Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with the accompanying Consolidated Financial Statements and Notes to the Consolidated Financial Statements thereto included in Part II Item 8, “Financial Statements and Supplementary Data .” Readers are cautioned the statements, estimates, projections or outlook contained in this report, including discussions regarding financial prospects, economic conditions, trends and uncertainties contained in this Item 7, may constitute forward-looking statements within the meaning of the PSLRA. These forward-looking statements involve risks and uncertainties which may cause our actual results to differ materially from the expectations expressed or implied in the forward-looking statements. A description of some of the risks and uncertainties can be found further below in this Item 7 and in Part I, Item 1A, “Risk Factors.”
Discussions of year-over-year comparisons between 2021 and 2020 are not included in this Form 10-K and can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Form 10-K for the fiscal year ended December 31, 2021.
EXECUTIVE OVERVIEW
General
UnitedHealth Group is a diversified health care company with a mission to help people live healthier lives and help make the health system work better for everyone. Our two complementary businesses — Optum and UnitedHealthcare — are driven by this unified mission and vision to improve health care access, affordability, experiences and outcomes for the individuals and organizations we are privileged to serve.
We have four reportable segments across our two business platforms, Optum and UnitedHealthcare:
• Optum Health;
• Optum Insight;
• Optum Rx; and
• UnitedHealthcare, which includes UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement and UnitedHealthcare Community & State.
Further information on our business and reportable segments is presented in Part I, Item 1, “Business” and in Note 14 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data.”
Business Trends
Our businesses participate in the United States, South America and certain other international health markets. In the United States, health care spending has grown consistently for many years and comprises 18% of gross domestic product (GDP). We expect overall spending on health care to continue to grow in the future, due to inflation, medical technology and pharmaceutical advancement, regulatory requirements, demographic trends in the population and national interest in health and well-being. The rate of market growth may be affected by a variety of factors, including macroeconomic conditions, which could impact our results of operations, including our continued efforts to control health care costs.
Pricing Trends. To price our health care benefits, products and services, we start with our view of expected future costs, including inflation and labor market dynamics. We frequently evaluate and adjust our approach in each of the local markets we serve, considering relevant factors, such as product positioning, price competitiveness and environmental, competitive, legislative and regulatory considerations, including minimum medical loss ratio (MLR) thresholds and similar revenue adjustments. We will continue seeking to balance growth and profitability across all these dimensions.
The commercial risk market remains highly competitive in the small group, large group and individual segments. We expect broad-based competition to continue as the industry adapts to individual and employer needs.
Medicare Advantage funding continues to be pressured, as discussed below in “Regulatory Trends and Uncertainties.”
In Medicaid, we believe the payment rate environment creates the risk of continued downward pressure on Medicaid margin percentages. We continue to take a prudent, market-sustainable posture for both new business and maintenance of existing relationships. We continue to advocate for actuarially sound rates commensurate with our medical cost trends and we remain dedicated to partnering with those states that are committed to the long-term viability of their programs.
23
Table of Contents
Medical Cost Trends. Our medical cost trends primarily relate to changes in unit costs; care activity; and prescription drug costs. We endeavor to mitigate those increases by engaging physicians and consumers with information and helping them make clinically sound choices, with the objective of helping them achieve high-quality, affordable care.
Medicaid Redeterminations. In December 2022, Congress passed the 2023 Omnibus Appropriations bill that allows states to resume Medicaid redeterminations beginning in April 2023. Redeterminations will result in a decline in people served through our Medicaid business and an expected increase in people served through our commercial and exchange-based offerings as we endeavor to ensure that people have continued access to benefits.
Delivery System and Payment Modernization. The health care market continues to change based on demographic shifts, new regulations, political forces and both payer and patient expectations. Health plans and care providers are being called upon to work together to close gaps in care and improve overall care quality and patient experience, improve the health of populations and reduce costs. We are working to accelerate this vision through the innovation and integration of our care delivery models including in clinic, in-home, behavioral and virtual care, and by using our data and analytics to provide clinicians with the necessary information in order to provide the best possible care in the most cost efficient setting. We continue to see a greater number of people enrolled in fully accountable value-based plans rewarding high-quality, affordable care and fostering collaboration.
This trend is creating needs for health management services which can coordinate care around the primary care physician, including new primary care channels, and for investments in new clinical and administrative information and management systems, which we believe provide growth opportunities for our Optum business platform.
Regulatory Trends and Uncertainties
Following is a summary of management’s view of the trends and uncertainties related to regulatory matters. For additional information regarding regulatory trends and uncertainties, see Part I, Item 1 “Business - Government Regulation” and Item 1A, “Risk Factors.”
Medicare Advantage Rates. Medicare Advantage rate notices over the years have at times resulted in industry base rates well below industry forward medical trend. For example, the February 2023 Advance Notice for 2024 rates would result in an industry base rate decrease, well short of what is an increasing industry forward medical cost trend, creating continued pressure in the Medicare Advantage program. Further, proposed substantial revisions to the risk adjustment model, which serves to adjust rates to reflect a patient’s health status and care resource needs, would result in reduced funding and benefits for people, especially those with some of the greatest health and social challenges.
As a result of ongoing Medicare funding pressures, there are adjustments we can make to partially offset these rate pressures and reductions for a particular period. For example, we can seek to intensify our medical and operating cost management, make changes to the size and composition of our care provider networks, adjust member benefits and implement or increase the member premiums supplementing the monthly payments we receive from the government. Additionally, we decide annually on a county-by-county basis where we will offer Medicare Advantage plans.
SELECTED OPERATING PERFORMANCE ITEMS
The following represents a summary of select 2022 year-over-year operating comparisons to 2021.
• Consolidated revenues increased by 13%, UnitedHealthcare revenues increased 12% and Optum revenues grew 17%.
• UnitedHealthcare served nearly 1.1 million more people, led by growth in community-based and senior offerings.
• Earnings from operations increased by 19%, including an increase of 20% at UnitedHealthcare and 17% at Optum.
• Diluted earnings per common share increased 17% to $21.18.
• Cash flows from operations were $26.2 billion.
• Return on equity was 27.2%.
24
Table of Contents
RESULTS SUMMARY
The following table summarizes our consolidated results of operations and other financial information:
(in millions, except percentages and per share data) For the Years Ended December 31, Change
2022 2021 2020 2022 vs. 2021
Revenues:
Premiums $ 257,157 $ 226,233 $ 201,478 $ 30,924 14 %
Products 37,424 34,437 34,145 2,987 9
Services 27,551 24,603 20,016 2,948 12
Investment and other income
2,030 2,324 1,502 (294) (13)
Total revenues 324,162 287,597 257,141 36,565 13
Operating costs:
Medical costs 210,842 186,911 159,396 23,931 13
Operating costs 47,782 42,579 41,704 5,203 12
Cost of products sold 33,703 31,034 30,745 2,669 9
Depreciation and amortization
3,400 3,103 2,891 297 10
Total operating costs 295,727 263,627 234,736 32,100 12
Earnings from operations 28,435 23,970 22,405 4,465 19
Interest expense (2,092) (1,660) (1,663) (432) 26
Earnings before income taxes 26,343 22,310 20,742 4,033 18
Provision for income taxes (5,704) (4,578) (4,973) (1,126) 25
Net earnings 20,639 17,732 15,769 2,907 16
Earnings attributable to noncontrolling interests
(519) (447) (366) (72) 16
Net earnings attributable to UnitedHealth Group common shareholders
$ 20,120 $ 17,285 $ 15,403 $ 2,835 16 %
Diluted earnings per share attributable to UnitedHealth Group common shareholders
$ 21.18 $ 18.08 $ 16.03 $ 3.10 17 %
Medical care ratio (a) 82.0 % 82.6 % 79.1 % (0.6) %
Operating cost ratio 14.7 14.8 16.2 (0.1)
Operating margin 8.8 8.3 8.7 0.5
Tax rate 21.7 20.5 24.0 1.2
Net earnings margin (b) 6.2 6.0 6.0 0.2
Return on equity (c) 27.2 % 25.2 % 24.9 % 2.0 %
________
(a) Medical care ratio (MCR) is calculated as medical costs divided by premium revenue.
(b) Net earnings margin attributable to UnitedHealth Group common shareholders.
(c) Return on equity is calculated as net earnings attributable to UnitedHealth Group common shareholders divided by average shareholders’ equity. Average shareholders’ equity is calculated using the shareholders’ equity balance at the end of the preceding year and the shareholders’ equity balances at the end of each of the four quarters of the year presented.
2022 RESULTS OF OPERATIONS COMPARED TO 2021 RESULTS
Consolidated Financial Results
Revenues
The increases in revenues were primarily driven by growth in the number of people served through Medicare Advantage and Medicaid, pricing trends and growth across the Optum businesses.
Medical Costs and MCR
Medical costs increased due to growth in people served. The MCR decreased due to COVID-19 effects, partially offset by decreased prior years favorable development and business mix.
Operating Cost Ratio
The operating cost ratio decreased primarily due to productivity gains, partially offset by investments and business mix.
25
Table of Contents
Reportable Segments
See Note 14 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data ” for more information on our segments. We utilize various metrics to evaluate and manage our reportable segments, including individuals served by UnitedHealthcare by major market segment and funding arrangement, people served by Optum Health and adjusted scripts for Optum Rx. These metrics are the main drivers of revenue, earnings and cash flows at each business. The metrics also allow management and investors to evaluate and understand business mix, including the level and scope of services provided to people and pricing trends when comparing the metrics to revenue by segment.
The following table presents a summary of the reportable segment financial information:
For the Years Ended December 31, Change
(in millions, except percentages) 2022 2021 2020 2022 vs. 2021
Revenues
UnitedHealthcare $ 249,741 $ 222,899 $ 200,875 $ 26,842 12 %
Optum Health 71,174 54,065 39,808 17,109 32
Optum Insight 14,581 12,199 10,802 2,382 20
Optum Rx 99,773 91,314 87,498 8,459 9
Optum eliminations (2,760) (2,013) (1,800) (747) 37
Optum
182,768 155,565 136,308 27,203 17
Eliminations (108,347) (90,867) (80,042) (17,480) 19
Consolidated revenues $ 324,162 $ 287,597 $ 257,141 $ 36,565 13 %
Earnings from operations
UnitedHealthcare $ 14,379 $ 11,975 $ 12,359 $ 2,404 20 %
Optum Health 6,032 4,462 3,434 1,570 35
Optum Insight 3,588 3,398 2,725 190 6
Optum Rx 4,436 4,135 3,887 301 7
Optum
14,056 11,995 10,046 2,061 17
Consolidated earnings from operations
$ 28,435 $ 23,970 $ 22,405 $ 4,465 19 %
Operating margin
UnitedHealthcare 5.8 % 5.4 % 6.2 % 0.4 %
Optum Health 8.5 8.3 8.6 0.2
Optum Insight 24.6 27.9 25.2 (3.3)
Optum Rx 4.4 4.5 4.4 (0.1)
Optum
7.7 7.7 7.4 —
Consolidated operating margin 8.8 % 8.3 % 8.7 % 0.5 %
UnitedHealthcare
The following table summarizes UnitedHealthcare revenues by business:
For the Years Ended December 31, Change
(in millions, except percentages) 2022 2021 2020 2022 vs. 2021
UnitedHealthcare Employer & Individual - Domestic $ 63,599 $ 60,023 $ 55,872 $ 3,576 6 %
UnitedHealthcare Employer & Individual - Global (a) 8,668 8,345 7,752 323 4
UnitedHealthcare Employer & Individual - Total (a) 72,267 68,368 63,624 3,899 6
UnitedHealthcare Medicare & Retirement
113,671 100,552 90,764 13,119 13
UnitedHealthcare Community & State
63,803 53,979 46,487 9,824 18
Total UnitedHealthcare revenues $ 249,741 $ 222,899 $ 200,875 $ 26,842 12 %
(a) On January 1, 2022, we realigned our operating segments to combine UnitedHealthcare Global and UnitedHealthcare Employer & Individual.
26
Table of Contents
The following table summarizes the number of individuals served by our UnitedHealthcare businesses, by major market segment and funding arrangement:
December 31, Change
(in thousands, except percentages) 2022 2021 2020 2022 vs. 2021
Commercial - domestic:
Risk-based 8,045 7,985 7,910 60 1 %
Fee-based 18,640 18,595 18,310 45 —
Total commercial - domestic 26,685 26,580 26,220 105 —
Medicare Advantage 7,105 6,490 5,710 615 9
Medicaid 8,170 7,655 6,620 515 7
Medicare Supplement (Standardized) 4,375 4,395 4,460 (20) —
Total community and senior 19,650 18,540 16,790 1,110 6
Total UnitedHealthcare - domestic medical 46,335 45,120 43,010 1,215 3
Commercial - global 5,360 5,510 5,425 (150) (3)
Total UnitedHealthcare - medical 51,695 50,630 48,435 1,065 2 %
Supplemental Data:
Medicare Part D stand-alone 3,295 3,700 4,045 (405) (11) %
Medicare Advantage increased due to growth in people served through individual and group Medicare Advantage plans. The increase in people served through Medicaid was primarily driven by states continuing to ease redetermination requirements and growth in people served through Dual Special Needs Plans.
UnitedHealthcare’s revenues increased due to growth in the number of people served through Medicare Advantage and Medicaid. Earnings from operations increased due to growth in people served and COVID-19 effects, partially offset by decreased prior years favorable development.
Optum
Total revenues and earnings from operations increased due to growth across the Optum businesses. The results by segment were as follows:
Optum Health
Revenues at Optum Health increased primarily due to organic growth in patients served under value-based care arrangements and business combinations. Earnings from operations increased due to organic growth in the number of people served under value-based care arrangements, cost management initiatives, asset dispositions and COVID-19 effects. Optum Health served approximately 102 million people as of December 31, 2022 compared to 100 million people as of December 31, 2021.
Optum Insight
Revenues and earnings from operations at Optum Insight increased due to growth in technology and managed services, with managed services revenue growth driven by business combinations and new health system partnerships.
Optum Rx
Revenues and earnings from operations at Optum Rx increased due to higher script volumes from growth in people served, increased utilization and organic growth in pharmacy care services, including community health, specialty and home delivery pharmacies. Earnings from operations also increased as a result of continued supply chain management initiatives. Optum Rx fulfilled 1,438 million and 1,368 million adjusted scripts in 2022 and 2021, respectively.
27
Table of Contents
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES
Liquidity
Introduction
We manage our liquidity and financial position in the context of our overall business strategy. We continually forecast and manage our cash, investments, working capital balances and capital structure to meet the short-term and long-term obligations of our businesses while seeking to maintain liquidity and financial flexibility. Cash flows generated from operating activities are principally from earnings before noncash expenses.
Our regulated subsidiaries generate significant cash flows from operations and are subject to, among other things, minimum levels of statutory capital, as defined by their respective jurisdictions, and restrictions on the timing and amount of dividends paid to their parent companies.
Our U.S. regulated subsidiaries paid their parent companies dividends of $8.8 billion and $8.0 billion in 2022 and 2021, respectively. See Note 10 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for further detail concerning our regulated subsidiary dividends.
Our nonregulated businesses also generate significant cash flows from operations available for general corporate use. Cash flows generated by these entities, combined with dividends from our regulated entities and financing through the issuance of long-term debt as well as issuance of commercial paper or the ability to draw under our committed credit facilities, further strengthen our operating and financial flexibility. We use these cash flows to expand our businesses through acquisitions, reinvest in our businesses through capital expenditures, repay debt and return capital to our shareholders through dividends and repurchases of our common stock.
Summary of our Major Sources and Uses of Cash and Cash Equivalents
For the Years Ended December 31, Change
(in millions) 2022 2021 2020 2022 vs. 2021
Sources of cash:
Cash provided by operating activities $ 26,206 $ 22,343 $ 22,174 $ 3,863
Issuances of long-term debt and short-term borrowings, net of repayments 12,536 2,481 2,586 10,055
Proceeds from common share issuances
1,253 1,355 1,440 (102)
Customer funds administered
5,548 622 1,677 4,926
Cash received for dispositions 3,414 15 221 3,399
Total sources of cash 48,957 26,816 28,098
Uses of cash:
Cash paid for acquisitions, net of cash assumed
(21,458) (4,821) (7,139) (16,637)
Cash dividends paid (5,991) (5,280) (4,584) (711)
Common share repurchases (7,000) (5,000) (4,250) (2,000)
Purchases of property, equipment and capitalized software
(2,802) (2,454) (2,051) (348)
Purchases of investments, net of sales and maturities (6,837) (1,843) (2,836) (4,994)
Purchases of redeemable noncontrolling interests (176) (1,338) — 1,162
Other (2,737) (1,564) (1,186) (1,173)
Total uses of cash (47,001) (22,300) (22,046)
Effect of exchange rate changes on cash and cash equivalents
34 (62) (116) 96
Net increase in cash and cash equivalents $ 1,990 $ 4,454 $ 5,936 $ (2,464)
2022 Cash Flows Compared to 2021 Cash Flows
Increased cash flows provided by operating activities were primarily driven by changes in working capital accounts and increased net earnings. Other significant changes in sources or uses of cash year-over-year included increased net issuances of long-term debt, customer funds administered, primarily driven by Medicare Part D timing and increased HSA deposits, cash received for dispositions and decreased purchases of redeemable noncontrolling interests, partially offset by increased cash paid for acquisitions, net purchases of investments and common stock repurchases.
28
Table of Contents
Financial Condition
As of December 31, 2022, our cash, cash equivalent, available-for-sale debt securities and equity securities balances of $69.4 billion included $23.4 billion of cash and cash equivalents (of which $1.3 billion was available for general corporate use), $42.3 billion of debt securities and $3.7 billion of equity securities. Given the significant portion of our portfolio held in cash equivalents, we do not anticipate fluctuations in the aggregate fair value of our financial assets to have a material impact on our liquidity or capital position. Other sources of liquidity, primarily from operating cash flows and our commercial paper program, which is fully supported by our bank credit facilities, reduce the need to sell investments during adverse market conditions. See Note 4 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” for further detail concerning our fair value measurements.
Our available-for-sale debt portfolio had a weighted-average duration of 4.0 years and a weighted-average credit rating of “Double A” as of December 31, 2022. When multiple credit ratings are available for an individual security, the average of the available ratings is used to determine the weighted-average credit rating.
Capital Resources and Uses of Liquidity
Cash Requirements. The Company’s cash requirements within the next twelve months include medical costs payable, accounts payable and accrued liabilities, short-term borrowings and current maturities of long-term debt, other current liabilities, and purchase commitments and other obligations. We expect the cash required to meet these obligations to be primarily generated through cash flows from current operations; cash available for general corporate use; and the realization of current assets, such as accounts receivable.
Our long-term cash requirements under our various contractual obligations and commitments include:
• Debt obligations. See Note 8 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data ” for further detail of our long-term debt and the timing of expected future payments. Interest coupon payments are typically paid semi-annually.
• Operating leases. See Note 12 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data ” for further detail of our obligations and the timing of expected future payments.
• Purchase and other obligations. These include $5.6 billion, $2.9 billion of which is expected to be paid within the next twelve months, of fixed or minimum commitments under existing purchase obligations for goods and services, including agreements cancelable with the payment of an early termination penalty, and remaining capital commitments for venture capital funds and other funding commitments. These amounts exclude agreements cancelable without penalty and liabilities to the extent recorded in our Consolidated Balance Sheets as of December 31, 2022.
• Other liabilities. These include other long-term liabilities reflected in our Consolidated Balance Sheets as of December 31, 2022, including obligations associated with certain employee benefit programs, unrecognized tax benefits and various long-term liabilities, which have some inherent uncertainty in the timing of these payments.
• Redeemable noncontrolling interests. See Note 2 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data ” for further detail. We do not have any material expected redemptions in the next twelve months.
We expect the cash required to meet our long-term obligations to be primarily generated through future cash flows from operations. However, we also have the ability to generate cash to satisfy both our current and long-term requirements through the issuance of commercial paper, issuance of long-term debt, or drawing under our committed credit facilities or the ability to sell investments. We believe our capital resources are sufficient to meet future, short-term and long-term, liquidity needs.
Short-Term Borrowings. Our revolving bank credit facilities provide liquidity support for our commercial paper borrowing program, which facilitates the private placement of senior unsecured debt through independent broker-dealers, and are available for general corporate purposes. For more information on our commercial paper and bank credit facilities, see Note 8 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data.”
Our revolving bank credit facilities contain various covenants, including covenants requiring us to maintain a defined debt to debt-plus-shareholders’ equity ratio of not more than 60%, subject to increase in certain circumstances set forth in the applicable credit agreement. As of December 31, 2022, our debt to debt-plus-shareholders’ equity ratio, as defined and calculated under the credit facilities, was 38%.
Long-Term Debt. Periodically, we access capital markets to issue long-term debt for general corporate purposes, such as to meet our working capital requirements, to refinance debt, to finance acquisitions or for share repurchases. For more information on our debt, see Note 8 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 “Financial Statements and Supplementary Data.”
29
Table of Contents
Credit Ratings. Our credit ratings as of December 31, 2022 were as follows:
Moody’s S&P Global Fitch A.M. Best
Ratings Outlook Ratings Outlook Ratings Outlook Ratings Outlook
Senior unsecured debt A3 Positive A+ Stable A Stable A Stable
Commercial paper P-2 n/a A-1 n/a F1 n/a AMB-1+ n/a
The availability of financing in the form of debt or equity is influenced by many factors, including our profitability, operating cash flows, debt levels, credit ratings, debt covenants and other contractual restrictions, regulatory requirements and economic and market conditions. A significant downgrade in our credit ratings or adverse conditions in the capital markets may increase the cost of borrowing for us or limit our access to capital.
Share Repurchase Program. As of December 31, 2022, we had Board of Directors’ authorization to purchase up to 31 million shares of our common stock. For more information on our share repurchase program, see Note 10 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data.”
Dividends. In June 2022, the Company’s Board of Directors increased the Company’s quarterly cash dividend to shareholders to an annual rate of $6.60 compared to $5.80 per share. For more information on our dividend, see Note 10 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data.”
Pending Acquisitions. As of December 31, 2022, we have entered into agreements to acquire companies in the health care sector, most notably, LHC Group, Inc. (NASDAQ: LHCG), subject to regulatory approval and other customary closing conditions. The total anticipated capital required for these acquisitions, excluding the payoff of acquired indebtedness, is approximately $9 billion. We completed the acquisition of LHC Group, Inc. on February 22, 2023.
We do not have other significant contractual obligations or commitments requiring cash resources. However, we continually evaluate opportunities to expand our operations, which include internal development of new products, programs and technology applications and may include acquisitions.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those estimates requiring management to make challenging, subjective or complex judgments, often because they must estimate the effects of matters inherently uncertain and may change in subsequent periods. Critical accounting estimates involve judgments and uncertainties which are sufficiently sensitive and may result in materially different results under different assumptions and conditions.
Medical Costs Payable
Medical costs and medical costs payable include estimates of our obligations for medical care services rendered on behalf of consumers, but for which claims have either not yet been received or processed. Depending on the health care professional and type of service, the typical billing lag for services can be up to 90 days from the date of service. Approximately 90% of claims related to medical care services are known and settled within 90 days from the date of service.
In each reporting period, our operating results include the effects of more completely developed medical costs payable estimates associated with previously reported periods. If the revised estimate of prior period medical costs is less than the previous estimate, we will decrease reported medical costs in the current period (favorable development). If the revised estimate of prior period medical costs is more than the previous estimate, we will increase reported medical costs in the current period (unfavorable development). Medical costs in 2022, 2021 and 2020 included favorable medical cost development related to prior years of $410 million, $1.7 billion and $880 million, respectively.
In developing our medical costs payable estimates, we apply different estimation methods depending on the month for which incurred claims are being estimated. For example, for the most recent two months, we estimate claim costs incurred by applying observed medical cost trend factors to the average per member per month (PMPM) medical costs incurred in prior months for which more complete claim data is available, supplemented by a review of near-term completion factors.
Completion Factors. A completion factor is an actuarial estimate, based upon historical experience and analysis of current trends, of the percentage of incurred claims during a given period adjudicated by us at the date of estimation. Completion factors are the most significant factors we use in developing our medical costs payable estimates for periods prior to the most recent two months. Completion factors include judgments in relation to claim submissions such as the time from date of service to claim receipt, claim levels and processing cycles, as well as other factors. If actual claims submission rates from providers (which can be influenced by a number of factors, including provider mix and electronic versus manual submissions), actual care activity incurred (which can be influenced by pandemics or seasonal illnesses, such as influenza), or our claim processing patterns are different than estimated, our reserve estimates may be significantly impacted.
30
Table of Contents
The following table illustrates the sensitivity of these factors and the estimated potential impact on our medical costs payable estimates for those periods as of December 31, 2022:
Completion Factors
(Decrease) Increase in Factors Increase (Decrease)
In Medical Costs Payable
(in millions)
(0.75)% $ 765
(0.50) 508
(0.25) 254
0.25 (252)
0.50 (503)
0.75 (753)
Medical Cost Per Member Per Month Trend Factors. Medical cost PMPM trend factors are significant factors we use in developing our medical costs payable estimates for the most recent two months. Medical cost trend factors are developed through a comprehensive analysis of claims incurred in prior months, provider contracting and expected unit costs, benefit design and a review of a broad set of health care utilization indicators. These factors include but are not limited to pharmacy utilization trends, inpatient hospital authorization data and seasonal and other incidence data from the National Centers for Disease Control. We also consider macroeconomic variables such as GDP growth, employment and disposable income. A large number of factors can cause the medical cost trend to vary from our estimates, including: our ability and practices to manage medical and pharmaceutical costs, changes in level and mix of services utilized; mix of benefits offered, including the impact of co-pays and deductibles; changes in medical practices; and catastrophes, epidemics and pandemics.
The following table illustrates the sensitivity of these factors and the estimated potential impact on our medical costs payable estimates for the most recent two months as of December 31, 2022:
Medical Cost PMPM Quarterly Trend
Increase (Decrease) in Factors Increase (Decrease)
In Medical Costs Payable
(in millions)
3% $ 985
2 656
1 328
(1) (328)
(2) (656)
(3) (985)
The completion factors and medical costs PMPM trend factors analyses above include outcomes considered reasonably likely based on our historical experience estimating liabilities for incurred but not reported benefit claims.
Management believes the amount of medical costs payable is reasonable and adequate to cover our liability for unpaid claims as of December 31, 2022; however, actual claim payments may differ from established estimates as discussed above. Assuming a hypothetical 1% difference between our December 31, 2022 estimates of medical costs payable and actual medical costs payable, excluding AARP Medicare Supplement Insurance and any potential offsetting impact from premium rebates, 2022 net earnings would have increased or decreased by approximately $215 million.
For more detail related to our medical cost estimates, see Note 2 of the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data.”
Goodwill
We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change indicating the carrying value may not be recoverable. When testing goodwill for impairment, we may first assess qualitative factors to determine if it is more likely than not the carrying value of a reporting unit exceeds its estimated fair value. During a qualitative analysis, we consider the impact of changes, if any, to the following factors: macroeconomic, industry and market factors; cost factors; changes in overall financial performance; and any other relevant events and uncertainties impacting a reporting unit. If our qualitative assessment indicates a goodwill impairment is more likely than not, we perform additional quantitative analyses. We may also elect to skip the qualitative testing and proceed directly to the quantitative testing. For reporting units where a quantitative analysis is performed, we perform a test measuring the fair values of the reporting units and comparing them to their carrying values, including goodwill. If the fair value is less than the carrying value of the reporting unit, an impairment is recognized for the difference, up to the carrying amount of goodwill.
31
Table of Contents
We estimate the fair values of our reporting units using a discounted cash flow method which includes assumptions about a wide variety of internal and external factors. Significant assumptions used in the discounted cash flow method include financial projections of free cash flow, including revenue trends, medical costs trends, operating productivity, income taxes and capital levels; long-term growth rates for determining terminal value beyond the discretely forecasted periods; and discount rates. For each reporting unit, comparative market multiples are used to corroborate the results of our discounted cash flow test.
Financial projections and long-term growth rates used for our reporting units are consistent with, and use inputs from, our internal long-term business plan and strategies. Discount rates are determined for each reporting unit and include consideration of the implied risk inherent in their forecasts. Our most significant estimate in the discount rate determinations involves our adjustments to the peer company weighted average costs of capital reflecting reporting unit-specific factors. We have not made any adjustments to decrease a discount rate below the calculated peer company weighted average cost of capital for any reporting unit. Company-specific adjustments to discount rates are subjective and thus are difficult to measure with certainty. The passage of time and the availability of additional information regarding areas of uncertainty with respect to the reporting units’ operations could cause these assumptions to change in the future. Additionally, as part of our quantitative impairment testing, we perform various sensitivity analyses on certain key assumptions, such as discount rates and cash flow projections to analyze the potential for a material impact. As of October 1, 2022, we completed our annual impairment tests for goodwill with all of our reporting units having fair values substantially in excess of their carrying values.
LEGAL MATTERS
A description of our legal proceedings is presented in Note 12 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data.”
CONCENTRATIONS OF CREDIT RISK
Investments in financial instruments such as marketable securities and accounts receivable may subject us to concentrations of credit risk. Our investments in marketable securities are managed under an investment policy authorized by our Board of Directors. This policy limits the amounts which may be invested in any one issuer and generally limits our investments to U.S. government and agency securities, state and municipal securities and corporate debt obligations of investment grade. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of employer groups and other customers constituting our client base. As of December 31, 2022, there were no significant concentrations of credit risk.