UnitedHealth Group Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures below are unaudited. Amounts are in U.S. dollars.
Business context
UnitedHealth Group operates two aligned platforms: UnitedHealthcare, its health benefits business, and Optum, its health services business. Its four reportable segments are UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. The company’s revenue comes mainly from health premiums, pharmacy products and health services.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $201.2 billion | $184.8 billion | +9% |
| Operating earnings | $15.2 billion | $12.9 billion | +18% |
| Net earnings attributable to common shareholders | $10.6 billion | $7.0 billion | +50% |
| Diluted EPS | $10.72 | $7.25 | +48% |
| Operating margin | 7.6% | 7.0% | +0.6 percentage points |
| Net earnings margin | 5.2% | 3.8% | +1.4 percentage points |
| Medical care ratio (medical costs / premiums) | 82.1% | 81.2% | +0.9 percentage points |
| Cash flows from operating activities | $13.6 billion | $9.8 billion | +39% |
Premium revenue was $158.5 billion, product revenue $26.4 billion and services revenue $15.3 billion. Operating costs totaled $186.0 billion, including $130.0 billion of medical costs. The effective tax rate fell to 22.8% from 40.4%; the 2017 rate and earnings benefited substantially from Tax Reform.
Fourth-quarter results
For the quarter ended December 31, 2017, revenue was $52.1 billion versus $47.5 billion in the prior-year quarter; operating earnings were $4.0 billion versus $3.2 billion; net earnings attributable to common shareholders were $3.6 billion versus $1.7 billion; and diluted EPS was $3.65 versus $1.74.
Segments and notable changes
- UnitedHealthcare revenue rose 10% to $163.3 billion and operating earnings increased 16% to $8.5 billion. Medicare Advantage membership grew 22% to 4.43 million and Medicaid membership grew 14% to 6.71 million.
- Optum revenue rose 9% to $91.2 billion, before consolidation eliminations, and operating earnings increased 19% to $6.7 billion. OptumHealth revenue rose 22%, OptumInsight 10% and OptumRx 5%.
- UnitedHealthcare Employer & Individual revenue declined 2% to $52.1 billion; individual commercial risk membership fell 64%, primarily reflecting reduced participation in ACA-compliant individual products.
- Consolidated revenue growth reflected increased membership and Optum growth, partly offset by the retreat from ACA individual products and the Health Insurance Industry Tax moratorium. Medical costs rose 11%, faster than revenue; the medical care ratio increased, partly due to the moratorium, while medical management and reduced individual ACA business provided offsets.
Cash, debt and liquidity
- Cash and cash equivalents were $12.0 billion at year-end; reported cash and investments were $43.8 billion. The filing states approximately $0.8 billion of cash and cash equivalents was available for general corporate use.
- Total commercial paper and long-term debt was $31.7 billion, compared with $33.0 billion a year earlier. Total equity was $49.8 billion, up from $38.2 billion.
- Operating cash flow was $13.6 billion. Investing activities used $8.6 billion and financing activities used $3.4 billion. The company paid $2.8 billion in dividends, repurchased $1.5 billion of shares and spent $2.0 billion on property, equipment and capitalized software.
- The defined debt-to-debt-plus-shareholders’ equity ratio was approximately 37%, below the 55% covenant limit. No amounts were drawn on revolving credit facilities at year-end.
- Quarterly dividends were increased in June 2017 to an annual rate of $3.00 per share. The Board retained discretion over future dividends.
Outlook, unusual items and risks
- Tax Reform: The December 2017 law reduced the U.S. corporate tax rate. Revaluation of deferred tax liabilities increased 2017 earnings by approximately $1.2 billion, or $1.22 per diluted share. Management expected an effective tax rate of approximately 24% in 2018.
- Health Insurance Industry Tax: The 2017 collection moratorium benefited the year’s results. The tax was expected to resume in 2018; the company estimated its share at approximately $2.8 billion. A further one-year moratorium was scheduled for 2019.
- Medicare Advantage: Final 2018 industry base rates increased approximately 0.45%, below the company’s cited 3% forward medical cost trend. Management identified continued funding pressure and said it would use cost management, network and benefit adjustments, and local-market decisions to respond. It expected at least 85% of Medicare Advantage members to be in plans rated four stars or higher for 2018 payment, versus approximately 80% for 2017 payment.
- Acquisitions: Agreements signed in December 2017 to acquire two health care companies for approximately $7.7 billion were not included in year-end contractual obligations. One closed in January 2018; the other was expected to close later in 2018 subject to regulatory approval and customary conditions.
- Claims and estimates: Medical costs payable were $17.9 billion, including $12.3 billion of incurred-but-not-reported claims. Prior-year reserve development reduced 2017 medical costs by $690 million, primarily reflecting lower-than-expected utilization. The filing notes that modest changes in reserve assumptions could materially affect earnings.
- Legal and regulatory exposure: The company faces extensive federal, state and international regulation, government audits and litigation. The DOJ pursued claims in a whistleblower matter alleging improper Medicare Advantage risk-adjustment submissions and False Claims Act violations; another related matter remained pending, and the company said it could not reasonably estimate its outcome.
- Other principal risks: Medical-cost forecasting and pricing, government program funding and audits, privacy and cybersecurity incidents, pharmacy benefit regulation, competition, provider relationships, acquisitions, investment and currency volatility, and limits on dividends from regulated subsidiaries. The filing provided no specific consolidated earnings or revenue guidance.
Important facts for investors to verify
- How much of the 2017 earnings and EPS increase is attributable to the one-time $1.2 billion tax remeasurement versus recurring operating performance.
- Whether 2018 Medicare Advantage reimbursement and the estimated $2.8 billion industry-tax burden can be offset through pricing, benefits, provider rates and operating efficiencies.
- Medical-cost trends, claim reserve development and the adequacy of the $17.9 billion medical costs payable estimate.
- Final closing terms, regulatory approvals, financing and integration performance for the approximately $7.7 billion of announced acquisitions.
- Developments and potential financial exposure in Medicare risk-adjustment audits, the pending DOJ matter and other material legal or regulatory proceedings.
- Availability of parent-company liquidity: regulated subsidiaries paid $3.7 billion in dividends in 2017, subject to statutory capital and regulatory restrictions.