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 9 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 medical cost trends, 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. 16 Table of Contents Medical Cost Trends. Our medical cost trends primarily relate to changes in unit costs, care activity and prescription drug costs. During the third quarter we continued to observe increased care patterns, primarily related to outpatient procedures for seniors, consistent with the levels observed in the second quarter, and which may continue in future periods. 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. Medicaid Redeterminations. The majority of states have resumed Medicaid redeterminations, which have impacted the number of people served through our Medicaid offerings, partially offset by an increase in consumers served through our commercial offerings as we endeavor to ensure that people and families have continued access to benefits. 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 2023 year-over-year operating comparisons to third quarter 2022 and other financial results. • Consolidated revenues grew 14%, UnitedHealthcare revenues grew 13% and Optum revenues grew 22%. • UnitedHealthcare served 1.5 million more people, driven by growth across each of our businesses. • Consolidated earnings from operations of $8.5 billion compared to $7.5 billion last year, including growth of 21% at UnitedHealthcare and 7% at Optum. • Diluted earnings per common share were $6.24. • Cash flows from operations for the nine months ended September 30, 2023 were $34.3 billion. • Return on equity was 28.0%. 17 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 September 30, Increase/(Decrease) Nine Months Ended September 30, Increase/(Decrease) 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Revenues: Premiums $ 72,339 $ 64,491 $ 7,848 12 % $ 217,599 $ 192,457 $ 25,142 13 % Products 10,354 9,190 1,164 13 31,272 28,026 3,246 12 Services 8,671 6,700 1,971 29 25,414 19,717 5,697 29 Investment and other income 997 513 484 94 2,910 1,175 1,735 148 Total revenues 92,361 80,894 11,467 14 277,195 241,375 35,820 15 Operating costs: Medical costs 59,550 52,635 6,915 13 179,663 157,251 22,412 14 Operating costs 13,855 11,663 2,192 19 41,289 34,773 6,516 19 Cost of products sold 9,423 8,306 1,117 13 28,576 25,389 3,187 13 Depreciation and amortization 1,007 828 179 22 2,998 2,418 580 24 Total operating costs 83,835 73,432 10,403 14 252,526 219,831 32,695 15 Earnings from operations 8,526 7,462 1,064 14 24,669 21,544 3,125 15 Interest expense (834) (516) (318) 62 (2,416) (1,416) (1,000) 71 Earnings before income taxes 7,692 6,946 746 11 22,253 20,128 2,125 11 Provision for income taxes (1,654) (1,562) (92) 6 (4,784) (4,397) (387) 9 Net earnings 6,038 5,384 654 12 17,469 15,731 1,738 11 Earnings attributable to noncontrolling interests (197) (122) (75) 61 (543) (372) (171) 46 Net earnings attributable to UnitedHealth Group common shareholders $ 5,841 $ 5,262 $ 579 11 % $ 16,926 $ 15,359 $ 1,567 10 % Diluted earnings per share attributable to UnitedHealth Group common shareholders $ 6.24 $ 5.55 $ 0.69 $ 18.01 $ 16.15 $ 1.86 Medical care ratio (a) 82.3 % 81.6 % 0.7 % 82.6 % 81.7 % 0.9 % Operating cost ratio 15.0 14.4 0.6 14.9 14.4 0.5 Operating margin 9.2 9.2 — 8.9 8.9 — Tax rate 21.5 22.5 (1.0) 21.5 21.8 (0.3) Net earnings margin (b) 6.3 6.5 (0.2) 6.1 6.4 (0.3) Return on equity (c) 28.0 % 28.5 % (0.5) % 27.7 % 28.1 % (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. Revenues also increased due to increased investment income, primarily driven by increased interest rates. 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 elevated care activity, primarily relating to outpatient care for seniors, and 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. 18 Table of Contents Reportable Segments See Note 9 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 September 30, Increase/ (Decrease) Nine Months Ended September 30, Increase/ (Decrease) (in millions, except percentages) 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 Revenues UnitedHealthcare $ 69,853 $ 61,995 $ 7,858 13 % $ 210,552 $ 186,695 $ 23,857 13 % Optum Health 23,864 18,463 5,401 29 70,785 52,728 18,057 34 Optum Insight 4,977 3,693 1,284 35 14,147 10,194 3,953 39 Optum Rx 28,857 25,203 3,654 14 84,921 73,919 11,002 15 Optum eliminations (961) (800) (161) 20 (2,713) (1,941) (772) 40 Optum 56,737 46,559 10,178 22 167,140 134,900 32,240 24 Eliminations (34,229) (27,660) (6,569) 24 (100,497) (80,220) (20,277) 25 Consolidated revenues $ 92,361 $ 80,894 $ 11,467 14 % $ 277,195 $ 241,375 $ 35,820 15 % Earnings from operations UnitedHealthcare $ 4,592 $ 3,799 $ 793 21 % $ 13,293 $ 11,447 $ 1,846 16 % Optum Health 1,568 1,575 (7) — 4,869 4,340 529 12 Optum Insight 1,109 1,007 102 10 2,984 2,693 291 11 Optum Rx 1,257 1,081 176 16 3,523 3,064 459 15 Optum 3,934 3,663 271 7 11,376 10,097 1,279 13 Consolidated earnings from operations $ 8,526 $ 7,462 $ 1,064 14 % $ 24,669 $ 21,544 $ 3,125 15 % Operating margin UnitedHealthcare 6.6 % 6.1 % 0.5 % 6.3 % 6.1 % 0.2 % Optum Health 6.6 8.5 (1.9) 6.9 8.2 (1.3) Optum Insight 22.3 27.3 (5.0) 21.1 26.4 (5.3) Optum Rx 4.4 4.3 0.1 4.1 4.1 — Optum 6.9 7.9 (1.0) 6.8 7.5 (0.7) Consolidated operating margin 9.2 % 9.2 % — % 8.9 % 8.9 % — % UnitedHealthcare The following table summarizes UnitedHealthcare revenues by business: Three Months Ended September 30, Increase/(Decrease) Nine Months Ended September 30, Increase/(Decrease) (in millions, except percentages) 2023 2022 2023 vs. 2022 2023 2022 2023 vs. 2022 UnitedHealthcare Employer & Individual - Domestic $ 16,854 $ 15,929 $ 925 6 % $ 50,157 $ 47,318 $ 2,839 6 % UnitedHealthcare Employer & Individual - Global 2,417 2,120 297 14 6,905 6,500 405 6 UnitedHealthcare Employer & Individual - Total 19,271 18,049 1,222 7 57,062 53,818 3,244 6 UnitedHealthcare Medicare & Retirement 32,022 27,895 4,127 15 97,468 85,620 11,848 14 UnitedHealthcare Community & State 18,560 16,051 2,509 16 56,022 47,257 8,765 19 Total UnitedHealthcare revenues $ 69,853 $ 61,995 $ 7,858 13 % $ 210,552 $ 186,695 $ 23,857 13 % 19 Table of Contents The following table summarizes the number of people served by our UnitedHealthcare businesses, by major market segment and funding arrangement: September 30, Increase/(Decrease) (in thousands, except percentages) 2023 2022 2023 vs. 2022 Commercial - Domestic: Risk-based 8,120 8,055 65 1 % Fee-based 19,130 18,500 630 3 Total Commercial - Domestic 27,250 26,555 695 3 Medicare Advantage 7,645 7,035 610 9 Medicaid 8,065 8,005 60 1 Medicare Supplement (Standardized) 4,345 4,370 (25) (1) Total Community and Senior 20,055 19,410 645 3 Total UnitedHealthcare - Domestic Medical 47,305 45,965 1,340 3 Commercial - Global 5,475 5,360 115 2 Total UnitedHealthcare - Medical 52,780 51,325 1,455 3 % Supplemental Data: Medicare Part D stand-alone 3,335 3,310 25 1 % UnitedHealthcare’s revenues increased due to growth in the number of people served through individual and group Medicare Advantage plans; growth in people served with higher acuity needs partially offset by Medicaid redeterminations; and an increase in the number of people served through commercial offerings. Earnings from operations increased due to increased investment income and the factors impacting revenue, partially offset by elevated care activity, primarily relating to outpatient care for seniors. 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. For the nine months ended September 30, 2023, earnings from operations increased, while remaining consistent for the three months ended September 30, 2023, due to cost management initiatives and increased investment income, offset by higher senior outpatient and behavioral health care activity, costs associated with serving newly added patients under value-based care arrangements and decreased asset dispositions. Optum Health served approximately 103 million people as of September 30, 2023 compared to 101 million people as of September 30, 2022. Optum Insight Revenues and earnings from operations at Optum Insight increased due to 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 growth in pharmacy offerings and higher script volumes from both new clients and growth in existing clients. Earnings from operations also increased as a result of continued supply chain and operating cost management initiatives. Optum Rx fulfilled 383 million and 359 million adjusted scripts in the third quarters of 2023 and 2022, respectively. 20 Table of Contents LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES Liquidity Summary of our Major Sources and Uses of Cash and Cash Equivalents Nine Months Ended September 30, Increase/(Decrease) (in millions) 2023 2022 2023 vs. 2022 Sources of cash: Cash provided by operating activities $ 34,261 $ 30,739 $ 3,522 Issuances of short-term borrowings and long-term debt, net of repayments 5,848 3,806 2,042 Proceeds from common stock issuances 1,039 1,084 (45) Customer funds administered 2,037 7,028 (4,991) Other — 50 (50) Total sources of cash 43,185 42,707 Uses of cash: Common stock repurchases (6,500) (6,000) (500) Cash paid for acquisitions, net of cash assumed (8,389) (7,154) (1,235) Purchases of investments, net of sales and maturities (2,850) (4,067) 1,217 Purchases of property, equipment and capitalized software (2,427) (1,936) (491) Cash dividends paid (5,023) (4,450) (573) Other (2,495) (1,634) (861) Total uses of cash (27,684) (25,241) Effect of exchange rate changes on cash and cash equivalents 49 4 45 Net increase in cash and cash equivalents $ 15,550 $ 17,470 $ (1,920) 2023 Cash Flows Compared to 2022 Cash Flows Increased cash flows provided by operating activities were primarily driven by increased net earnings and the receipt of our October CMS premium payment of $11.9 billion and $9.8 billion in September 2023 and 2022, respectively. Other significant changes in sources or uses of cash year-over-year included increased net issuances of short-term borrowings and long-term debt and decreased net purchases of investments, partially offset by decreased customer funds administered, primarily driven by Medicare Part D timing, and increased cash paid for acquisitions. Financial Condition As of September 30, 2023, our cash, cash equivalent, available-for-sale debt securities and equity securities balances of $87.5 billion included approximately $38.9 billion of cash and cash equivalents (of which $1.5 billion was available for general corporate use), $44.4 billion of debt securities and $4.2 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 3.8 years and a weighted-average credit rating of “Double A” as of September 30, 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 nine months ended September 30, 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. 21 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 September 30, 2023, our debt to debt-plus-shareholders’ equity ratio, as defined and calculated under the credit facilities, was approximately 38%. 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 September 30, 2023 were as follows: Moody’s S&P Global Fitch A.M. Best Ratings Outlook Ratings Outlook Ratings Outlook Ratings Outlook Senior unsecured debt A2 Stable A+ Stable A Stable A Stable Commercial paper P-1 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 nine months ended September 30, 2023, we repurchased approximately 13 million shares at an average price of $485.10 per share. As of September 30, 2023, we had Board of Directors’ authorization to purchase up to 18 million shares of our common stock. Dividends. In June 2023, the Company’s Board of Directors increased our quarterly cash dividend to shareholders to an annual rate of $7.52 compared to $6.60 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 Acquisitions. As of September 30, 2023, we have entered into agreements to acquire companies in the health care sector, subject to regulatory approval and other customary closing conditions. The total anticipated consideration required for these acquisitions, excluding the payoff of acquired indebtedness, is approximately $5 billion. 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. 22 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; increases in costs and other liabilities associated with litigation, government investigations, audits or reviews; failure to 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; 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.