UnitedHealth Group Inc. — 2009 Form 10-K
Business context and reporting period: The filing covers the fiscal year ended December 31, 2009, with fourth-quarter results also disclosed. UnitedHealth Group is a diversified health benefits and health services company serving more than 70 million people. Its four reporting segments are Health Benefits, OptumHealth, Ingenix and Prescription Solutions. All amounts below are U.S. dollars.
Key financial results
| Metric | FY 2009 | FY 2008 | Change |
|---|---|---|---|
| Revenue | $87.138 billion | $81.186 billion | +7% |
| Earnings from operations | $6.359 billion | $5.263 billion | +21% |
| Operating margin | 7.3% | 6.5% | +0.8 percentage points |
| Net earnings | $3.822 billion | $2.977 billion | +28% |
| Diluted EPS | $3.24 | $2.40 | +35% |
| Cash from operating activities | $5.625 billion | $4.238 billion | +33% |
Premiums were $79.315 billion, services revenue $5.306 billion, product revenue $1.925 billion and investment and other income $592 million. Medical costs were $65.289 billion; the medical care ratio was 82.3%, up from 82.0%. The operating cost ratio improved to 14.6% from 16.1%.
Fourth quarter: Revenue was $21.784 billion, operating earnings $1.575 billion, net earnings $944 million and diluted EPS $0.81. In fourth-quarter 2008, the respective figures were $20.454 billion, $1.279 billion, $726 million and $0.60.
Balance sheet and liquidity: At year-end, cash and cash equivalents were $9.8 billion and cash and investments were approximately $24.4 billion. Total debt was $11.173 billion, down from $12.794 billion; the debt-to-total-capital ratio fell to 32.1% from 38.1%. Shareholders’ equity was $23.606 billion. The company had no commercial paper outstanding and no borrowings under its $2.5 billion revolving credit facility. Operating cash flow exceeded reported net earnings.
Material changes and operating drivers
- Growth was led by public and senior markets, premium rate increases, and the full-year contribution from 2008 acquisitions. Total Health Benefits membership declined 3% to 31.995 million: commercial membership fell 7%, while public and senior membership grew 13%.
- Health Benefits revenue rose 7% to $81.341 billion, but segment operating earnings fell 6% to $4.788 billion and margin declined to 5.9% from 6.7%. UnitedHealthcare’s medical care ratio increased to 84.0% from 83.5%.
- Prescription Solutions revenue increased 15% to $14.452 billion and operating earnings rose 90% to $689 million, supported by prescription volume, mail-service fulfillment and a favorable generic-drug mix.
- OptumHealth revenue increased 6% to $5.528 billion, while operating earnings declined 11% to $636 million; management cited commercial membership declines, contract start-up costs and lower investment income.
- Ingenix revenue increased 17% to $1.823 billion and operating earnings rose 7% to $246 million. Investment in new services, international expansion and privacy/security costs weighed on margin.
- Net earnings rebounded from 2008, when operating costs included $882 million for historical stock-option litigation and related legal costs, $350 million for out-of-network reimbursement litigation, $50 million for another legal matter and $46 million in severance and other items. The 2008 total also benefited from $185 million in asset-sale proceeds recorded as a reduction in operating costs.
Cash flow, capital allocation and outlook
Operating cash flow improved from 2008, partly because 2008 included a $573 million after-tax stock-option settlement payment, and because of changes in medical costs payable and Medicare Part D balances. The company repurchased 74.3 million shares for $1.8 billion in 2009 and paid $36 million in dividends. In February 2010, the board authorized repurchases of up to 120 million shares; the company also completed tenders for $775 million of notes using cash on hand.
Management anticipated lower operating cash flow in 2010 than in 2009, citing expected lower net earnings, timing of CMS payments and a legislated change to Medicare Part D claims-payment timing. CMS’s approximately 5% reduction in Medicare Advantage reimbursement for 2010 prompted selective benefit and premium changes, plan exits in some counties, and increased cost management. The filing does not provide a clear numerical 2010 earnings or revenue guidance figure.
Risks, contingencies and unusual items
- Health care reform proposals were unresolved when the filing was made. Changes to coverage rules, taxes, underwriting, Medicare Advantage or Medicaid could affect revenue, costs, enrollment and goodwill. CMS accounted for 27% of consolidated revenue in 2009, primarily through senior-market business.
- Medical-cost estimation is a major judgment area. 2009 included $310 million of favorable prior-year medical-cost development; a hypothetical 1% difference between estimated and actual year-end medical costs payable would change 2009 net earnings by approximately $52 million.
- The recession reduced employer-plan enrollment; commercial membership declined, and management expected elevated employment-related attrition until employment stabilized. Government budget pressure, provider finances, medical inflation and utilization are additional risks.
- The company disclosed ongoing audits and investigations, including Medicare risk-adjustment audits, a Department of Labor ERISA review and a California administrative proceeding concerning claims processing. Outcomes and potential financial effects were uncertain.
- Significant legal matters included the proposed $350 million settlement of out-of-network reimbursement litigation, subject to final court approval, and a $50 million payment under the New York Attorney General agreement to fund an independent reimbursement database. Other provider litigation remained pending.
- Goodwill and other intangible assets totaled $23.1 billion, or 39% of assets; the annual goodwill assessment found no impairment as of year-end. The company also reported a $2.0 billion reinsurance receivable related to a divested life and annuity business, with continued exposure if the reinsurer cannot pay.
- Regulated subsidiaries paid $4.2 billion in dividends to parent companies in 2009, including $2.5 billion of extraordinary dividends. Management anticipated lower overall subsidiary dividends in 2010. The AARP relationship is significant; related Medicare arrangements were extended under agreements with stated future expiration dates.
Deloitte issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether 2010 Medicare Advantage reimbursement reductions and other policy changes pressure membership, pricing and Health Benefits margins.
- Whether medical-cost trends and claims estimates develop as expected, including the effect of favorable prior-period reserve development on reported results.
- How much of reported growth and earnings improvement is attributable to underlying performance versus 2008 one-time legal and other charges.
- The final outcome and potential cash or operating effects of the pending litigation, investigations and Medicare risk-adjustment audits.
- Whether management’s expected 2010 decline in operating cash flow materializes, and whether restricted subsidiary capital affects parent-company liquidity and capital returns.