UnitedHealth Group Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise stated. Amounts are in U.S. dollars. UnitedHealth Group operates UnitedHealthcare (health benefits) and Optum (health services), reported through four segments: UnitedHealthcare, OptumHealth, OptumInsight and OptumRx.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $25.432 billion | $23.193 billion | +10% |
| Operating earnings | $2.221 billion | $2.016 billion | +10% |
| Net earnings | $1.346 billion | $1.191 billion | +13% |
| Diluted EPS | $1.22 | $1.03 | +18% |
| Operating margin | 8.7% | 8.7% | Unchanged |
| Medical care ratio | 81.4% | 81.3% | +0.1 percentage point |
| Operating cost ratio | 14.2% | 14.1% | +0.1 percentage point |
| Net margin | 5.3% | 5.1% | +0.2 percentage point |
| Effective tax rate | 36.0% | 37.0% | −1.0 percentage point |
| Operating cash flow | $1.224 billion | $1.205 billion | +2% |
Premium revenue rose 9% to $23.003 billion; services revenue increased 17% to $1.598 billion and products revenue increased 23% to $649 million. Management attributed growth to risk-based UnitedHealthcare business and growth across Optum. Medical costs rose 9% to $18.725 billion, while total operating costs rose 10% to $23.211 billion. Lower average shares outstanding (1.099 billion diluted versus 1.156 billion) also contributed to EPS growth.
Segments and notable comparisons
- UnitedHealthcare: Revenue of $23.874 billion, up 9%; operating earnings of $1.899 billion, up 12%, with margin improving to 8.0% from 7.7%. Total medical membership increased 5% to 33.995 million.
- Optum: Combined segment revenue of $6.810 billion, up 20%, while operating earnings were nearly flat at $322 million versus $325 million. OptumHealth revenue grew 37%, but its operating earnings fell 24% to $109 million and margin declined to 7.2% from 13.0%. OptumInsight operating earnings rose 57% to $83 million; OptumRx operating earnings were essentially flat at $130 million.
- Segment comparisons were recast to reflect a January 2011 realignment of certain businesses; the report says prior-period segment information was recast to conform.
Cash, liquidity and debt
- Cash and cash equivalents were $9.790 billion at March 31, up from $9.123 billion at year-end. Cash, cash equivalents and available-for-sale investments totaled $26.9 billion; total assets were $65.335 billion and shareholders’ equity was $26.571 billion.
- Cash from operations was $1.224 billion. Investing activities used $1.337 billion, including $541 million paid for acquisitions; financing activities provided $780 million. Cash increased $667 million during the quarter.
- Commercial paper and long-term debt had a combined carrying value of $11.645 billion, versus $11.142 billion at December 31. Commercial paper outstanding was $1.690 billion. The company issued $750 million of senior notes in February and retired $955 million of long-term debt.
- A $2.5 billion revolving credit facility, maturing May 2012, had no borrowings outstanding. Debt-to-total-capital was 30.5%; the company reported compliance with its debt covenants.
- The company repurchased 15 million shares for $620 million and paid a first-quarter dividend of $0.125 per share, totaling $135 million.
Outlook, risks and unusual items
- Management expected consumer health-system utilization to increase in 2011 and said higher utilization could raise medical costs and the medical care ratio. It also anticipated lower operating cash flow in 2011 than in 2010, citing expected lower net earnings and certain 2011 premiums received early in late 2010. No specific full-year earnings or revenue guidance is provided in the supplied filing text.
- Health reform provisions create uncertainty around medical-loss-ratio rebates, premium-rate review, Medicare Advantage reimbursement, Medicaid participation and Part D discounts. The company noted increased scrutiny of premium rates and possible margin pressure. It said Medicare Advantage rates were frozen at 2010 levels, with a separate 1.6% reduction for 2011 and additional reductions scheduled to phase in beginning in 2012.
- Potential Penn Treaty guaranty-fund assessments were estimated at $250–$300 million, or $0.12–$0.15 per share, in 2011. The company said it would accrue an assessment if and when the state court rules on liquidation; timing and actual cost remain uncertain.
- CMS proposed a revised Medicare risk-adjustment audit methodology that could permit extrapolated, retroactive payment adjustments. The company said the methodology’s eventual form could have a material adverse effect, though it did not believe ongoing audits then underway would materially affect results, financial position or cash flows.
- Prior-year medical-cost estimates developed favorably by $440 million in Q1 2011, compared with $490 million in Q1 2010. Management attributed the favorable development mainly to lower-than-expected utilization and claims processing factors; such reserve development affects reported-period medical costs.
- Legal and regulatory matters include the California claims-processing administrative proceeding, which alleged 992,936 violations and could result in penalties; the filing says the company is defending the matter. The AMA-related settlement was paid in 2010 and became final after appeals were dismissed in March 2011. The report also describes other litigation and governmental reviews, and says some losses cannot be reasonably estimated.
- Management cited medical-cost estimation, regulation and health reform, litigation, investment performance, credit access, privacy and data security, acquisitions, and reliance on regulated-subsidiary cash flows among material risks. The filing reported no material change to the risk factors in the 2010 Form 10-K.
Most important facts for investors to verify
- Whether the $440 million favorable prior-year medical-cost development recurs, and how utilization and medical-cost trends develop.
- How health reform, premium-rate oversight and Medicare Advantage payment changes affect pricing, rebates, membership and margins.
- The final outcome and timing of Penn Treaty assessments and Medicare risk-adjustment audits.
- Whether the reported OptumHealth earnings decline and broadly flat Optum operating earnings persist after acquisitions and business realignment.
- Whether expected lower 2011 operating cash flow materializes, and how acquisitions, debt issuance, share repurchases and dividends affect liquidity and leverage.