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Item 2. Management’s Discussion and Analysis

2023-05-03 compared with 2022-11-02 · 60 added, 77 removed, 200 unchanged (41% of the section changed)

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EXECUTIVE OVERVIEW

UnitedHealth Group Incorporated is a health care and well-being company with a mission to help people live healthier lives and help make the health system work better for everyone.

UnitedHealth Group is a health care and well-being company with a mission to help people live healthier lives and help make the health system work better for everyone.

Our two distinct, yet complementary business platforms — Optum and UnitedHealthcare — are working to help build a modern, high-performing health system through improved access, affordability, outcomes and experiences for the individuals and organizations we are privileged to serve.

We have four reportable segments across our two business platforms, Optum and UnitedHealthcare:

We have four reportable segments:

• Optum Health;

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• UnitedHealthcare, which includes UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement and UnitedHealthcare Community & State.

Further information on our business is presented in Part I, Item 1, “Business” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 10-K and additional information on our segments, including the realignment of our UnitedHealthcare operating segments to combine UnitedHealthcare Global and UnitedHealthcare Employer & Individual, can be found in this Item 2 and in Note 9 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Further information on our business is presented in Part I, Item 1, “Business” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 10-K and additional information on our segments can be found in this Item 2 and in Note 8 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Business Trends

Our businesses participate in the United States, South America and certain other international health markets.

Overall spending on health care is impacted by inflation, utilization, medical technology and pharmaceutical advancement, regulatory requirements, demographic trends in the population and national interest in health and well-being.

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 and regulatory changes, which could impact our results of operations, including our continued efforts to control health care costs.

Pricing Trends.

To price our health care benefit products, 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 all 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.

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 will continue seeking to balance growth and profitability across all these dimensions.

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Medical Cost Trends.

Our medical cost trends primarily relate to changes in unit costs, health system utilization and prescription drug costs.

COVID-19 related care and testing costs as well as the deferral of care have also impacted medical cost trends in the current year and may continue in future years.

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.

COVID-19 Trends and Uncertainties

During the nine months ended September 30, 2022, overall care was near normal baseline levels, with certain areas of care at or approaching seasonal baselines, and other areas below.

Future care patterns and acuity may temporarily rise due to missed regular care.

Future developments, such as the severity of new COVID-19 variants, could introduce new uncertainties to care patterns and our business.

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 quality, affordable care.

Regulatory Trends and Uncertainties

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 Final Notice for 2024 rates resulted 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, substantial revisions to the risk adjustment model, which serves to adjust rates to reflect a patient’s health status and care resource needs, will result in reduced funding and potentially 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 AND OTHER SIGNIFICANT ITEMS

The following summarizes select third quarter 2022 year-over-year operating comparisons to third quarter 2021 and other financial results.

The following summarizes select first quarter 2023 year-over-year operating comparisons to first quarter 2022 and other financial results.

• Consolidated revenues grew 15%, UnitedHealthcare revenues grew 13% and Optum revenues grew 25%.

• UnitedHealthcare served 910,000 more people, led by growth in community and senior programs.

• UnitedHealthcare served 1.9 million more people, driven by growth across our U.S.

• Consolidated earnings from operations of $8.1 billion compared to $7.0 billion last year, included growth of 14% at UnitedHealthcare and 19% at Optum.

• Diluted earnings per common share were $5.95.

• Cash flows from operations for the nine months ended September 30, 2022 were $30.7 billion.

• Cash flows from operations for the three months ended March 31, 2023 were $16.3 billion.

• Return on equity was 28.2%.

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(in millions, except percentages and per share data) Three Months Ended

September 30, Increase/(Decrease) Nine Months Ended

September 30, Increase/(Decrease)

2022 2021 2022 vs.

March 31, Increase/(Decrease)

2023 2022 2023 vs.

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Medical Costs and MCR

For the three and nine months ended September 30, 2022, medical costs increased due to growth in people served through Medicare Advantage and Medicaid.

The MCR decreased due to COVID-19 effects, partially offset by business mix.

For the nine months ended September 30, 2022, the decreases to the MCR were also partially offset by decreased prior years favorable development, primarily due to the effects of COVID-19 in 2021.

Medical costs increased primarily due to growth in people served through Medicare Advantage and Medicaid.

The MCR increased as a result of business mix.

Operating Cost Ratio

For the three and nine months ended September 30, 2022, the operating cost ratio decreased primarily due to productivity gains, offset by business mix and investments.

For the nine months ended September 30, 2022, the operating cost ratio also decreased due to COVID-19 related revenue effects.

The operating cost ratio increased primarily due to business mix and investments to support future growth, partially offset by continued productivity advances.

Reportable Segments

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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 mix of care delivered through value-based care models at Optum Health, level and scope of services provided to people and pricing trends when comparing the metrics to revenue by segment.

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:

Three Months Ended

September 30, Increase/(Decrease) Nine Months Ended

September 30, Increase/(Decrease)

March 31, Increase/(Decrease)

(in millions, except percentages) 2023 2022 2023 vs.

2021 2022 2021 2022 vs.

UnitedHealthcare $ 70,468 $ 62,595 $ 7,873 13 %

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The following table summarizes UnitedHealthcare revenues by business:

Three Months Ended September 30, Increase/(Decrease) Nine Months Ended September 30, Increase/(Decrease)

Three Months Ended March 31, Increase/(Decrease)

(in millions, except percentages) 2023 2022 2023 vs.

2021 2022 2021 2022 vs.

UnitedHealthcare Employer & Individual - Domestic $ 16,544 $ 15,822 $ 722 5 %

UnitedHealthcare Employer & Individual - Global (a) 2,120 2,139 (19) (1) 6,500 6,292 208 3

UnitedHealthcare Employer & Individual - Total (a) 18,049 17,233 816 5 53,818 50,960 2,858 6

UnitedHealthcare Employer & Individual - Global 2,163 2,133 30 1

UnitedHealthcare Employer & Individual - Total 18,707 17,955 752 4

UnitedHealthcare Medicare & Retirement 33,006 29,100 3,906 13

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Total UnitedHealthcare revenues $ 70,468 $ 62,595 $ 7,873 13 %

(a) On January 1, 2022, we realigned our operating segments to combine UnitedHealthcare Global and UnitedHealthcare Employer & Individual.

The following table summarizes the number of people served by our UnitedHealthcare businesses, by major market segment and funding arrangement:

September 30, Increase/(Decrease)

March 31, Increase/(Decrease)

(in thousands, except percentages) 2023 2022 2023 vs.

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Medicare Part D stand-alone 3,380 3,360 20 1 %

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 due to COVID-19 and growth in people served through Dual Special Needs Plans.

UnitedHealthcare’s revenues increased due to growth in the number of individuals served through Medicare Advantage and Medicaid, including a greater mix of people with higher acuity needs.

For the three months ended September 30, 2022, earnings from operations increased due to growth in people served and COVID-19 effects.

For the nine months ended September 30, 2022, earnings from operations increased due to growth in people served and COVID-19 effects, partially offset by decreased prior years favorable development, primarily due to the effects of COVID-19 in 2021.

UnitedHealthcare’s revenues and earnings from operations increased due to growth in the number of people served through individual and group Medicare Advantage plans;

growth in existing Medicaid markets;

including a greater mix of people with higher acuity needs;

and an increase in the number of people served through risk-based and fee-based commercial offerings.

Total revenues and earnings from operations increased due to growth across the Optum businesses.

The results by segment were as follows:

Revenues at Optum Health increased primarily due to organic growth in 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.

For the three months ended September 30, 2022, increases in earnings from operations were partially offset by care activity levels at fee-for-service practices.

Optum Health served approximately 101 million people as of September 30, 2022 compared to 99 million people as of September 30, 2021.

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 and cost management initiatives.

Optum Health served approximately 103 million people as of March 31, 2023 compared to 100 million people as of March 31, 2022.

Optum Insight

Revenues and earnings from operations at Optum Insight increased due to growth in technology and managed services, with managed services growth driven by higher payer volumes and new health system partnerships.

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-behavioral and specialty pharmacy.

Revenues and earnings from operations at Optum Insight increased due growth in business services as a result of business combinations and growth in technology services.

Revenues and earnings from operations at Optum Rx increased due to higher script volumes from growth in people served and growth in specialty pharmacy offerings.

Earnings from operations also increased as a result of continued supply chain management initiatives.

Optum Rx fulfilled 359 million and 344 million adjusted scripts in the third quarters of 2022 and 2021, respectively.

Optum Rx fulfilled 378 million and 352 million adjusted scripts in the first quarters of 2023 and 2022, respectively.

LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES

Summary of our Major Sources and Uses of Cash and Cash Equivalents

Nine Months Ended September 30, Increase/(Decrease)

Three Months Ended March 31, Increase/(Decrease)

(in millions) 2023 2022 2023 vs.

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Customer funds administered 5,012 5,120 (108)

Other 50 — 50

Total sources of cash 34,058 13,038

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Cash dividends paid (1,537) (1,363) (174)

Purchases of redeemable noncontrolling interests (176) (1,338) 1,162

Other (1,119) (1,807) 688

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2023 Cash Flows Compared to 2022 Cash Flows

Increased cash flows provided by operating activities were primarily driven by an increase in unearned revenue due to the September receipt of our October CMS premium payment of $9.8 billion and increased net earnings.

Other significant changes in sources or uses of cash year-over-year included increased customer funds administered, primarily driven by Medicare Part D timing, and decreased purchases of redeemable noncontrolling interests, partially offset by increased cash paid for acquisitions and common stock repurchases.

Increased cash flows provided by operating activities were primarily driven by an increase in unearned revenue due to the March receipt of our April CMS premium payment of $11.2 billion and increased net earnings, partially offset by changes in working capital accounts.

Other significant changes in sources or uses of cash year-over-year included increased net issuances of short-term borrowings and long-term debt, partially offset by increased cash paid for acquisitions and net purchases of investments.

Financial Condition

As of September 30, 2022, our cash, cash equivalent, available-for-sale debt securities and equity securities balances of $81.8 billion included approximately $38.8 billion of cash and cash equivalents (of which $3.7 billion was available for general corporate use), $39.6 billion of debt securities and $3.4 billion of investments in equity securities.

As of March 31, 2023, our cash, cash equivalent, available-for-sale debt securities and equity securities balances of $91.2 billion included approximately $41.9 billion of cash and cash equivalents (of which $7.0 billion was available for general corporate use), $45.4 billion of debt securities and $3.9 billion of investments in equity securities.

Given the significant portion of our portfolio held in cash and 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.

Our available-for-sale debt securities portfolio had a weighted-average duration of 4.1 years and a weighted-average credit rating of “Double A” as of September 30, 2022.

Our available-for-sale debt securities portfolio had a weighted-average duration of 4.0 years and a weighted-average credit rating of “Double A” as of March 31, 2023.

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.

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A summary of our cash requirements as of December 31, 2022 was disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 10-K.

During the nine months ended September 30, 2022, there were no material changes to this previously disclosed information outside the ordinary course of business.

During the three months ended March 31, 2023, there were no material changes to this previously disclosed information outside the ordinary course of business.

We believe our capital resources are sufficient to meet future, short-term and long-term, liquidity needs.

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Our revolving bank credit facilities provide liquidity support for our commercial paper borrowing program, which facilitates the private placement of 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 Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” in our 2021 10-K.

For more information on our commercial paper and bank credit facilities, see Note 5 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and Note 8 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” in our 2022 10-K.

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%.

As of September 30, 2022, our debt to debt-plus-shareholders’ equity ratio, as defined and calculated under the credit facilities, was approximately 35%.

As of March 31, 2023, our debt to debt-plus-shareholders’ equity ratio, as defined and calculated under the credit facilities, was approximately 42%.

Long-Term Debt.

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Credit Ratings.

Our credit ratings as of September 30, 2022 were as follows:

Our credit ratings as of March 31, 2023 were as follows:

Moody’s S&P Global Fitch A.M.

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Share Repurchase Program.

During the nine months ended September 30, 2022, we repurchased approximately 12 million shares at an average price of $497.41 per share.

As of September 30, 2022, we had Board of Directors’ authorization to purchase up to 33 million shares of our common stock.

In June 2022, the Company’s Board of Directors increased our 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 6 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Pending Business Combinations.

As of September 30, 2022, we have entered into agreements to acquire companies in the health care sector, most notably Change Healthcare (NASDAQ:

CHNG) and LHC Group, Inc.

LHCG), subject to regulatory approval and other customary closing conditions.

As of that date, the total anticipated capital required for these business combinations, excluding associated disposition proceeds and the payoff of acquired indebtedness, was approximately $14 billion.

The Company completed the acquisition of Change Healthcare on October 3, 2022.

During the three months ended March 31, 2023, we repurchased approximately 4 million shares at an average price of $484.83 per share.

As of March 31, 2023, we had Board of Directors’ authorization to purchase up to 27 million shares of our common stock.

Our quarterly cash dividend to shareholders reflects an annual dividend rate of $6.60 per share.

For additional liquidity discussion, see Note 10 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 in our 2022 10-K.

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Actual results could differ materially from those that management expects, depending on the outcome of certain factors including:

risks associated with public health crises, large-scale medical emergencies and pandemics, such as the COVID-19 pandemic;

our ability to effectively estimate, price for and manage medical costs;

new or changes in existing health care laws or regulations, or their enforcement or application;

the DOJ’s legal action relating to the risk adjustment submission matter;

our ability to maintain and achieve improvement in quality scores impacting revenue;

reductions in revenue or delays to cash flows received under government programs;

changes in Medicare, the CMS star ratings program or the application of risk adjustment data validation audits;

the DOJ’s legal action relating to the risk adjustment submission matter;

our ability to maintain and achieve improvement in quality scores impacting revenue;

failure to maintain effective and efficient information systems or if our technology products do not operate as intended;

cyberattacks, other privacy/data security incidents, or our failure to comply with related regulations;

failure to protect proprietary rights to our databases, software and related products;

risks and uncertainties associated with our businesses providing pharmacy care services;

competitive pressures, including our ability to develop and deliver innovative products to health care payers and expand access to virtual care;

competitive pressures, including our ability to maintain or increase our market share;

changes in or challenges to our public sector contract awards;

failure to achieve targeted operating cost productivity improvements;

failure to develop and maintain satisfactory relationships with health care payers, physicians, hospitals and other service providers;

failure to attract, develop, retain, and manage the succession of key employees and executives;

the impact of potential changes in tax laws and regulations (including any increase in the U.S.

income tax rate applicable to corporations);

failure to achieve targeted operating cost productivity improvements;

increases in costs and other liabilities associated with litigation, government investigations, audits or reviews;

failure to manage successfully our strategic alliances or complete or receive anticipated benefits of strategic transactions;

failure to manage successfully our strategic alliances or complete, manage or integrate strategic transactions;

risks associated with public health crises arising from large-scale medical emergencies, pandemics, natural disasters and other extreme events;

fluctuations in foreign currency exchange rates;

downgrades in our credit ratings;

failure to attract, develop, retain, and manage the succession of key employees and executives;

our investment portfolio performance;

impairment of our goodwill and intangible assets;

failure to protect proprietary rights to our databases, software and related products;

downgrades in our credit ratings;

and our ability to obtain sufficient funds from our regulated subsidiaries or from external financings to fund our obligations, maintain our debt to total capital ratio at targeted levels, maintain our quarterly dividend payment cycle, or continue repurchasing shares of our common stock.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis