UNITEDHEALTH GROUP INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read together with the accompanying Condensed Consolidated Financial Statements and Notes and with our 2022 10-K, including the Consolidated Financial Statements and Notes included in Part II, Item 8, “Financial Statements and Supplementary Data” in that report. Unless the context indicates otherwise, references to the terms “UnitedHealth Group,” the “Company,” “we,” “our” or “us” used throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to UnitedHealth Group Incorporated and its consolidated subsidiaries. Readers are cautioned that the statements, estimates, projections or outlook contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations, including discussions regarding financial prospects, economic conditions, trends and uncertainties contained in this Item 2, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the results discussed or implied in the forward-looking statements. A description of some of the risks and uncertainties is set forth in Part I, Item 1A, “Risk Factors” in our 2022 10-K and in the discussion below. EXECUTIVE OVERVIEW General 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: • 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 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. 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 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 all relevant factors, such as product positioning, price competitiveness and environmental, competitive, legislative and regulatory considerations, including minimum medical loss ratio 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. Government programs in the community and senior sector tend to receive lower rates of increase than the commercial market due to governmental budget pressures and lower cost trends. 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 quality, affordable care. 14 Table of Contents 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 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 1.9 million more people, driven by growth across our U.S. businesses. • 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 three months ended March 31, 2023 were $16.3 billion. • Return on equity was 28.2%. 15 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) Three Months Ended March 31, Increase/(Decrease) 2023 2022 2023 vs. 2022 Revenues: Premiums $ 72,786 $ 64,070 $ 8,716 14 % Products 10,267 9,340 927 10 Services 8,080 6,372 1,708 27 Investment and other income 798 367 431 117 Total revenues 91,931 80,149 11,782 15 Operating costs: Medical costs 59,845 52,523 7,322 14 Operating costs 13,625 11,401 2,224 20 Cost of products sold 9,405 8,487 918 11 Depreciation and amortization 970 788 182 23 Total operating costs 83,845 73,199 10,646 15 Earnings from operations 8,086 6,950 1,136 16 Interest expense (754) (433) (321) 74 Earnings before income taxes 7,332 6,517 815 13 Provision for income taxes (1,558) (1,369) (189) 14 Net earnings 5,774 5,148 626 12 Earnings attributable to noncontrolling interests (163) (121) (42) 35 Net earnings attributable to UnitedHealth Group common shareholders $ 5,611 $ 5,027 $ 584 12 % Diluted earnings per share attributable to UnitedHealth Group common shareholders $ 5.95 $ 5.27 $ 0.68 13 % Medical care ratio (a) 82.2 % 82.0 % 0.2 % Operating cost ratio 14.8 14.2 0.6 Operating margin 8.8 8.7 0.1 Tax rate 21.2 21.0 0.2 Net earnings margin (b) 6.1 6.3 (0.2) Return on equity (c) 28.2 % 27.8 % 0.4 % (a) Medical care ratio (MCR) is calculated as medical costs divided by premium revenue. (b) Net earnings margin attributable to UnitedHealth Group shareholders. (c) Return on equity is calculated as annualized 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 quarters in the year presented. 2023 RESULTS OF OPERATIONS COMPARED TO 2022 RESULTS OF OPERATIONS 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 primarily due to growth in people served through Medicare Advantage and Medicaid. The MCR increased as a result of business mix. Operating Cost Ratio The operating cost ratio increased primarily due to business mix and investments to support future growth, partially offset by continued productivity advances. 16 Table of Contents Reportable Segments See Note 8 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for more information on our segments. We utilize various metrics to evaluate and manage our reportable segments, including people 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: Three Months Ended March 31, Increase/(Decrease) (in millions, except percentages) 2023 2022 2023 vs. 2022 Revenues UnitedHealthcare $ 70,468 $ 62,595 $ 7,873 13 % Optum Health 23,004 16,682 6,322 38 Optum Insight 4,496 3,219 1,277 40 Optum Rx 27,418 23,911 3,507 15 Optum eliminations (859) (553) (306) 55 Optum 54,059 43,259 10,800 25 Eliminations (32,596) (25,705) (6,891) 27 Consolidated revenues $ 91,931 $ 80,149 $ 11,782 15 % Earnings from operations UnitedHealthcare $ 4,343 $ 3,798 $ 545 14 % Optum Health 1,776 1,366 410 30 Optum Insight 907 847 60 7 Optum Rx 1,060 939 121 13 Optum 3,743 3,152 591 19 Consolidated earnings from operations $ 8,086 $ 6,950 $ 1,136 16 % Operating margin UnitedHealthcare 6.2 % 6.1 % 0.1 % Optum Health 7.7 8.2 (0.5) Optum Insight 20.2 26.3 (6.1) Optum Rx 3.9 3.9 — Optum 6.9 7.3 (0.4) Consolidated operating margin 8.8 % 8.7 % 0.1 % 17 Table of Contents UnitedHealthcare The following table summarizes UnitedHealthcare revenues by business: Three Months Ended March 31, Increase/(Decrease) (in millions, except percentages) 2023 2022 2023 vs. 2022 UnitedHealthcare Employer & Individual - Domestic $ 16,544 $ 15,822 $ 722 5 % 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 UnitedHealthcare Community & State 18,755 15,540 3,215 21 Total UnitedHealthcare revenues $ 70,468 $ 62,595 $ 7,873 13 % The following table summarizes the number of people served by our UnitedHealthcare businesses, by major market segment and funding arrangement: March 31, Increase/(Decrease) (in thousands, except percentages) 2023 2022 2023 vs. 2022 Commercial - Domestic: Risk-based 8,025 7,950 75 1 % Fee-based 19,325 18,460 865 5 Total Commercial - Domestic 27,350 26,410 940 4 Medicare Advantage 7,545 6,890 655 10 Medicaid 8,380 7,810 570 7 Medicare Supplement (Standardized) 4,320 4,355 (35) (1) Total Community and Senior 20,245 19,055 1,190 6 Total UnitedHealthcare - Domestic Medical 47,595 45,465 2,130 5 Commercial - Global 5,295 5,500 (205) (4) Total UnitedHealthcare - Medical 52,890 50,965 1,925 4 % Supplemental Data: Medicare Part D stand-alone 3,380 3,360 20 1 % 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. 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 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 growth in business services as a result of business combinations and growth in technology services. Optum Rx 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 378 million and 352 million adjusted scripts in the first quarters of 2023 and 2022, respectively. 18 Table of Contents LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES Liquidity Summary of our Major Sources and Uses of Cash and Cash Equivalents Three Months Ended March 31, Increase/(Decrease) (in millions) 2023 2022 2023 vs. 2022 Sources of cash: Cash provided by operating activities $ 16,327 $ 5,319 $ 11,008 Issuances of short-term borrowings and long-term debt, net of repayments 12,375 2,048 10,327 Proceeds from common stock issuances 344 551 (207) Customer funds administered 5,012 5,120 (108) Total sources of cash 34,058 13,038 Uses of cash: Common stock repurchases (2,000) (2,500) 500 Cash paid for acquisitions, net of cash assumed (7,826) (1,231) (6,595) Purchases of investments, net of sales and maturities (2,319) (1,632) (687) Purchases of property, equipment and capitalized software (760) (555) (205) Cash dividends paid (1,537) (1,363) (174) Other (1,119) (1,807) 688 Total uses of cash (15,561) (9,088) Effect of exchange rate changes on cash and cash equivalents 51 157 (106) Net increase in cash and cash equivalents $ 18,548 $ 4,107 $ 14,441 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 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 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 4.0 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. Capital Resources and Uses of Liquidity In addition to cash flows from operations and cash and cash equivalent balances available for general corporate use, our capital resources and uses of liquidity are as follows: Cash Requirements. 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 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. We continually evaluate opportunities to expand our operations, including through internal development of new products, programs and technology applications and business combinations. 19 Table of Contents Short-Term Borrowings. 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 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 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. Periodically, we access capital markets and 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 long-term debt, 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. Credit Ratings. Our credit ratings as of March 31, 2023 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. 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. Dividends. 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. RECENTLY ISSUED ACCOUNTING STANDARDS There are no recently issued accounting standards that are expected to have a material impact on our Condensed Consolidated Financial Statements. CRITICAL ACCOUNTING ESTIMATES In preparing our Condensed Consolidated Financial Statements, we are required to make judgments, assumptions and estimates, which we believe are reasonable and prudent based on the available facts and circumstances. These judgments, assumptions and estimates affect certain of our revenues and expenses and their related balance sheet accounts and disclosure of our contingent liabilities. We base our assumptions and estimates primarily on historical experience and consider known and projected trends. On an ongoing basis, we re-evaluate our selection of assumptions and the method of calculating our estimates. Actual results, however, may materially differ from our calculated estimates, and this difference would be reported in our current operations. Our critical accounting estimates include medical costs payable and goodwill. For a detailed description of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 in our 2022 10-K. For a detailed discussion of our significant accounting policies, see Note 2 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” in our 2022 10-K. 20 Table of Contents FORWARD-LOOKING STATEMENTS The statements, estimates, projections, guidance or outlook contained in this document include “forward-looking” statements which are intended to take advantage of the “safe harbor” provisions of the federal securities law. The words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “forecast,” “outlook,” “plan,” “project,” “should” and similar expressions identify forward-looking statements. These statements may contain information about financial prospects, economic conditions and trends and involve risks and uncertainties. Actual results could differ materially from those that management expects, depending on the outcome of certain factors including: 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; 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; risks and uncertainties associated with our businesses providing pharmacy care services; 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; the impact of potential changes in tax laws and regulations (including any increase in the U.S. income tax rate applicable to corporations); increases in costs and other liabilities associated with litigation, government investigations, audits or reviews; 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; 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. This above list is not exhaustive. We discuss these matters, and certain risks that may affect our business operations, financial condition and results of operations, more fully in our filings with the SEC, including our reports on Forms 10-K, 10-Q and 8-K. By their nature, forward-looking statements are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Actual results may vary materially from expectations expressed or implied in this document or any of our prior communications. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. We do not undertake to update or revise any forward-looking statements, except as required by law.