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UNH > SEC Filings for UNH > Form 10-K on 12-Feb-2014All Recent SEC Filings

Show all filings for UNITEDHEALTH GROUP INC

Form 10-K for UNITEDHEALTH GROUP INC


12-Feb-2014

Annual Report


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. Readers are cautioned that 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 that 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 Item 1A, "Risk Factors."
EXECUTIVE OVERVIEW
General
UnitedHealth Group is a diversified health and well-being company dedicated to helping people live healthier lives and making the health system work better for everyone. We offer a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services; and Optum, which provides information and technology-enabled health services.
We have four reportable segments across our two business platforms, UnitedHealthcare and Optum:
UnitedHealthcare, which includes UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement, UnitedHealthcare Community & State and UnitedHealthcare International;

OptumHealth;

OptumInsight; and

OptumRx.

Further information on our business and reportable segments is presented in Item 1, "Business" and in Note 13 to the Consolidated Financial Statements in Item 8, "Financial Statements."
2014 Business Realignment. On January 1, 2014, we realigned certain of our businesses to respond to changes in the markets we serve and the opportunities that are emerging as the health system evolves. Our Optum business platform took responsibility for certain technology operations and business processing activities with the intention of pursuing additional third-party commercial opportunities in addition to continuing to serve UnitedHealthcare. These activities, which were historically a corporate function, will be included in OptumInsight's results of operations. Our periodic filings with the SEC beginning with our first quarter 2014 Form 10-Q will include historical segment results restated to reflect the effect of this realignment and will continue to present the same four reportable segments (UnitedHealthcare, OptumHealth, OptumInsight and OptumRx).
Business Trends
Our businesses participate in the U.S., Brazilian and certain other international health economies. In the United States, health care spending comprises approximately 18% of gross domestic product and has grown consistently for many years. 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 macro-economic conditions and regulatory changes, including enacted health care reforms in the United States, which could also impact our results of operations.
Pricing Trends. We seek to price our health care benefit products consistent with anticipated underlying medical trends, while balancing growth, margins, and competitive dynamics (such as product positioning and price competitiveness) and legislative and regulatory changes such as cost increases for the industry fees and tax provisions of Health Reform Legislation. We continue to expect premium rates to be under pressure from ongoing market competition in commercial products and from government payment rates. Aggregating UnitedHealthcare's businesses, and before giving effect to Health Reform Legislation taxes, we believe the medical care ratio will rise over time as we continue to grow in the senior and public markets and participate in the emerging public health benefit exchange market.
In response to Health Reform Legislation, HHS established a review threshold of annual commercial premium rate increases generally at or above 10% and enacted a new rule requiring the production of information for any proposed rate increase. HHS review does not supersede existing state review and approval procedures. We have experienced regulatory challenges to appropriate premium rate increases in several states, including California and New York. The competitive forces common in our markets do not support unjustifiable rate increases. Further, our rates and rate filings are developed using methods


consistent with the standards of actuarial practices and we endeavor to sustain a commercial medical care ratio in a stable range for an equivalent mix of business. We have requested and received rate increases above 10% in a number of markets due to the combination of medical cost trends and the incremental costs of health care reform. We expect commercial pricing to continue to be highly competitive. The intensity of pricing competition depends on local market conditions and competitive dynamics. Overall, the industry has experienced lower medical costs trends due to moderated utilization, which has impacted pricing trends. Conversely, carriers are generally reflecting the 2014 Health Reform Legislation industry fees in their pricing. In some markets, competitors have adjusted their pricing to reflect recent medical cost trend experience as well as the implication of rate review rules and new benefit changes from Health Reform Legislation. In other areas we are seeing greater price competition due to pricing adjustments and other varied approaches used by competitors. The Medicare Advantage rate structure is changing and funding has been cut in recent years, with additional reductions to take effect in 2014 and 2015, as discussed below in "Regulatory Trends and Uncertainties." We expect these factors to result in year-over-year pressure on gross margin percentages for our Medicare business during 2014.
States are struggling to balance budget pressures with increases in their Medicaid expenditures. During 2013, rate changes for some Medicaid programs were slightly negative year-over-year. In general, we expect continued pressure on net margin percentages due to the Medicaid reimbursement rate environment, which we expect will remain tight due to the potential non-collectability of the insurer fee primarily related to Medicare Dual SNP programs and Medicaid. We continue to work with our state customers to advocate for actuarially sound rates that are commensurate with our medical cost trends, including fees and related taxes, and to take a prudent, market-sustainable posture for both new bids and maintenance of existing Medicaid contracts.
Medical Cost Trends. We expect our 2014 commercial medical cost trend to be in the range of 6.0% plus or minus 50 basis points, compared to approximately 5% in 2013. In 2014, we expect relatively consistent unit cost and utilization trends compared to 2013, before taking into account reform impacts. The impact of Health Reform Legislation and mandates is expected to pressure 2014 medical cost trends. Driving the increases are mandated essential health benefits and limits on out-of-pocket maximums. Consistent with recent years, our 2014 trend is expected to be driven primarily by continued unit cost pressure from health care providers. We expect 2014 pharmacy trends to be consistent with 2013. The primary drivers of prescription drug trends continue to be unit cost pressure on brand name drugs and a shift towards expensive new specialty drugs. In recent years, the recent weak economic environment combined with our medical cost management strategies has had a favorable impact on utilization trends. We believe the expected stability in the utilization trends in 2014 is influenced by our medical management strategies, our continued focus on value-based contracting arrangements and greater consumer engagement.
Delivery System and Payment Modernization. The health care market is changing 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 for people, improve the health of populations and reduce costs. The focus on delivery system modernization and payment reform is critical and the alignment of incentives between key constituents remains an important theme.
Through expansion of our existing programs and the creation of new programs, we are increasingly rewarding care providers for delivering improvements in quality and cost-efficiency. As of December 31, 2013, more than 2 million people we serve were directly aligned through the most progressive of these arrangements, including full risk, shared risk and bundled episode of care payment approaches. This trend is also creating needs for health management services that can coordinate care around the primary care physician, including new primary care channels, and for investment in new clinical and administrative information and management systems, providing growth opportunities for our Optum business platform.
Government Reliance on Private Sector. The government, as a benefit sponsor, has been increasingly relying on private sector programs. We expect this trend to continue as we believe the private sector provides a more flexible, better managed, higher quality health care experience than do traditional passive indemnity programs typically used in governmental benefit programs.

Many states are expanding their interest in managed care with particular emphasis on consumers who have complex and expensive health care needs. Medicaid managed care is increasingly viewed as an effective method to improve quality and manage costs. For example, there are nearly 10 million dually eligible beneficiaries who typically have complex conditions, with costs of care that are far higher than those of a typical Medicare or Medicaid beneficiary. Similarly, a small but complex group of nearly 4 million individuals who qualify for additional benefits under LTC programs represent only 6% of the total Medicaid population yet account for more than 30% of total Medicaid expenditures. The long-term care market represents a portion of the more than 15 million ABD Americans. While these individuals' health needs are more complex and more costly,


they have primarily been historically served in unmanaged environments. These markets provide UnitedHealthcare and Optum with an opportunity to work with governments to improve the health status of these populations through coordination of care. As of December 31, 2013, UnitedHealthcare served more than 275,000 people in legacy dually eligible programs through Medicare Advantage and SNPs. In the first half of 2014, UnitedHealthcare Community & State will help implement Integrated MME program awards in three states. Regulatory Trends and Uncertainties
Following is a summary of management's view of the trends and uncertainties related to some of the key provisions of Health Reform Legislation and other regulatory items; for additional information regarding Health Reform Legislation and regulatory trends and uncertainties, see Item 1, "Business - Government Regulation" and Item 1A, "Risk Factors." Medicare Advantage Rates and Minimum Loss Ratios. Medicare Advantage payment benchmarks have been cut over the last several years, including 2013, with additional funding reductions to be phased-in through 2017. Additionally, Congress passed the Budget Control Act of 2011, which as amended by the American Taxpayer Relief Act of 2012, triggered automatic across-the-board budget cuts (known as sequestration), including a 2% reduction in Medicare Advantage and Medicare Part D payments beginning April 1, 2013. The CMS final notice of 2014 Medicare Advantage benchmark rates and payment policies includes significant reductions to 2014 Medicare Advantage payments, including the benchmark reductions described previously. These reductions and Health Reform Legislation insurance industry tax described below result in revenue reductions and incremental assessments totaling more than 4% in 2014, against a typical industry forward medical cost trend outlook of 3%. The impact of these cuts to our Medicare Advantage revenues is partially mitigated by reductions in provider reimbursements for those care providers with rates indexed to Medicare Advantage revenues or Medicare fee-for-service reimbursement rates. Compared to 2013, and prior to any efforts to mitigate these funding reductions, we estimate that the net impact on our 2014 consolidated after-tax earnings will be approximately $0.9 billion. These factors affected our plan benefit designs, market participation, growth prospects and earnings potential for our Medicare Advantage plans in 2014. Further, beginning in 2014, Medicare Advantage and Medicare Part D plans will be required to have minimum MLRs of 85%. We do not believe the minimum MLR standard will have a material impact on our earnings. CMS is expected to release the proposed 2015 Medicare Advantage Rates on February 21, 2014. We expect sustained Medicare Advantage rate pressures in 2015 due to the continuing effect of the factors described above. Health Reform Legislation directed HHS to establish a program to reward high-quality Medicare Advantage plans beginning in 2012. Accordingly, our Medicare Advantage rates are currently enhanced by CMS quality bonuses in certain counties based on a plan's star rating. The level of star ratings from CMS, based upon specified clinical and operational performance standards, will impact future quality bonuses. In addition, star ratings affect the amount of savings a plan has to generate to offer supplemental benefits, which ultimately may affect the plan's revenue. The current expanded stars bonus program that pays bonuses to qualifying plans rated 3 stars or higher is set to expire after 2014. In 2015, quality bonus payments will only be paid to 4 and 5 star plans. For the 2014 payment year, approximately 57% of our current Medicare Advantage members are enrolled in plans that will be rated 3.5 stars or higher and approximately 9% are enrolled in plans that will be rated 4 stars or higher. For the 2015 payment year, based on scoring released by CMS in October 2013, approximately 70% of our current Medicare Advantage members are enrolled in plans that will be rated 3.5 stars or higher and approximately 24% are enrolled in plans that will be rated 4 stars or higher.
The ongoing reductions to Medicare Advantage funding place continued importance on effective medical management and ongoing improvements in administrative efficiency. There are a number of adjustments we can make and are making to partially offset these rate reductions. These adjustments will impact the majority of the seniors we serve through Medicare Advantage. For example, we seek to intensify our medical and operating cost management, make changes to the size and composition of our care provider networks, adjust members' benefits, implement or increase member premiums over and above the monthly payments we receive from the government, and decide on a county-by-county basis where we will offer Medicare Advantage plans. The depth of the underfunding of these benefits has caused us to exit certain plans and market areas for 2014 in which we served approximately 150,000 Medicare Advantage beneficiaries in 2013. In other markets, we may experience some reduction in membership in the plans with the greatest benefit cuts, but expect stable or growing membership in our strongest markets. We are dedicating substantial resources to improving our quality scores and star ratings to improve the performance and sustainability of our local market programs for 2016 and beyond.
In the longer term, we also may be able to mitigate some of the effects of reduced funding by increasing enrollment due, in part, to the increasing number of people eligible for Medicare in coming years. As Medicare Advantage reimbursement changes, other products may become relatively more attractive to Medicare beneficiaries increasing the demand for other senior health benefits products such as our Medicare Supplement and Medicare Part D insurance offerings.
Industry Fees and Taxes. Health Reform Legislation includes an annual, non-deductible insurance industry tax to be levied proportionally across the insurance industry for risk-based products, beginning January 1, 2014. The industry-wide amount of


the annual tax is $8 billion in 2014, $11.3 billion in 2015 and 2016, $13.9 billion in 2017 and $14.3 billion in 2018. For 2019 and beyond, the amount will equal the annual tax for the preceding year increased by the rate of premium growth for the preceding year. The annual tax will be allocated to each market participant based on the ratio of the entity's net premiums written during the preceding calendar year to the total health insurance industry's net premiums written for any U.S. health risk-based products during the preceding calendar year, subject to certain exceptions. This tax will first be expensed ratably throughout 2014 and our first payment will be made in September 2014. With the introduction of state health insurance exchanges and other significant market reforms in the individual and small group markets in 2014, Health Reform Legislation includes three programs designed to stabilize the health insurance markets. These programs encompass: a transitional reinsurance program; a temporary risk corridors program; and a permanent risk adjustment program. The transitional reinsurance program is a temporary program that will be funded on a per capita basis from all commercial lines of business including insured and self-funded arrangements, $25 billion over a three-year period beginning in 2014 of which $20 billion, subject to increases based on state decisions, will fund the reinsurance pool and $5 billion will fund the U.S. Treasury (Reinsurance Program). While funding for the Reinsurance Program will come from all commercial lines of business, only non-grandfathered, market reform compliant individual business will be eligible for reinsurance recoveries.
We expect our share of the industry fee to be approximately $1.3 billion to $1.4 billion in 2014. We estimate a significant increase of approximately 500 basis points in our 2014 effective income tax rate because this fee is not deductible. We estimate that the 2014 effect on earnings from operations due to our tax deductible contributions to the Reinsurance Program will be approximately $0.5 billion in 2014, payable in 2015. We do not expect material payments or receipts related to the temporary risk corridors program, permanent risk adjustment program or reinsurance recoveries in 2014. Our 2014 results of operations will include estimates related to these fees and programs. To the extent possible, we include the reform fees and related tax impacts in our pricing, which is expected to result in $1.4 billion to $1.6 billion of additional premium in 2014. Since the industry fee will be included in operating costs, we expect our medical care ratio to decrease in 2014 compared to historical results; the industry fee cost will be factored in, however, when calculating minimum MLR rebates.
Exchanges and Coverage Expansion. Across markets, we and our competitors are adapting product, network and marketing strategies to anticipate new distribution or expanding distribution channels including public exchanges, private exchanges and off exchange purchasing. Effective in 2014, states may create their own public exchange, enter a partnership exchange or rely on the federally facilitated exchange for individuals and small employers, with enrollment processes that commenced in October 2013. Exchanges create new market dynamics that could impact our existing businesses, depending on the ultimate member migration patterns for each market, the pace of migration in the market and the impact of the migration on our established membership. For example, over time certain employers may no longer offer health benefits to their employees and some employers purchasing full risk products could convert to self-funded programs. Our level of participation in public exchanges has been and will continue to be determined on a state-by-state basis. Each state is evaluated based on factors such as growth opportunities, our current local presence, our competitive positioning, our ability to honor our commitments to our local customers and members and the regulatory environment. In 2014, we are participating in 13 exchanges in 10 states and the District of Columbia, including four individual and nine SHOP exchanges.
Health Reform Legislation and related U.S. Supreme Court ruling also provide for optional expanded Medicaid coverage effective in January 2014. These measures remain subject to implementation at the state level, with varying levels of state adoption planned for January 1, 2014. We participate in programs in 24 states and the District of Columbia, and of these, more than half have opted to expand Medicaid.
Individual & Small Group Market Reforms. Health Reform Legislation includes several provisions, for most individual and small group plans with plan years beginning on January 1, 2014, that are expected to alter the individual and small group marketplace, including, among other matters: (1) adjusted community rating requirements, which will change how individual and small group plans are priced in many states; (2) essential health benefit requirements, which will result in benefit changes for many individual and small group policyholders; (3) actuarial value requirements, which will significantly impact benefit designs in the individual market, such as member cost sharing requirements; and (4) guaranteed issue requirements, which will require carriers to provide coverage to any qualified group or individual. These changes have resulted in significant benefit design and pricing changes for a substantial portion of the fully insured individual and small group markets. In 2014, we expect a decrease in individual membership due to a reduction in the number of states in which we will offer policies to new customers.


RESULTS SUMMARY
The following table summarizes our consolidated results of operations and other
financial information:
                                          For the Years Ended December 31,          Increase/(Decrease)        Increase/(Decrease)
(in millions, except percentages
and per share data)                       2013             2012         2011           2013 vs. 2012              2012 vs. 2011
Revenues:
Premiums                             $    109,557       $ 99,728     $ 91,983     $     9,829         10 %   $     7,745          8 %
Services                                    8,997          7,437        6,613           1,560         21             824         12
Products                                    3,190          2,773        2,612             417         15             161          6
Investment and other income                   745            680          654              65         10              26          4
Total revenues                            122,489        110,618      101,862          11,871         11           8,756          9
Operating costs:
Medical costs                              89,290         80,226       74,332           9,064         11           5,894          8
Operating costs                            19,362         17,306       15,557           2,056         12           1,749         11
Cost of products sold                       2,839          2,523        2,385             316         13             138          6
Depreciation and amortization               1,375          1,309        1,124              66          5             185         16
Total operating costs                     112,866        101,364       93,398          11,502         11           7,966          9
Earnings from operations                    9,623          9,254        8,464             369          4             790          9
Interest expense                             (708 )         (632 )       (505 )            76         12             127         25
Earnings before income taxes                8,915          8,622        7,959             293          3             663          8
Provision for income taxes                 (3,242 )       (3,096 )     (2,817 )           146          5             279         10
Net earnings                                5,673          5,526        5,142             147          3             384          7
Earnings attributable to
noncontrolling interests                      (48 )            -            -              48          -               -         nm
Net earnings attributable to
UnitedHealth Group common
shareholders                         $      5,625       $  5,526     $  5,142     $        99          2 %   $       384          7 %
Diluted earnings per share
attributable to UnitedHealth Group
common shareholders                  $       5.50       $   5.28     $   4.73     $      0.22          4 %   $      0.55         12 %
Medical care ratio (a)                       81.5 %         80.4 %       80.8 %           1.1  %                    (0.4 )%
Operating cost ratio                         15.8           15.6         15.3             0.2                        0.3
Operating margin                              7.9            8.4          8.3            (0.5 )                      0.1
Tax rate                                     36.4           35.9         35.4             0.5                        0.5
Net margin                                    4.6            5.0          5.0            (0.4 )                        -
Return on equity (b)                         17.7 %         18.7 %       18.9 %          (1.0 )%                    (0.2 )%

nm= not meaningful
(a) Medical care ratio is calculated as medical costs divided by premium revenue.

(b) Return on equity is calculated as net earnings divided by average equity. Average equity is calculated using the equity balance at the end of the preceding year and the equity balances at the end of the four quarters in the year presented.

SELECTED OPERATING PERFORMANCE AND OTHER SIGNIFICANT ITEMS
The following represents a summary of select 2013 year-over-year operating comparisons to 2012 and other 2013 significant items.
Consolidated revenues increased by 11%, UnitedHealthcare revenues increased by 10% and Optum revenues grew by 26%.

Earnings from operations increased by 4%, including a decrease of 6% at UnitedHealthcare and an increase of 61% at Optum.

UnitedHealthcare medical enrollment grew organically by 4.5 million people, including 2.9 million military beneficiaries through the TRICARE contract. Medicare Part D stand-alone membership grew by 725,000 people.

OptumRx completed the insourcing of pharmacy services for 12 million new and migrating customers served by UnitedHealthcare.

The consolidated medical care ratio of 81.5% increased 110 basis points.

As of December 31, 2013, there was $1.0 billion of cash available for general corporate use and 2013 cash flows from operations were $7.0 billion.


2013 RESULTS OF OPERATIONS COMPARED TO 2012 RESULTS
Consolidated Financial Results
Revenues
The increases in revenues during 2013 were primarily driven by the full year effect of 2012 acquisitions, including Amil, growth in the number of individuals served through benefit products and overall organic growth in each of Optum's major businesses. The revenue impact of these factors was partially offset by the reduction in Medicare Advantage rates. Also offsetting the revenue increase was the first quarter conversion of a large fully-insured commercial customer . . .

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