UnitedHealth Group Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report; quarterly data are summarized below. UnitedHealth Group operates health benefits businesses through UnitedHealthcare and health services businesses through Optum.
Financial results and position
- Revenue: $157.1 billion, up 20% from $130.5 billion in 2014. Growth reflected the Catamaran acquisition and expansion across the businesses.
- Profit: Operating earnings rose 7% to $11.0 billion; net earnings attributable to common stockholders increased 3% to $5.8 billion. Diluted EPS was $6.01, up 5%.
- Margins and medical costs: Operating margin declined to 7.0% from 7.9%; medical care ratio increased to 81.7% from 81.2%. UnitedHealthcare operating earnings fell 3%, while Optum operating earnings grew 30%.
- Cash flow: Operating cash flow was $9.7 billion, up 21%. Investing activities used $18.4 billion, primarily reflecting $16.2 billion of net cash paid for acquisitions. Financing activities provided $12.2 billion, including debt issuance.
- Liquidity and debt: Year-end cash and cash equivalents were $10.9 billion and investments were approximately $20.8 billion; only $286 million of cash was available for general corporate use. Commercial paper and long-term debt totaled $32.1 billion, up from $17.4 billion. The company reported a 47% debt-to-debt-plus-equity ratio under its credit facilities, versus a 55% limit.
- Capital returns: 2015 dividends paid were $1.8 billion; share repurchases were $1.2 billion. The annualized dividend rate increased to $2.00 per share in June 2015.
- Fourth quarter: Revenue was $43.6 billion, operating earnings $2.5 billion, net earnings attributable to common stockholders $1.2 billion and diluted EPS $1.26. In Q4 2014, the corresponding figures were $33.4 billion, $2.8 billion, $1.5 billion and $1.55.
Material changes versus the prior period
- Catamaran was acquired on July 23, 2015 for $14.3 billion in cash, funded primarily with new debt. It contributed $12.4 billion of revenue after acquisition and had an immaterial impact on net earnings for that period. The acquisition materially increased OptumRx revenue and consolidated debt.
- UnitedHealthcare revenue rose 10%, while its operating earnings declined 3%. The company attributed the earnings pressure chiefly to $815 million of combined individual exchange-related losses and premium deficiency reserves, partly offset by growth, medical-cost management and productivity.
- Optum revenue rose 42% and operating earnings rose 30%, with Catamaran contributing to OptumRx growth. OptumInsight’s operating margin improved; OptumHealth’s declined amid investments in growth.
- The effective tax rate rose to 42.6% from 41.8%, primarily reflecting the nondeductible health insurance industry tax. Foreign currency translation losses also increased, contributing to a $1.9 billion other comprehensive loss in 2015.
Outlook, commentary and risks
- Management expected continued provider unit-cost pressure and a modest increase in utilization in 2016, with medical management intended to mitigate cost growth. It also highlighted rising specialty-drug costs.
- Management reported that 2016 Medicare Advantage funding was expected to increase about 1.25% industry-wide, below a typical 3% forward medical-cost trend. It expected about 56% of its Medicare Advantage members to be in plans rated four stars or higher for payment year 2016, and at least 63% for 2017.
- The company expanded individual public-exchange offerings to 34 states for 2016 but cited weaker-than-expected participation, deteriorating claims experience and losses. It was not pursuing membership growth, recorded a reserve for estimated 2016 losses, and planned to decide by mid-2016 on participation in 2017.
- The health insurance industry tax was expected to cost UnitedHealth Group $1.9 billion in 2016. A federal budget provision suspended collection for 2017; the tax was scheduled to resume in 2018.
- Key risks include medical-cost estimation and utilization, government program funding and audits, changing regulation, exchange-product losses, privacy and cybersecurity incidents, competitive pressures, acquisition integration, investment and foreign-exchange exposure, and restrictions on dividends from regulated subsidiaries. Goodwill and other intangible assets totaled $52.8 billion at year-end; no impairment was recorded in 2015.
- Contingencies: The company disputed a California regulatory fine of approximately $174 million; a court invalidated certain regulations underlying the decision, and the company could not estimate a loss range. Government reviews include Medicare risk-adjustment coding and chart-review processes; potential losses were not estimable. Possible guaranty-fund assessments tied to Penn Treaty were also uncertain.
- The financial-statement auditor gave an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective. The assessment excluded Catamaran, which represented 16% of consolidated assets and 8% of 2015 revenue.
Important facts for investors to verify
- Whether exchange-related losses and the 2016 premium deficiency reserve develop as estimated, and whether the company continues offering exchange products in 2017.
- How medical-cost trends, reserve development and Medicare Advantage funding and star ratings affect margins and earnings.
- Catamaran integration, realized synergies, purchase-accounting adjustments and the effect of higher debt and interest expense.
- Cash available for parent-company needs, regulated-subsidiary dividend capacity, debt maturities and credit-rating outlooks.
- Developments in Medicare risk-adjustment reviews, the California fine dispute and potential guaranty-fund assessments.