UnitedHealth Group Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless otherwise noted. UnitedHealth Group is a diversified health benefits and health services company, reporting four segments: Health Benefits, OptumHealth, Ingenix and Prescription Solutions. Management said it served 75 million individuals worldwide.
Financial performance
Amounts are in millions of dollars, except per-share data, ratios and membership figures.
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenue | $23,193 | $22,004 | Up 5% |
| Operating earnings | $2,016 | $1,668 | Up 21% |
| Operating margin | 8.7% | 7.6% | Up 1.1 percentage points |
| Net earnings | $1,191 | $984 | Up 21% |
| Diluted EPS | $1.03 | $0.81 | Up 27% |
| Medical care ratio | 81.3% | 82.4% | Down 1.1 percentage points |
| Operating cost ratio | 14.1% | 14.2% | Down 0.1 percentage points |
| Effective tax rate | 37.0% | 36.0% | Up 1.0 percentage point |
- Premium revenue rose 5% to $21,128; services revenue increased 5% to $1,364; product revenue rose 20% to $528.
- Operating costs increased 4% to $21,177. Medical costs rose 4% to $17,170, slower than premium growth.
- Prior-period medical cost estimates developed favorably by $490, compared with $200 in Q1 2009. Management attributed the 2010 development mainly to more efficient claims handling, lower-than-expected utilization, lower H1N1 costs than estimated, and member mix. This benefit contributed to current-period results.
- Cash from operations was $1,205, versus $1,112. Investing activities used $583 and financing activities used $502; cash increased $120 to $9,920.
- At March 31, cash and cash equivalents were $9,920, short-term investments $1,155 and long-term investments $13,835. Total assets were $59,541 and shareholders’ equity $24,319.
- Debt carrying value, including commercial paper, was $10,523, down from $11,173 at December 31, 2009. Current debt and commercial paper were $2,522; long-term debt was $8,001. Commercial paper outstanding was $225, and the $2.5 billion revolving facility was undrawn. Debt-to-total-capital was 30.2%, within the covenant limit of below 50%.
Material changes and segment trends
- Revenue growth reflected public and senior market risk-based business, commercial premium increases, and growth in specialty benefits and health technology offerings; commercial membership declined.
- Health Benefits revenue was $21,637 and operating earnings $1,682; operating margin improved to 7.8% from 6.4%. Total Health Benefits membership was 32.285 million, nearly unchanged year over year: commercial membership fell 4%, while public and senior membership rose 11%. Medicare Advantage membership increased 18% and Medicaid membership 13%.
- OptumHealth revenue grew 6% to $1,417, but operating earnings declined 4% to $151; margin fell to 10.7% from 11.9%. Ingenix revenue rose 31% to $505, while margin declined to 10.5% from 12.7%. Prescription Solutions revenue rose 16% to $4,096, while operating earnings declined 7% to $130 and margin fell to 3.2% from 4.0%.
- Interest expense declined to $125 from $131. The company completed cash tenders for $775 of principal of fixed-rate notes and entered into interest rate swaps with $2,977 notional value to better match floating-rate assets and liabilities.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management expected lower regulated-subsidiary dividends in 2010 than in 2009; ordinary dividend capacity for 2010 was $3.2 billion, with $460 paid in Q1.
- Management said the effects of 2010 federal health reform were not yet fully knowable because implementation rules and guidance were pending. Identified exposures include minimum medical care ratio requirements and potential rebates, higher medical and administrative costs, taxes and assessments, Medicare Advantage payment reductions, and limits on pricing or product flexibility. Management also noted possible growth opportunities in health services.
- The recession was reducing employer-sponsored commercial enrollment; management expected this pressure to continue until employment stabilized. It noted Medicaid growth alongside commercial attrition and warned that prolonged weakness could pressure government funding and provider finances.
- Management expected mental health parity changes to affect behavioral health costs beginning in 2011, but did not expect a material effect on 2010 results based on its current interpretation.
- Legal matters include a proposed $350 million settlement of out-of-network reimbursement litigation, subject to final court approval and potential termination rights; a final approval hearing was scheduled for September 2010. A California claims-processing administrative matter and other litigation and regulatory reviews were also disclosed.
- The company reported $490 of favorable prior-year medical cost development, a higher benefit than the prior-year $200. Investors should distinguish this estimate development from underlying current-period operating trends.
- The company stated that disclosure controls were effective as of March 31, 2010 and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether medical cost trends and the favorable reserve development persist, and how medical care ratio results develop without prior-period estimate benefits.
- How health reform rules affect rebates, pricing, costs, taxes, Medicare Advantage and the company’s markets as regulations are finalized.
- Whether growth in public and senior membership offsets continued commercial enrollment attrition, and whether weaker-margin trends in OptumHealth, Ingenix and Prescription Solutions improve.
- Debt maturities, debt tender effects, interest-rate swap exposure, credit ratings and regulated-subsidiary dividend capacity.
- The final outcome and financial impact of the proposed litigation settlement and pending regulatory matters.