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 2022 and 2021 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, 2022.
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 businesses — 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 businesses:
• 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 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 care patterns, 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 ” and we have observed increased care patterns as discussed below in “Medical Cost Trends.” Our 2024 benefit design approach contemplates these trends.
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.
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Medical Cost Trends. Our medical cost trends primarily relate to changes in unit costs; care activity; and prescription drug costs. During 2023, we observed increased care patterns, primarily related to outpatient procedures for seniors, which we expect will persist throughout 2024, and 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 high-quality, affordable care.
Medicaid Redeterminations. The resumption of Medicaid redeterminations 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 care.
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. A key focus of our future growth is to accelerate the transition from fee-for-service care delivery and payment models to fully accountable value-based care. This transition requires initial costs such as system enhancements, integrated care coordination technology, physician training and clinical engagement. Enhanced clinical engagement is a critical step to improving the health outcomes of the people we serve and should result in lower costs to the overall health system over time.
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 Final Notice for 2024 rates resulted in an industry base rate decrease, as did the January 2024 Advance Notice for 2025 rates, both of which are 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 continue to 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.
Pending Disposition. On December 22, 2023, we entered into an agreement to sell our operations in Brazil to a private investor, subject to regulatory approval and other closing conditions. We completed the disposition on February 6, 2024, and will record a loss of approximately $7 billion in the quarter ended March 31, 2024, the majority of which was due to foreign currency translation losses in accumulated other comprehensive income.
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SELECTED OPERATING PERFORMANCE ITEMS
The following represents a summary of select 2023 year-over-year operating comparisons to 2022.
• Consolidated revenues increased by 15%, UnitedHealthcare revenues increased 13% and Optum revenues grew 24%.
• UnitedHealthcare served nearly 1.1 million more people, driven by growth in commercial and senior offerings.
• Earnings from operations increased by 14%, including an increase of 14% at UnitedHealthcare and 13% at Optum.
• Diluted earnings per common share increased 13% to $23.86.
• Cash flows from operations were $29.1 billion.
• Return on equity was 27.0%.
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
2023 2022 2021 2023 vs. 2022
Revenues:
Premiums $ 290,827 $ 257,157 $ 226,233 $ 33,670 13 %
Products 42,583 37,424 34,437 5,159 14
Services 34,123 27,551 24,603 6,572 24
Investment and other income
4,089 2,030 2,324 2,059 101
Total revenues 371,622 324,162 287,597 47,460 15
Operating costs:
Medical costs 241,894 210,842 186,911 31,052 15
Operating costs 54,628 47,782 42,579 6,846 14
Cost of products sold 38,770 33,703 31,034 5,067 15
Depreciation and amortization
3,972 3,400 3,103 572 17
Total operating costs 339,264 295,727 263,627 43,537 15
Earnings from operations 32,358 28,435 23,970 3,923 14
Interest expense (3,246) (2,092) (1,660) (1,154) 55
Earnings before income taxes 29,112 26,343 22,310 2,769 11
Provision for income taxes (5,968) (5,704) (4,578) (264) 5
Net earnings 23,144 20,639 17,732 2,505 12
Earnings attributable to noncontrolling interests
(763) (519) (447) (244) 47
Net earnings attributable to UnitedHealth Group common shareholders
$ 22,381 $ 20,120 $ 17,285 $ 2,261 11 %
Diluted earnings per share attributable to UnitedHealth Group common shareholders
$ 23.86 $ 21.18 $ 18.08 $ 2.68 13 %
Medical care ratio (a) 83.2 % 82.0 % 82.6 % 1.2 %
Operating cost ratio 14.7 14.7 14.8 —
Operating margin 8.7 8.8 8.3 (0.1)
Tax rate 20.5 21.7 20.5 (1.2)
Net earnings margin (b) 6.0 6.2 6.0 (0.2)
Return on equity (c) 27.0 % 27.2 % 25.2 % (0.2) %
________
(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.
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2023 RESULTS OF OPERATIONS COMPARED TO 2022 RESULTS
Consolidated Financial Results
Revenues
The increases in revenues were primarily driven by growth in the number of people served throughout the year in 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 throughout the year in 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 was consistent primarily due to operating cost management, offset by business mix and investments to support future growth.
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) 2023 2022 2021 2023 vs. 2022
Revenues
UnitedHealthcare $ 281,360 $ 249,741 $ 222,899 $ 31,619 13 %
Optum Health 95,319 71,174 54,065 24,145 34
Optum Insight 18,932 14,581 12,199 4,351 30
Optum Rx 116,087 99,773 91,314 16,314 16
Optum eliminations (3,703) (2,760) (2,013) (943) 34
Optum
226,635 182,768 155,565 43,867 24
Eliminations (136,373) (108,347) (90,867) (28,026) 26
Consolidated revenues $ 371,622 $ 324,162 $ 287,597 $ 47,460 15 %
Earnings from operations
UnitedHealthcare $ 16,415 $ 14,379 $ 11,975 $ 2,036 14 %
Optum Health 6,560 6,032 4,462 528 9
Optum Insight 4,268 3,588 3,398 680 19
Optum Rx 5,115 4,436 4,135 679 15
Optum
15,943 14,056 11,995 1,887 13
Consolidated earnings from operations
$ 32,358 $ 28,435 $ 23,970 $ 3,923 14 %
Operating margin
UnitedHealthcare 5.8 % 5.8 % 5.4 % — %
Optum Health 6.9 8.5 8.3 (1.6)
Optum Insight 22.5 24.6 27.9 (2.1)
Optum Rx 4.4 4.4 4.5 —
Optum
7.0 7.7 7.7 (0.7)
Consolidated operating margin 8.7 % 8.8 % 8.3 % (0.1) %
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UnitedHealthcare
The following table summarizes UnitedHealthcare revenues by business:
For the Years Ended December 31, Change
(in millions, except percentages) 2023 2022 2021 2023 vs. 2022
UnitedHealthcare Employer & Individual - Domestic $ 67,187 $ 63,599 $ 60,023 $ 3,588 6 %
UnitedHealthcare Employer & Individual - Global (a) 9,307 8,668 8,345 639 7
UnitedHealthcare Employer & Individual - Total (a) 76,494 72,267 68,368 4,227 6
UnitedHealthcare Medicare & Retirement
129,862 113,671 100,552 16,191 14
UnitedHealthcare Community & State
75,004 63,803 53,979 11,201 18
Total UnitedHealthcare revenues $ 281,360 $ 249,741 $ 222,899 $ 31,619 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 individuals served by our UnitedHealthcare businesses, by major market segment and funding arrangement:
December 31, Change
(in thousands, except percentages) 2023 2022 2021 2023 vs. 2022
Commercial - domestic:
Risk-based 8,115 8,045 7,985 70 1 %
Fee-based 19,200 18,640 18,595 560 3
Total commercial - domestic 27,315 26,685 26,580 630 2
Medicare Advantage 7,695 7,105 6,490 590 8
Medicaid 7,845 8,170 7,655 (325) (4)
Medicare Supplement (Standardized) 4,355 4,375 4,395 (20) —
Total community and senior 19,895 19,650 18,540 245 1
Total UnitedHealthcare - domestic medical 47,210 46,335 45,120 875 2
Commercial - global 5,540 5,360 5,510 180 3
Total UnitedHealthcare - medical 52,750 51,695 50,630 1,055 2 %
Supplemental Data:
Medicare Part D stand-alone 3,315 3,295 3,700 20 1 %
UnitedHealthcare’s revenues increased due to growth in the number of people served throughout the year in Medicare Advantage, Medicaid and commercial offerings. People served in Medicaid as of December 31, 2023 decreased primarily due to redeterminations, largely occurring in the second half of 2023, partially offset by increased people served with higher acuity needs. 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. Earnings from operations increased due to cost management initiatives and increased investment income, partially offset by higher senior outpatient and behavioral health care activity and costs associated with serving newly added patients under value-based care arrangements. Optum Health served approximately 103 million people as of December 31, 2023 compared to 102 million people as of December 31, 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.
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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 1,542 million and 1,438 million adjusted scripts in 2023 and 2022, respectively.
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 $8.0 billion and $8.8 billion in 2023 and 2022, 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) 2023 2022 2021 2023 vs. 2022
Sources of cash:
Cash provided by operating activities $ 29,068 $ 26,206 $ 22,343 $ 2,862
Issuances of long-term debt and short-term borrowings, net of repayments 4,280 12,536 2,481 (8,256)
Proceeds from common share issuances
1,353 1,253 1,355 100
Customer funds administered
— 5,548 622 (5,548)
Cash received for dispositions 685 3,414 15 (2,729)
Total sources of cash 35,386 48,957 26,816
Uses of cash:
Cash paid for acquisitions, net of cash assumed
(10,136) (21,458) (4,821) 11,322
Common share repurchases (8,000) (7,000) (5,000) (1,000)
Cash dividends paid (6,761) (5,991) (5,280) (770)
Purchases of property, equipment and capitalized software
(3,386) (2,802) (2,454) (584)
Purchases of investments, net of sales and maturities (1,777) (6,837) (1,843) 5,060
Purchases of redeemable noncontrolling interests (730) (176) (1,338) (554)
Customer funds administered (521) — — (521)
Other (2,110) (2,737) (1,564) 627
Total uses of cash (33,421) (47,001) (22,300)
Effect of exchange rate changes on cash and cash equivalents
97 34 (62) 63
Net increase in cash and cash equivalents $ 2,062 $ 1,990 $ 4,454 $ 72
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2023 Cash Flows Compared to 2022 Cash Flows
Increased cash flows provided by operating activities were driven by changes in working capital accounts and increased net earnings. Other significant changes in sources or uses of cash year-over-year included decreased cash paid for acquisitions and net purchases of investments, offset by decreased net issuances of short-term borrowings and long-term debt, customer funds administered and cash from dispositions.
Financial Condition
As of December 31, 2023, our cash, cash equivalent, available-for-sale debt securities and equity securities balances of $75.2 billion included $25.4 billion of cash and cash equivalents (of which $1.3 billion was available for general corporate use), $44.9 billion of debt securities and $4.9 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, 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
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 $7.9 billion, $3.7 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, 2023.
• Other liabilities. These include other long-term liabilities reflected in our Consolidated Balance Sheets as of December 31, 2023, 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 potential required 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.”
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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, 2023, 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.”
Credit Ratings. Our credit ratings as of December 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 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. As of December 31, 2023, we had Board of Directors’ authorization to purchase up to 15 million shares of our common stock. The Board of Directors from time to time may further amend the share repurchase program in order to increase the authorized number of shares which may be repurchased under the program. 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 2023, our Board of Directors increased the Company’s 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 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, 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 capital required for these acquisitions, excluding the payoff of acquired indebtedness, is approximately $6 billion.
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 2023, 2022 and 2021 included favorable medical cost development related to prior years of $840 million, $410 million and $1.7 billion, 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
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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.
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, 2023:
Completion Factors
(Decrease) Increase in Factors Increase (Decrease)
In Medical Costs Payable
(in millions)
(0.75)% $ 880
(0.50) 585
(0.25) 292
0.25 (290)
0.50 (579)
0.75 (867)
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, 2023:
Medical Cost PMPM Quarterly Trend
Increase (Decrease) in Factors Increase (Decrease)
In Medical Costs Payable
(in millions)
3% $ 1,128
2 752
1 376
(1) (376)
(2) (752)
(3) (1,128)
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, 2023; however, actual claim payments may differ from established estimates as discussed above. Assuming a hypothetical 1% difference between our December 31, 2023 estimates of medical costs payable and actual medical costs payable, excluding AARP Medicare Supplement Insurance and any potential offsetting impact from premium rebates, 2023 net earnings would have increased or decreased by approximately $245 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.”
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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.
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, 2023, 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, 2023, there were no significant concentrations of credit risk.