2010. A California claims-processing administrative proceeding could result in fines or penalties.
- The company is subject to continuing government audits and investigations, including Medicare coding reviews that may cause payment adjustments. It also disclosed an aggregate $2.0 billion reinsurance receivable related to the 2005 sale of its Golden Rule life and annuity business.
- Health reform-related limits on future deductibility of certain compensation contributed to the higher 2010 effective tax rate. Other notable capital actions were the debt tender, increased quarterly dividend, and continued share repurchases.
- Investment portfolio risks included interest-rate and equity-price exposure. Management reported an average portfolio credit rating of AA and a 2.1-year weighted-average duration. Non-U.S. agency mortgage-backed holdings included $8 of commercial mortgage loans in default; subprime and Alt-A securities were $7 and $17, respectively.
Important facts for investors to verify
- Whether medical care ratio improvement and the unusually large favorable medical cost development are sustainable, and how estimates develop in later periods.
- Final implementation rules and actual financial effects of health reform, including medical cost ratio rebates, Medicare Advantage rate changes, and the industry assessment.
- Commercial membership trends, public and senior growth, and whether Prescription Solutions’ margin pressure persists.
- Outcomes and potential costs of the provider litigation, proposed $350 settlement, California administrative proceeding, and government audits.
- Cash generation and capital allocation after debt repayment, repurchases, and the new quarterly dividend; also monitor debt ratings, which had negative outlooks from S&P and Fitch.