|
|
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 Item 8, “Financial Statements.”
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
Part I, Item 1A, “Risk Factors.”
EXECUTIVE OVERVIEW
General
UnitedHealth Group is a diversified health care company dedicated to helping people live healthier lives and helping make the
health system work better for everyone. Through our diversified family of businesses, we leverage core competencies in advanced, enabling technology; health care data; information and intelligence; and clinical care delivery, management and coordination to help meet the demands of the health system. These core competencies are deployed within our two distinct, but strategically aligned, business platforms: health benefits operating under UnitedHealthcare and health services operating under Optum.
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 Global;
|
Business Trends
Our businesses participate in the United States, South America and certain other international health markets. In the United States, health care spending has grown consistently for many years and comprises approximately 18% of gross domestic product. 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, which have impacted and could further impact our results of operations.
Pricing Trends
. To price our health care benefit products, we start with our view of expected future costs. 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 MLR thresholds. We will continue seeking to balance growth and profitability across all of these dimensions.
The commercial risk market remains highly competitive in both the small group and large group segments. We expect broad-based competition to continue as the industry adapts to individual and employer needs amid reform changes. The ACA included an annual, nondeductible insurance industry tax (Health Insurance Industry Tax) to be levied proportionally across the insurance industry for risk-based health insurance products. A provision in the 2016 Federal Budget imposed a one year moratorium for 2017 on the collection of the Health Insurance Industry Tax. Pricing for contracts that cover a portion of calendar year 2018 reflected the impact of the returning Health Insurance Industry Tax. Conversely, the industry has continued to experience favorable medical cost trends due to moderated utilization, which has impacted the competitive pricing environment.
We expect continued Medicaid revenue growth due to anticipated increases in the number of people we serve; we also believe that the payment rate environment creates the risk of 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 advocate for actuarially sound rates that are 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.
Medical Cost Trends.
Our medical cost trends primarily relate to changes in unit costs, health system utilization and prescription drug costs. We endeavor to mitigate those increases by engaging physicians and consumers with information and helping them make clinically sound choices, with the objective of helping them achieve high quality, affordable 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, improve the health of populations and reduce costs. We continue to see a greater number of people enrolled in plans with underlying incentive-based care provider payment models that reward high-quality, affordable care and foster collaboration. We work together with clinicians to leverage our data and analytics to provide the necessary information to close gaps in care and improve overall health outcomes for patients.
We are increasingly rewarding care providers for delivering improvements in quality and cost-efficiency. As of December 31, 2017, we served nearly 16 million people through some form of aligned contractual arrangement, including full-risk, shared-
risk and bundled episode-of-care and performance incentive payment approaches. As of December 31, 2017, our contracts with value-based elements total nearly $65 billion in annual spending.
This trend is creating needs for health management services that 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.
Regulatory Trends and Uncertainties
Medicare Advantage Rates.
Final 2018 Medicare Advantage rates resulted in an increase in industry base rates of approximately 0.45%, well short of the industry forward medical cost trend of 3%, as well as the return of the Health Insurance Industry Tax in 2018, described below, which creates continued pressure in the Medicare Advantage program. The impact of this funding shortfall in Medicare Advantage is partially mitigated by reductions in provider payments for those care providers with rates indexed to Medicare Advantage revenues or Medicare fee-for-service payment rates. These factors can affect our plan benefit designs, pricing, growth prospects and earnings expectations for our Medicare Advantage plans.
The ongoing pressure on Medicare Advantage funding places continued importance on effective medical management and ongoing improvements in administrative efficiency. There are a number of adjustments we have made to partially offset these rate pressures and reductions. In some years, 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, and adjust members' benefits, implement or increase the member premiums that supplement 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.
As Medicare Advantage payments change, other products may become relatively more attractive to Medicare beneficiaries and increase the demand for other senior health benefits products such as our market-leading Medicare Supplement and stand-alone Medicare Part D insurance offerings.
Our Medicare Advantage rates are currently enhanced by CMS quality bonuses in certain counties based on our local plans’ Star ratings. 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 can use to offer supplemental benefits, which ultimately may affect the plan’s membership and revenue. For the 2017 payment year, approximately 80% of our Medicare Advantage members were in plans rated four stars or higher. We expect that at least 85% of our Medicare Advantage members will be in plans rated four stars or higher for payment year 2018. We continue to dedicate substantial resources to advance our quality scores and Star ratings to strengthen our local market programs and further improve our performance.
Tax Reform.
Tax Reform was enacted by the U.S federal government in December 2017, changing existing United States tax law including reducing the U.S. corporate income tax rate. The Company re-measured deferred taxes as of the date of enactment, which resulted in a $1.2 billion reduction to the net deferred tax liability and corresponding increase to earnings in 2017. With Tax Reform, we expect that our effective tax rate in 2018 will be approximately 24%.
Health Insurance Industry Tax.
A provision in the 2016 Federal Budget imposed a one year moratorium for 2017 on the collection of the Health Insurance Industry Tax. In 2018, the industry-wide amount of the Health Insurance Industry Tax will be $14.3 billion and we expect our portion to be approximately $2.8 billion. A one year moratorium on the collection of the Health Insurance Industry Tax will occur in 2019.
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
|
|
Change
|
|
2017
|
|
2016
|
|
2015
|
|
2017 vs. 2016
|
|
2016 vs. 2015
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
158,453
|
|
|
$
|
144,118
|
|
|
$
|
127,163
|
|
|
$
|
14,335
|
|
|
10
|
%
|
|
$
|
16,955
|
|
|
13
|
%
|
Products
|
|
26,366
|
|
|
26,658
|
|
|
17,312
|
|
|
(292
|
)
|
|
(1
|
)
|
|
9,346
|
|
|
54
|
|
Services
|
|
15,317
|
|
|
13,236
|
|
|
11,922
|
|
|
2,081
|
|
|
16
|
|
|
1,314
|
|
|
11
|
|
Investment and other income
|
|
1,023
|
|
|
828
|
|
|
710
|
|
|
195
|
|
|
24
|
|
|
118
|
|
|
17
|
|
Total revenues
|
|
201,159
|
|
|
184,840
|
|
|
157,107
|
|
|
16,319
|
|
|
9
|
|
|
27,733
|
|
|
18
|
|
Operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical costs
|
|
130,036
|
|
|
117,038
|
|
|
103,875
|
|
|
12,998
|
|
|
11
|
|
|
13,163
|
|
|
13
|
|
Operating costs
|
|
29,557
|
|
|
28,401
|
|
|
24,312
|
|
|
1,156
|
|
|
4
|
|
|
4,089
|
|
|
17
|
|
Cost of products sold
|
|
24,112
|
|
|
24,416
|
|
|
16,206
|
|
|
(304
|
)
|
|
(1
|
)
|
|
8,210
|
|
|
51
|
|
Depreciation and amortization
|
|
2,245
|
|
|
2,055
|
|
|
1,693
|
|
|
190
|
|
|
9
|
|
|
362
|
|
|
21
|
|
Total operating costs
|
|
185,950
|
|
|
171,910
|
|
|
146,086
|
|
|
14,040
|
|
|
8
|
|
|
25,824
|
|
|
18
|
|
Earnings from operations
|
|
15,209
|
|
|
12,930
|
|
|
11,021
|
|
|
2,279
|
|
|
18
|
|
|
1,909
|
|
|
17
|
|
Interest expense
|
|
(1,186
|
)
|
|
(1,067
|
)
|
|
(790
|
)
|
|
(119
|
)
|
|
11
|
|
|
(277
|
)
|
|
35
|
|
Earnings before income taxes
|
|
14,023
|
|
|
11,863
|
|
|
10,231
|
|
|
2,160
|
|
|
18
|
|
|
1,632
|
|
|
16
|
|
Provision for income taxes
|
|
(3,200
|
)
|
|
(4,790
|
)
|
|
(4,363
|
)
|
|
1,590
|
|
|
(33
|
)
|
|
(427
|
)
|
|
10
|
|
Net earnings
|
|
10,823
|
|
|
7,073
|
|
|
5,868
|
|
|
3,750
|
|
|
53
|
|
|
1,205
|
|
|
21
|
|
Earnings attributable to noncontrolling interests
|
|
(265
|
)
|
|
(56
|
)
|
|
(55
|
)
|
|
(209
|
)
|
|
373
|
|
|
(1
|
)
|
|
2
|
|
Net earnings attributable to UnitedHealth Group common shareholders
|
|
$
|
10,558
|
|
|
$
|
7,017
|
|
|
$
|
5,813
|
|
|
$
|
3,541
|
|
|
50
|
%
|
|
$
|
1,204
|
|
|
21
|
%
|
Diluted earnings per share attributable to UnitedHealth Group common shareholders
|
|
$
|
10.72
|
|
|
$
|
7.25
|
|
|
$
|
6.01
|
|
|
$
|
3.47
|
|
|
48
|
%
|
|
$
|
1.24
|
|
|
21
|
%
|
Medical care ratio (a)
|
|
82.1
|
%
|
|
81.2
|
%
|
|
81.7
|
%
|
|
0.9
|
%
|
|
|
|
(0.5
|
)%
|
|
|
Operating cost ratio
|
|
14.7
|
|
|
15.4
|
|
|
15.5
|
|
|
(0.7
|
)
|
|
|
|
(0.1
|
)
|
|
|
Operating margin
|
|
7.6
|
|
|
7.0
|
|
|
7.0
|
|
|
0.6
|
|
|
|
|
—
|
|
|
|
Tax rate
|
|
22.8
|
|
|
40.4
|
|
|
42.6
|
|
|
(17.6
|
)
|
|
|
|
(2.2
|
)
|
|
|
Net earnings margin (b)
|
|
5.2
|
|
|
3.8
|
|
|
3.7
|
|
|
1.4
|
|
|
|
|
0.1
|
|
|
|
Return on equity (c)
|
|
24.4
|
%
|
|
19.4
|
%
|
|
17.7
|
%
|
|
5.0
|
%
|
|
|
|
1.7
|
%
|
|
|
|
|
(a)
|
Medical care ratio 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 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 each of the four quarters in the year presented.
|
SELECTED OPERATING PERFORMANCE AND OTHER SIGNIFICANT ITEMS
The following represents a summary of select
2017
year-over-year operating comparisons to
2016
and other
2017
significant items.
|
|
•
|
Consolidated revenues increased by
9%
, UnitedHealthcare revenues increased
10%
and Optum revenues grew
9%
.
|
|
|
•
|
UnitedHealthcare grew to serve an additional
1.1 million
people domestically.
|
|
|
•
|
Earnings from operations increased by
18%
, including increases of
16%
at UnitedHealthcare and
19%
at Optum.
|
|
|
•
|
Diluted earnings per common share increased
48%
to
$10.72
, including $1.22 per share due to the impact of Tax Reform.
|
|
|
•
|
Cash flows from operations were
$13.6 billion
, an increase of
39%
.
|
2017 RESULTS OF OPERATIONS COMPARED TO 2016 RESULTS
.
Consolidated Financial Results
Revenue
The increase in revenue was primarily driven by organic growth in the number of individuals served across our UnitedHealthcare benefits businesses and growth across the Optum business. The increase was partially offset by revenue decreases due to the withdrawals of the ACA-compliant products in the individual market and the effects of the Health Insurance Industry Tax moratorium.
Medical Costs and MCR
Medical costs increased due to risk-based membership growth and medical cost trends. The MCR increased due to the effects of the Health Insurance Industry Tax moratorium, offset primarily by the reduction in individual ACA business, medical management initiatives and an increase in favorable medical cost reserve development.
Income Tax Rate
Our effective tax rate decreased primarily due to the impact of Tax Reform and the Health Insurance Tax moratorium. The provision for income taxes included the $1.2 billion benefit from the revaluation of net deferred tax liabilities.
Reportable Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
Change
|
|
Change
|
(in millions, except percentages)
|
|
2017
|
|
2016
|
|
2015
|
|
2017 vs. 2016
|
|
2016 vs. 2015
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UnitedHealthcare
|
|
$
|
163,257
|
|
|
$
|
148,581
|
|
|
$
|
131,343
|
|
|
$
|
14,676
|
|
|
10
|
%
|
|
$
|
17,238
|
|
|
13
|
%
|
OptumHealth
|
|
20,570
|
|
|
16,908
|
|
|
13,927
|
|
|
3,662
|
|
|
22
|
|
|
2,981
|
|
|
21
|
|
OptumInsight
|
|
8,087
|
|
|
7,333
|
|
|
6,196
|
|
|
754
|
|
|
10
|
|
|
1,137
|
|
|
18
|
|
OptumRx
|
|
63,755
|
|
|
60,440
|
|
|
48,272
|
|
|
3,315
|
|
|
5
|
|
|
12,168
|
|
|
25
|
|
Optum eliminations
|
|
(1,227
|
)
|
|
(1,088
|
)
|
|
(791
|
)
|
|
(139
|
)
|
|
13
|
|
|
(297
|
)
|
|
38
|
|
Optum
|
|
91,185
|
|
|
83,593
|
|
|
67,604
|
|
|
7,592
|
|
|
9
|
|
|
15,989
|
|
|
24
|
|
Eliminations
|
|
(53,283
|
)
|
|
(47,334
|
)
|
|
(41,840
|
)
|
|
(5,949
|
)
|
|
13
|
|
|
(5,494
|
)
|
|
13
|
|
Consolidated revenues
|
|
$
|
201,159
|
|
|
$
|
184,840
|
|
|
$
|
157,107
|
|
|
$
|
16,319
|
|
|
9
|
%
|
|
$
|
27,733
|
|
|
18
|
%
|
Earnings from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UnitedHealthcare
|
|
$
|
8,498
|
|
|
$
|
7,307
|
|
|
$
|
6,754
|
|
|
$
|
1,191
|
|
|
16
|
%
|
|
$
|
553
|
|
|
8
|
%
|
OptumHealth
|
|
1,823
|
|
|
1,428
|
|
|
1,240
|
|
|
395
|
|
|
28
|
|
|
188
|
|
|
15
|
|
OptumInsight
|
|
1,770
|
|
|
1,513
|
|
|
1,278
|
|
|
257
|
|
|
17
|
|
|
235
|
|
|
18
|
|
OptumRx
|
|
3,118
|
|
|
2,682
|
|
|
1,749
|
|
|
436
|
|
|
16
|
|
|
933
|
|
|
53
|
|
Optum
|
|
6,711
|
|
|
5,623
|
|
|
4,267
|
|
|
1,088
|
|
|
19
|
|
|
1,356
|
|
|
32
|
|
Consolidated earnings from operations
|
|
$
|
15,209
|
|
|
$
|
12,930
|
|
|
$
|
11,021
|
|
|
$
|
2,279
|
|
|
18
|
%
|
|
$
|
1,909
|
|
|
17
|
%
|
Operating margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UnitedHealthcare
|
|
5.2
|
%
|
|
4.9
|
%
|
|
5.1
|
%
|
|
0.3
|
%
|
|
|
|
(0.2
|
)%
|
|
|
OptumHealth
|
|
8.9
|
|
|
8.4
|
|
|
8.9
|
|
|
0.5
|
|
|
|
|
(0.5
|
)
|
|
|
OptumInsight
|
|
21.9
|
|
|
20.6
|
|
|
20.6
|
|
|
1.3
|
|
|
|
|
—
|
|
|
|
OptumRx
|
|
4.9
|
|
|
4.4
|
|
|
3.6
|
|
|
0.5
|
|
|
|
|
0.8
|
|
|
|
Optum
|
|
7.4
|
|
|
6.7
|
|
|
6.3
|
|
|
0.7
|
|
|
|
|
0.4
|
|
|
|
Consolidated operating margin
|
|
7.6
|
%
|
|
7.0
|
%
|
|
7.0
|
%
|
|
0.6
|
%
|
|
|
|
—
|
%
|
|
|
UnitedHealthcare
The following table summarizes UnitedHealthcare revenues by business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
Change
|
|
Change
|
(in millions, except percentages)
|
|
2017
|
|
2016
|
|
2015
|
|
2017 vs. 2016
|
|
2016 vs. 2015
|
UnitedHealthcare Employer & Individual
|
|
$
|
52,066
|
|
|
$
|
53,084
|
|
|
$
|
47,194
|
|
|
$
|
(1,018
|
)
|
|
(2
|
)%
|
|
$
|
5,890
|
|
|
12
|
%
|
UnitedHealthcare Medicare & Retirement
|
|
65,995
|
|
|
56,329
|
|
|
49,735
|
|
|
9,666
|
|
|
17
|
|
|
6,594
|
|
|
13
|
|
UnitedHealthcare Community & State
|
|
37,443
|
|
|
32,945
|
|
|
28,911
|
|
|
4,498
|
|
|
14
|
|
|
4,034
|
|
|
14
|
|
UnitedHealthcare Global
|
|
7,753
|
|
|
6,223
|
|
|
5,503
|
|
|
1,530
|
|
|
25
|
|
|
720
|
|
|
13
|
|
Total UnitedHealthcare revenues
|
|
$
|
163,257
|
|
|
$
|
148,581
|
|
|
$
|
131,343
|
|
|
$
|
14,676
|
|
|
10
|
%
|
|
$
|
17,238
|
|
|
13
|
%
|
The following table summarizes the number of individuals served by our UnitedHealthcare businesses, by major market segment and funding arrangement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Change
|
|
Change
|
(in thousands, except percentages)
|
|
2017
|
|
2016
|
|
2015
|
|
2017 vs. 2016
|
|
2016 vs. 2015
|
Commercial risk-based - group
|
|
7,935
|
|
|
7,470
|
|
|
7,095
|
|
|
465
|
|
|
6
|
%
|
|
375
|
|
|
5
|
%
|
Commercial risk-based - individual
|
|
485
|
|
|
1,350
|
|
|
1,190
|
|
|
(865
|
)
|
|
(64
|
)
|
|
160
|
|
|
13
|
|
Commercial fee-based
|
|
18,595
|
|
|
18,900
|
|
|
18,565
|
|
|
(305
|
)
|
|
(2
|
)
|
|
335
|
|
|
2
|
|
Fee-based TRICARE
|
|
2,850
|
|
|
2,860
|
|
|
2,880
|
|
|
(10
|
)
|
|
—
|
|
|
(20
|
)
|
|
(1
|
)
|
Total commercial
|
|
29,865
|
|
|
30,580
|
|
|
29,730
|
|
|
(715
|
)
|
|
(2
|
)
|
|
850
|
|
|
3
|
|
Medicare Advantage
|
|
4,430
|
|
|
3,630
|
|
|
3,235
|
|
|
800
|
|
|
22
|
|
|
395
|
|
|
12
|
|
Medicaid
|
|
6,705
|
|
|
5,890
|
|
|
5,305
|
|
|
815
|
|
|
14
|
|
|
585
|
|
|
11
|
|
Medicare Supplement (Standardized)
|
|
4,445
|
|
|
4,265
|
|
|
4,035
|
|
|
180
|
|
|
4
|
|
|
230
|
|
|
6
|
|
Total public and senior
|
|
15,580
|
|
|
13,785
|
|
|
12,575
|
|
|
1,795
|
|
|
13
|
|
|
1,210
|
|
|
10
|
|
Total UnitedHealthcare - domestic medical
|
|
45,445
|
|
|
44,365
|
|
|
42,305
|
|
|
1,080
|
|
|
2
|
|
|
2,060
|
|
|
5
|
|
International
|
|
4,080
|
|
|
4,220
|
|
|
4,090
|
|
|
(140
|
)
|
|
(3
|
)
|
|
130
|
|
|
3
|
|
Total UnitedHealthcare - medical
|
|
49,525
|
|
|
48,585
|
|
|
46,395
|
|
|
940
|
|
|
2
|
%
|
|
2,190
|
|
|
5
|
%
|
Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare Part D stand-alone
|
|
4,940
|
|
|
4,930
|
|
|
5,060
|
|
|
10
|
|
|
—
|
%
|
|
(130
|
)
|
|
(3
|
)%
|
In the commercial group market, broad-based growth was across group sizes and regions, led by gains in services to small groups and resulted in the overall increase in people served through risk-based benefit plans. Fee-based commercial group business declined due to the non-renewal of one public sector customer. Membership in individual business decreased due to our reduced participation in ACA-compliant products in 2017. Medicare Advantage increased year-over-year due to growth in people served through individual and employer-sponsored group Medicare Advantage plans. Medicaid growth was driven by the combination of new state-based awards and growth in established programs. Medicare Supplement growth reflected strong customer retention and new sales.
UnitedHealthcare’s revenue increase was due to growth in the number of individuals served across its businesses and price increases for underlying medical cost trends, which were partially offset by the reduction of people served in ACA-compliant individual products and the impact of the Health Insurance Industry Tax moratorium.
The increase in UnitedHealthcare’s earnings from operations was led by diversified growth and increased operating margin. The 2016 results included losses in ACA-complaint individual products and guaranty fund assessments.
Optum
Total revenues and earnings from operations increased as each segment reported increased revenues and earnings from operations as a result of the factors discussed below.
The results by segment were as follows:
OptumHealth
Revenue and earnings from operations increased at OptumHealth primarily due to organic and acquisition-related growth in care delivery.
OptumInsight
Revenue and earnings from operations at OptumInsight increased primarily due to growth in revenue management services and business process services.
OptumRx
Revenue and earnings from operations at OptumRx increased primarily due to client and consumer growth. In 2017, OptumRx fulfilled 1.3 billion adjusted scripts compared to 1.2 billion in 2016.
2016 RESULTS OF OPERATIONS COMPARED TO 2015 RESULTS
Our results of operations were affected by our acquisition of Catamaran in the third quarter of 2015.
Consolidated Financial Results
Revenues
The increases in revenues were primarily driven by organic growth in the number of individuals served across our UnitedHealthcare benefits businesses and growth across all of our Optum services businesses.
Medical Costs
Medical costs increased due to risk-based membership growth and medical cost trends, partially offset by medical management initiatives.
Income Tax Rate
Our effective tax rate decreased primarily due to the adoption of “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which we adopted in the first quarter of 2016.
Reportable Segments
UnitedHealthcare
UnitedHealthcare’s revenue growth was due to growth in the number of individuals served across its businesses and price increases for underlying medical cost trends.
UnitedHealthcare’s operating earnings increased due to diversified growth, offset by guaranty fund assessments recorded in the fourth quarter of 2016.
Optum
Total revenues and operating earnings increased as each reporting segment increased revenues and earnings from operations by double-digit percentages as a result of the factors discussed below.
The results by segment were as follows:
OptumHealth
Revenue and earnings from operations increased at OptumHealth primarily due to growth in its health care delivery businesses as well as expansion of behavioral services into new Medicaid markets. Strong performance in business supporting UnitedHealthcare partially offset by investments in the health care delivery business drove the increase in earnings from operations.
OptumInsight
Revenue and earnings from operations at OptumInsight increased primarily due to growth in revenue management, business process outsourcing and technology services.
OptumRx
Revenue and earnings from operations at OptumRx increased primarily due to the full-year impact of Catamaran and organic growth. In 2016, OptumRx fulfilled 1.2 billion adjusted scripts compared to 932 million in 2015.
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 financial regulations and standards in their respective jurisdictions. These standards, among other things, require these subsidiaries to maintain specified levels of statutory capital, as defined by each jurisdiction, and restrict the timing and amount of dividends and other distributions that may be paid to their parent companies.
Our nonregulated businesses also generate significant cash flows from operations that are 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 shareholder dividends and/or repurchases of our common stock, depending on market conditions.
Summary of our Major Sources and Uses of Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
Change
|
|
Change
|
(in millions)
|
|
2017
|
|
2016
|
|
2015
|
|
2017 vs. 2016
|
|
2016 vs. 2015
|
Sources of cash:
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
13,596
|
|
|
$
|
9,795
|
|
|
$
|
9,740
|
|
|
$
|
3,801
|
|
|
$
|
55
|
|
Issuances of long-term debt and commercial paper, net of repayments
|
|
—
|
|
|
990
|
|
|
14,607
|
|
|
(990
|
)
|
|
(13,617
|
)
|
Proceeds from common share issuances
|
|
688
|
|
|
429
|
|
|
402
|
|
|
259
|
|
|
27
|
|
Customer funds administered
|
|
3,172
|
|
|
1,692
|
|
|
768
|
|
|
1,480
|
|
|
924
|
|
Other
|
|
—
|
|
|
37
|
|
|
—
|
|
|
(37
|
)
|
|
37
|
|
Total sources of cash
|
|
17,456
|
|
|
12,943
|
|
|
25,517
|
|
|
|
|
|
Uses of cash:
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash assumed
|
|
(2,131
|
)
|
|
(1,760
|
)
|
|
(16,164
|
)
|
|
(371
|
)
|
|
14,404
|
|
Cash dividends paid
|
|
(2,773
|
)
|
|
(2,261
|
)
|
|
(1,786
|
)
|
|
(512
|
)
|
|
(475
|
)
|
Common share repurchases
|
|
(1,500
|
)
|
|
(1,280
|
)
|
|
(1,200
|
)
|
|
(220
|
)
|
|
(80
|
)
|
Repayments of long-term debt and commercial paper, net of issuances
|
|
(2,615
|
)
|
|
—
|
|
|
—
|
|
|
(2,615
|
)
|
|
—
|
|
Purchases of property, equipment and capitalized software
|
|
(2,023
|
)
|
|
(1,705
|
)
|
|
(1,556
|
)
|
|
(318
|
)
|
|
(149
|
)
|
Purchases of investments, net of sales and maturities
|
|
(4,319
|
)
|
|
(5,927
|
)
|
|
(531
|
)
|
|
1,608
|
|
|
(5,396
|
)
|
Other
|
|
(539
|
)
|
|
(581
|
)
|
|
(696
|
)
|
|
42
|
|
|
115
|
|
Total uses of cash
|
|
(15,900
|
)
|
|
(13,514
|
)
|
|
(21,933
|
)
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(5
|
)
|
|
78
|
|
|
(156
|
)
|
|
(83
|
)
|
|
234
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
1,551
|
|
|
$
|
(493
|
)
|
|
$
|
3,428
|
|
|
$
|
2,044
|
|
|
$
|
(3,921
|
)
|
2017 Cash Flows Compared to 2016 Cash Flows
Increased cash flows provided by operating activities were primarily driven by higher net earnings and changes in working capital accounts, partially offset by the change in net deferred tax liabilities driven by tax reform.
Other significant changes in sources or uses of cash year-over-year included net repayments of debt compared to 2016 net proceeds from debt issuances, which were partially offset by lower net purchases of investments.
2016 Cash Flows Compared to 2015 Cash Flows
Cash flows provided by operating activities increased slightly as higher net earnings were mostly offset by increased CMS receivables and other operating items.
Other significant changes in sources or uses of cash year-over-year included increased net purchases of investments in 2016 and the decreases in cash paid for acquisitions and proceeds from debt issuances due to the 2015 acquisition of Catamaran.
Financial Condition
As of
December 31, 2017
, our cash, cash equivalent and available-for-sale investment balances of
$42.4 billion
included
$12.0 billion
of cash and cash equivalents (of which approximately
$800 million
was available for general corporate use),
$28.4 billion
of debt securities and
$2.0 billion
of investments in equity securities consisting of investments in non-U.S. dollar fixed-income funds; employee savings plan related investments; and dividend paying stocks. 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 supported by our bank credit facilities, reduce the need to sell investments during adverse market conditions. See
Note 4 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements”
for further detail concerning our fair value measurements.
Our available-for-sale debt portfolio had a weighted-average duration of 3.2 years and a weighted-average credit rating of “Double A” as of
December 31, 2017
. 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:
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 55%. As of December 31, 2017, our debt to debt-plus-shareholders’ equity ratio, as defined and calculated under the credit facilities, was approximately 37%.
Credit Ratings.
Our credit ratings as of
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody’s
|
|
S&P Global
|
|
Fitch
|
|
A.M. Best
|
|
Ratings
|
|
Outlook
|
|
Ratings
|
|
Outlook
|
|
Ratings
|
|
Outlook
|
|
Ratings
|
|
Outlook
|
Senior unsecured debt
|
A3
|
|
Stable
|
|
A+
|
|
Negative
(a)
|
|
A-
|
|
Stable
|
|
bbb+
|
|
Stable
|
Commercial paper
|
P-2
|
|
n/a
|
|
A-1
|
|
n/a
|
|
F1
|
|
n/a
|
|
AMB-2
|
|
n/a
|
|
|
(a)
|
In January 2018, S&P Global affirmed our ratings and changed our outlook to Stable.
|
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. For example, 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.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table summarizes future obligations due by period as of December 31, 2017, under our various contractual obligations and commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2019 to 2020
|
|
2021 to 2022
|
|
Thereafter
|
|
Total
|
Debt (a)
|
|
$
|
4,006
|
|
|
$
|
7,017
|
|
|
$
|
7,241
|
|
|
$
|
30,609
|
|
|
$
|
48,873
|
|
Operating leases
|
|
538
|
|
|
884
|
|
|
851
|
|
|
809
|
|
|
3,082
|
|
Purchase and other obligations (b)
|
|
833
|
|
|
866
|
|
|
462
|
|
|
293
|
|
|
2,454
|
|
Other liabilities (c)
|
|
823
|
|
|
284
|
|
|
284
|
|
|
5,589
|
|
|
6,980
|
|
Redeemable noncontrolling interests (d)
|
|
1,575
|
|
|
358
|
|
|
25
|
|
|
231
|
|
|
2,189
|
|
Total contractual obligations
|
|
$
|
7,775
|
|
|
$
|
9,409
|
|
|
$
|
8,863
|
|
|
$
|
37,531
|
|
|
$
|
63,578
|
|
|
|
(b)
|
Includes fixed or minimum commitments under existing purchase obligations for goods and services, including agreements that are cancelable with the payment of an early termination penalty and remaining capital commitments for venture capital funds and other funding commitments. Excludes agreements that are cancelable without penalty and excludes liabilities to the extent recorded in our Consolidated Balance Sheets as of
December 31, 2017
.
|
|
|
(c)
|
Includes obligations associated with contingent consideration and other payments related to business acquisitions, certain employee benefit programs, amounts accrued for guaranty fund assessments, unrecognized tax benefits, and various other long-term liabilities. Due to uncertainty regarding payment timing, obligations for employee benefit programs, charitable contributions, future settlements and other liabilities have been classified as “Thereafter.”
|
|
|
(d)
|
Includes commitments for redeemable shares of our subsidiaries. When the timing of the redemption is indeterminable, the commitment has been classified as “Thereafter.”
|
Pending Acquisitions.
In December 2017, we entered into agreements to acquire two companies in the health care sector for a total of approximately $7.7 billion, which are not reflected in the table above. One of the acquisitions closed in January 2018; the other is expected to close later in 2018, subject to regulatory approval and other customary closing conditions.
We do not have other significant contractual obligations or commitments that require 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.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2017, we were not involved in any off-balance sheet arrangements, which have or are reasonably likely to have a material effect on our financial condition, results of operations or liquidity.
RECENTLY ISSUED ACCOUNTING STANDARDS
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those estimates that require management to make challenging, subjective or complex judgments, often because they must estimate the effects of matters that are inherently uncertain and may change in subsequent
periods. Critical accounting estimates involve judgments and uncertainties that 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 that have been rendered on behalf of insured 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 and substantially all within twelve months. As of
December 31, 2017
, our days outstanding in medical payables was 50 days, calculated as total medical payables divided by total medical costs times the number of days in the period.
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 2017, 2016 and 2015 included favorable medical cost development related to prior years of
$690 million
,
$220 million
and
$320 million
, 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 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 that have been 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 inventory levels and claim processing backlogs, 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) 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, 2017
:
|
|
|
|
|
|
Completion Factors
(Decrease) Increase in Factors
|
|
Increase (Decrease)
In Medical Costs Payable
|
|
|
(in millions)
|
(0.75)%
|
|
$
|
486
|
|
(0.50)
|
|
323
|
|
(0.25)
|
|
161
|
|
0.25
|
|
(160
|
)
|
0.50
|
|
(320
|
)
|
0.75
|
|
(478
|
)
|
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, including but not limited to, pharmacy utilization trends, inpatient hospital authorization data and influenza incidence data from the National Centers for Disease Control. We also consider macroeconomic variables such as gross-domestic product 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, catastrophes and epidemics.
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, 2017
:
|
|
|
|
|
|
Medical Cost PMPM Trend
Increase (Decrease) in Factors
|
|
Increase (Decrease)
In Medical Costs Payable
|
|
|
(in millions)
|
3%
|
|
$
|
623
|
|
2
|
|
415
|
|
1
|
|
208
|
|
(1)
|
|
(208
|
)
|
(2)
|
|
(415
|
)
|
(3)
|
|
(623
|
)
|
The completion factors and medical costs PMPM trend factors analyses above include outcomes that are 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, 2017
; however, actual claim payments may differ from established estimates as discussed above. Assuming a hypothetical 1% difference between our
December 31, 2017
estimates of medical costs payable and actual medical costs payable, excluding AARP Medicare Supplement Insurance and any potential offsetting impact from premium rebates, 2017 net earnings would have increased or decreased by $110 million.
Revenues
We derive a substantial portion of our revenues from health care insurance premiums. We recognize premium revenues in the period eligible individuals are entitled to receive health care services. Customers are typically billed monthly at a contracted rate per eligible person multiplied by the total number of people eligible to receive services.
Our Medicare Advantage and Medicare Part D premium revenues are subject to periodic adjustment under the CMS risk adjustment payment methodology. The CMS risk adjustment model provides higher per member payments for enrollees diagnosed with certain conditions and lower payments for enrollees who are healthier. We estimate risk adjustment revenues based upon the data submitted and expected to be submitted to CMS. As a result of the variability of factors that determine such estimations, the actual amount of CMS’ retroactive payments could be materially more or less than our estimates. This may result in favorable or unfavorable adjustments to our Medicare premium revenue and, accordingly, our profitability. For more detail on premium revenues, see
Note 2 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements.”
Risk adjustment data for our plans is subject to review by the federal and state governments, including audit by regulators. See
Note 12 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements”
for additional information regarding these audits. Our estimates of premiums to be recognized are reduced by any expected premium minimum MLR rebates payable by us.
Goodwill and Intangible Assets
Goodwill.
We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate 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 that 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 that 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 multi-step test measuring the fair values of the reporting units and comparing them to their aggregate carrying values, including goodwill. If the fair value is less than the carrying value of the reporting unit, then the implied value of goodwill would be calculated and compared to the carrying amount of goodwill to determine whether goodwill is impaired.
We estimate the fair values of our reporting units using discounted cash flows, which include assumptions about a wide variety of internal and external factors. Significant assumptions used in the impairment analysis include financial projections of free cash flow (including significant assumptions about operations, capital requirements and income taxes), 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.
Forecasts 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. Key assumptions used in these forecasts include:
|
|
•
|
Revenue trends.
Key revenue drivers for each reporting unit are determined and assessed. Significant factors include: customer and/or membership growth, medical trends and the impact and expectations of regulatory environments. Additional macro-economic assumptions relating to unemployment, GDP growth, interest rates and inflation are also evaluated and incorporated, as appropriate.
|
|
|
•
|
Medical cost trends.
For further discussion of medical cost trends, see the “Medical Cost Trend” section of Executive Overview-
Business Trends
above and the discussion in the “Medical Costs Payable”
critical accounting estimate
above. Similar factors, including historical and expected medical cost trend levels, are considered in estimating our long-term medical trends at the reporting unit level.
|
|
|
•
|
Operating productivity.
We forecast expected operating cost levels based on historical levels and expectations of future operating cost levels.
|
|
|
•
|
Capital levels.
The operating and long-term capital requirements for each business are considered.
|
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 that reflect 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. We completed our annual impairment tests for goodwill as of October 1, 2017. All of our reporting units had fair values substantially in excess of their carrying values.
Intangible Assets.
Our finite-lived intangible assets are subject to impairment tests when events or circumstances indicate that an asset’s (or asset group’s) carrying value may exceed its estimated fair value. Consideration is given on a quarterly basis to a number of potential impairment indicators, including: changes in the use of the assets, changes in legal or other business factors that could affect value, experienced or expected operating cash-flow deterioration or losses, adverse changes in customer populations, adverse competitive or technological advances that could impact value and other factors.
Our indefinite-lived intangible assets are tested for impairment on an annual basis, or more frequently if impairment indicators exist. To determine if an indefinite-lived intangible asset is impaired, we compare its estimated fair value to its carrying value. If the carrying value exceeds its estimated fair value, an impairment would be recorded for the amount by which the carrying value exceeds its estimated fair value. Intangible assets were not impaired in 2017.
LEGAL MATTERS
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 that 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 that are investment grade. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of employer groups and other customers that constitute our client base. As of
December 31, 2017
, there were no significant concentrations of credit risk.
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of UnitedHealth Group Incorporated and Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of UnitedHealth Group Incorporated and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinions
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
|
|
|
/
S
/ DELOITTE & TOUCHE LLP
|
|
Minneapolis, Minnesota
|
February 13, 2018
|
We have served as the Company's auditor since 2002.
UnitedHealth Group
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
December 31,
2017
|
|
December 31,
2016
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,981
|
|
|
$
|
10,430
|
|
Short-term investments
|
|
3,509
|
|
|
2,845
|
|
Accounts receivable, net of allowances of $641 and $514
|
|
9,568
|
|
|
8,152
|
|
Other current receivables, net of allowances of $440 and $409
|
|
6,262
|
|
|
7,499
|
|
Assets under management
|
|
3,101
|
|
|
3,105
|
|
Prepaid expenses and other current assets
|
|
2,663
|
|
|
1,848
|
|
Total current assets
|
|
37,084
|
|
|
33,879
|
|
Long-term investments
|
|
28,341
|
|
|
23,868
|
|
Property, equipment and capitalized software, net of accumulated depreciation and amortization of $3,694 and $3,749
|
|
7,013
|
|
|
5,901
|
|
Goodwill
|
|
54,556
|
|
|
47,584
|
|
Other intangible assets, net of accumulated amortization of $4,309 and $3,847
|
|
8,489
|
|
|
8,541
|
|
Other assets
|
|
3,575
|
|
|
3,037
|
|
Total assets
|
|
$
|
139,058
|
|
|
$
|
122,810
|
|
Liabilities, redeemable noncontrolling interests and equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Medical costs payable
|
|
$
|
17,871
|
|
|
$
|
16,391
|
|
Accounts payable and accrued liabilities
|
|
15,180
|
|
|
13,361
|
|
Commercial paper and current maturities of long-term debt
|
|
2,857
|
|
|
7,193
|
|
Unearned revenues
|
|
2,269
|
|
|
1,968
|
|
Other current liabilities
|
|
12,286
|
|
|
10,339
|
|
Total current liabilities
|
|
50,463
|
|
|
49,252
|
|
Long-term debt, less current maturities
|
|
28,835
|
|
|
25,777
|
|
Deferred income taxes
|
|
2,182
|
|
|
2,761
|
|
Other liabilities
|
|
5,556
|
|
|
4,831
|
|
Total liabilities
|
|
87,036
|
|
|
82,621
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests
|
|
2,189
|
|
|
2,012
|
|
Equity:
|
|
|
|
|
Preferred stock, $0.001 par value - 10 shares authorized; no shares issued or outstanding
|
|
—
|
|
|
—
|
|
Common stock, $0.01 par value - 3,000 shares authorized; 969 and 952 issued and outstanding
|
|
10
|
|
|
10
|
|
Additional paid-in capital
|
|
1,703
|
|
|
—
|
|
Retained earnings
|
|
48,730
|
|
|
40,945
|
|
Accumulated other comprehensive loss
|
|
(2,667
|
)
|
|
(2,681
|
)
|
Nonredeemable noncontrolling interests
|
|
2,057
|
|
|
(97
|
)
|
Total equity
|
|
49,833
|
|
|
38,177
|
|
Total liabilities, redeemable noncontrolling interests and equity
|
|
$
|
139,058
|
|
|
$
|
122,810
|
|
UnitedHealth Group
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
(in millions, except per share data)
|
|
2017
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
Premiums
|
|
$
|
158,453
|
|
|
$
|
144,118
|
|
|
$
|
127,163
|
|
Products
|
|
26,366
|
|
|
26,658
|
|
|
17,312
|
|
Services
|
|
15,317
|
|
|
13,236
|
|
|
11,922
|
|
Investment and other income
|
|
1,023
|
|
|
828
|
|
|
710
|
|
Total revenues
|
|
201,159
|
|
|
184,840
|
|
|
157,107
|
|
Operating costs:
|
|
|
|
|
|
|
Medical costs
|
|
130,036
|
|
|
117,038
|
|
|
103,875
|
|
Operating costs
|
|
29,557
|
|
|
28,401
|
|
|
24,312
|
|
Cost of products sold
|
|
24,112
|
|
|
24,416
|
|
|
16,206
|
|
Depreciation and amortization
|
|
2,245
|
|
|
2,055
|
|
|
1,693
|
|
Total operating costs
|
|
185,950
|
|
|
171,910
|
|
|
146,086
|
|
Earnings from operations
|
|
15,209
|
|
|
12,930
|
|
|
11,021
|
|
Interest expense
|
|
(1,186
|
)
|
|
(1,067
|
)
|
|
(790
|
)
|
Earnings before income taxes
|
|
14,023
|
|
|
11,863
|
|
|
10,231
|
|
Provision for income taxes
|
|
(3,200
|
)
|
|
(4,790
|
)
|
|
(4,363
|
)
|
Net earnings
|
|
10,823
|
|
|
7,073
|
|
|
5,868
|
|
Earnings attributable to noncontrolling interests
|
|
(265
|
)
|
|
(56
|
)
|
|
(55
|
)
|
Net earnings attributable to UnitedHealth Group common shareholders
|
|
$
|
10,558
|
|
|
$
|
7,017
|
|
|
$
|
5,813
|
|
Earnings per share attributable to UnitedHealth Group common shareholders:
|
|
|
|
|
|
|
Basic
|
|
$
|
10.95
|
|
|
$
|
7.37
|
|
|
$
|
6.10
|
|
Diluted
|
|
$
|
10.72
|
|
|
$
|
7.25
|
|
|
$
|
6.01
|
|
Basic weighted-average number of common shares outstanding
|
|
964
|
|
|
952
|
|
|
953
|
|
Dilutive effect of common share equivalents
|
|
21
|
|
|
16
|
|
|
14
|
|
Diluted weighted-average number of common shares outstanding
|
|
985
|
|
|
968
|
|
|
967
|
|
Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents
|
|
5
|
|
|
3
|
|
|
8
|
|
Cash dividends declared per common share
|
|
$
|
2.875
|
|
|
$
|
2.375
|
|
|
$
|
1.875
|
|
UnitedHealth Group
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
(in millions)
|
|
2017
|
|
2016
|
|
2015
|
Net earnings
|
|
$
|
10,823
|
|
|
$
|
7,073
|
|
|
$
|
5,868
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Gross unrealized gains (losses) on investment securities during the period
|
|
209
|
|
|
(73
|
)
|
|
(123
|
)
|
Income tax effect
|
|
(72
|
)
|
|
26
|
|
|
44
|
|
Total unrealized gains (losses), net of tax
|
|
137
|
|
|
(47
|
)
|
|
(79
|
)
|
Gross reclassification adjustment for net realized gains included in net earnings
|
|
(83
|
)
|
|
(166
|
)
|
|
(141
|
)
|
Income tax effect
|
|
30
|
|
|
60
|
|
|
53
|
|
Total reclassification adjustment, net of tax
|
|
(53
|
)
|
|
(106
|
)
|
|
(88
|
)
|
Total foreign currency translation (losses) gains
|
|
(70
|
)
|
|
806
|
|
|
(1,775
|
)
|
Other comprehensive income (loss)
|
|
14
|
|
|
653
|
|
|
(1,942
|
)
|
Comprehensive income
|
|
10,837
|
|
|
7,726
|
|
|
3,926
|
|
Comprehensive income attributable to noncontrolling interests
|
|
(265
|
)
|
|
(56
|
)
|
|
(55
|
)
|
Comprehensive income attributable to UnitedHealth Group common shareholders
|
|
$
|
10,572
|
|
|
$
|
7,670
|
|
|
$
|
3,871
|
|
UnitedHealth Group
Consolidated Statements of Changes in Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-In Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Nonredeemable
Noncontrolling
Interests
|
|
Total
Equity
|
(in millions)
|
|
Shares
|
|
Amount
|
|
|
|
Net Unrealized Gains (Losses) on Investments
|
|
Foreign Currency Translation (Losses) Gains
|
|
|
Balance at January 1, 2015
|
|
954
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
33,836
|
|
|
$
|
223
|
|
|
$
|
(1,615
|
)
|
|
$
|
—
|
|
|
$
|
32,454
|
|
Net earnings
|
|
|
|
|
|
|
|
5,813
|
|
|
|
|
|
|
26
|
|
|
5,839
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
(167
|
)
|
|
(1,775
|
)
|
|
|
|
(1,942
|
)
|
Issuances of common stock, and related tax effects
|
|
10
|
|
|
—
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
127
|
|
Share-based compensation, and related tax benefits
|
|
|
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
589
|
|
Common share repurchases
|
|
(11
|
)
|
|
—
|
|
|
(462
|
)
|
|
(738
|
)
|
|
|
|
|
|
|
|
(1,200
|
)
|
Cash dividends paid on common shares
|
|
|
|
|
|
|
|
(1,786
|
)
|
|
|
|
|
|
|
|
(1,786
|
)
|
Redeemable noncontrolling interests fair value and other adjustments
|
|
|
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
(225
|
)
|
Acquisition of nonredeemable noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
9
|
|
Distributions to nonredeemable noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140
|
)
|
|
(140
|
)
|
Balance at December 31, 2015
|
|
953
|
|
|
10
|
|
|
29
|
|
|
37,125
|
|
|
56
|
|
|
(3,390
|
)
|
|
(105
|
)
|
|
33,725
|
|
Adjustment to adopt ASU 2016-09
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
28
|
|
Net earnings
|
|
|
|
|
|
|
|
7,017
|
|
|
|
|
|
|
40
|
|
|
7,057
|
|
Other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
(153
|
)
|
|
806
|
|
|
|
|
653
|
|
Issuances of common stock, and related tax effects
|
|
9
|
|
|
—
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
191
|
|
Share-based compensation
|
|
|
|
|
|
455
|
|
|
|
|
|
|
|
|
|
|
455
|
|
Common share repurchases
|
|
(10
|
)
|
|
—
|
|
|
(316
|
)
|
|
(964
|
)
|
|
|
|
|
|
|
|
(1,280
|
)
|
Cash dividends paid on common shares
|
|
|
|
|
|
|
|
(2,261
|
)
|
|
|
|
|
|
|
|
(2,261
|
)
|
Acquisition of redeemable noncontrolling interest shares
|
|
|
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
(143
|
)
|
Redeemable noncontrolling interest fair value and other adjustments
|
|
|
|
|
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
(216
|
)
|
Distributions to nonredeemable noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
(32
|
)
|
Balance at December 31, 2016
|
|
952
|
|
|
10
|
|
|
—
|
|
|
40,945
|
|
|
(97
|
)
|
|
(2,584
|
)
|
|
(97
|
)
|
|
38,177
|
|
Net earnings
|
|
|
|
|
|
|
|
10,558
|
|
|
|
|
|
|
194
|
|
|
10,752
|
|
Other comprehensive income
(loss)
|
|
|
|
|
|
|
|
|
|
84
|
|
|
(70
|
)
|
|
|
|
14
|
|
Issuances of common stock, and related tax effects
|
|
26
|
|
|
—
|
|
|
2,225
|
|
|
|
|
|
|
|
|
|
|
2,225
|
|
Share-based compensation
|
|
|
|
|
|
582
|
|
|
|
|
|
|
|
|
|
|
582
|
|
Common share repurchases
|
|
(9
|
)
|
|
—
|
|
|
(1,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,500
|
)
|
Cash dividends paid on common shares
|
|
|
|
|
|
|
|
(2,773
|
)
|
|
|
|
|
|
|
|
(2,773
|
)
|
Acquisition of redeemable noncontrolling interest shares
|
|
|
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
283
|
|
Redeemable noncontrolling interests fair value and other adjustments
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
113
|
|
Acquisition of nonredeemable noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,112
|
|
|
2,112
|
|
Distributions to nonredeemable noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152
|
)
|
|
(152
|
)
|
Balance at December 31, 2017
|
|
969
|
|
|
$
|
10
|
|
|
$
|
1,703
|
|
|
$
|
48,730
|
|
|
$
|
(13
|
)
|
|
$
|
(2,654
|
)
|
|
$
|
2,057
|
|
|
$
|
49,833
|
|
UnitedHealth Group
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
(in millions)
|
|
2017
|
|
2016
|
|
2015
|
Operating activities
|
|
|
|
|
|
|
Net earnings
|
|
$
|
10,823
|
|
|
$
|
7,073
|
|
|
$
|
5,868
|
|
Noncash items:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
2,245
|
|
|
2,055
|
|
|
1,693
|
|
Deferred income taxes
|
|
(965
|
)
|
|
81
|
|
|
(73
|
)
|
Share-based compensation
|
|
597
|
|
|
485
|
|
|
406
|
|
Other, net
|
|
217
|
|
|
(82
|
)
|
|
(235
|
)
|
Net change in other operating items, net of effects from acquisitions and changes in AARP balances:
|
|
|
|
|
|
|
Accounts receivable
|
|
(1,062
|
)
|
|
(1,357
|
)
|
|
(591
|
)
|
Other assets
|
|
(630
|
)
|
|
(1,601
|
)
|
|
(1,430
|
)
|
Medical costs payable
|
|
1,284
|
|
|
1,849
|
|
|
2,585
|
|
Accounts payable and other liabilities
|
|
930
|
|
|
1,494
|
|
|
1,280
|
|
Unearned revenues
|
|
157
|
|
|
(202
|
)
|
|
237
|
|
Cash flows from operating activities
|
|
13,596
|
|
|
9,795
|
|
|
9,740
|
|
Investing activities
|
|
|
|
|
|
|
Purchases of investments
|
|
(14,588
|
)
|
|
(17,547
|
)
|
|
(9,939
|
)
|
Sales of investments
|
|
4,623
|
|
|
7,339
|
|
|
6,054
|
|
Maturities of investments
|
|
5,646
|
|
|
4,281
|
|
|
3,354
|
|
Cash paid for acquisitions, net of cash assumed
|
|
(2,131
|
)
|
|
(1,760
|
)
|
|
(16,164
|
)
|
Purchases of property, equipment and capitalized software
|
|
(2,023
|
)
|
|
(1,705
|
)
|
|
(1,556
|
)
|
Other, net
|
|
(126
|
)
|
|
37
|
|
|
(144
|
)
|
Cash flows used for investing activities
|
|
(8,599
|
)
|
|
(9,355
|
)
|
|
(18,395
|
)
|
Financing activities
|
|
|
|
|
|
|
Common share repurchases
|
|
(1,500
|
)
|
|
(1,280
|
)
|
|
(1,200
|
)
|
Cash dividends paid
|
|
(2,773
|
)
|
|
(2,261
|
)
|
|
(1,786
|
)
|
Proceeds from common stock issuances
|
|
688
|
|
|
429
|
|
|
402
|
|
Repayments of long-term debt
|
|
(4,398
|
)
|
|
(2,596
|
)
|
|
(1,041
|
)
|
(Repayments of) proceeds from commercial paper, net
|
|
(3,508
|
)
|
|
(382
|
)
|
|
3,666
|
|
Proceeds from issuance of long-term debt
|
|
5,291
|
|
|
3,968
|
|
|
11,982
|
|
Customer funds administered
|
|
3,172
|
|
|
1,692
|
|
|
768
|
|
Other, net
|
|
(413
|
)
|
|
(581
|
)
|
|
(552
|
)
|
Cash flows (used for) from financing activities
|
|
(3,441
|
)
|
|
(1,011
|
)
|
|
12,239
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(5
|
)
|
|
78
|
|
|
(156
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
1,551
|
|
|
(493
|
)
|
|
3,428
|
|
Cash and cash equivalents, beginning of period
|
|
10,430
|
|
|
10,923
|
|
|
7,495
|
|
Cash and cash equivalents, end of period
|
|
$
|
11,981
|
|
|
$
|
10,430
|
|
|
$
|
10,923
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,133
|
|
|
$
|
1,055
|
|
|
$
|
639
|
|
Cash paid for income taxes
|
|
4,004
|
|
|
4,726
|
|
|
4,401
|
|
Supplemental schedule of non-cash investing activities
|
|
|
|
|
|
|
Common stock issued for acquisitions
|
|
$
|
2,164
|
|
|
$
|
—
|
|
|
$
|
—
|
|
UnitedHealth Group
Notes to the Consolidated Financial Statements
|
|
1.
|
Description of Business
|
UnitedHealth Group Incorporated (individually and together with its subsidiaries, “UnitedHealth Group” and “the Company”) is a diversified health care company dedicated to helping people live healthier lives and helping make the health system work better for everyone.
Through its diversified family of businesses, the Company leverages core competencies in data and health information; advanced technology; and clinical expertise to help meet the demands of the health system. These core competencies are deployed within two distinct, but strategically aligned, business platforms: health benefits operating under UnitedHealthcare and health services operating under Optum.
2.
Basis of Presentation, Use of Estimates and Significant Accounting Policies
Basis of Presentation
The Company has prepared the Consolidated Financial Statements according to U.S. Generally Accepted Accounting Principles (GAAP) and has included the accounts of UnitedHealth Group and its subsidiaries.
Use of Estimates
These Consolidated Financial Statements include certain amounts based on the Company’s best estimates and judgments. The Company’s most significant estimates relate to estimates and judgments for medical costs payable and revenues, valuation and impairment analysis of goodwill and other intangible assets and estimates of other current liabilities and other current receivables. Certain of these estimates require the application of complex assumptions and judgments, often because they involve matters that are inherently uncertain and will likely change in subsequent periods. The impact of any change in estimates is included in earnings in the period in which the estimate is adjusted.
Revenues
Premiums
Premium revenues are primarily derived from risk-based health insurance arrangements in which the premium is typically at a fixed rate per individual served for a one-year period, and the Company assumes the economic risk of funding its customers’ health care and related administrative costs.
Premium revenues are recognized in the period in which eligible individuals are entitled to receive health care benefits. Health care premium payments received from the Company’s customers in advance of the service period are recorded as unearned revenues. Fully insured commercial products of U.S. health plans, Medicare Advantage and Medicare Prescription Drug Benefit (Medicare Part D) plans with medical loss ratios as calculated under the definitions in the Patient Protection and Affordable Care Act (ACA) and related federal and state regulations and implementing regulations, that fall below certain targets are required to rebate ratable portions of their premiums annually. Medicare Advantage premium revenue includes the impact of Centers for Medicare & Medicaid Services (CMS) quality bonuses based on plans’ Star ratings.
Premium revenues are recognized based on the estimated premiums earned net of projected rebates because the Company is able to reasonably estimate the ultimate premiums of these contracts. The Company also records premium revenues from capitation arrangements at its OptumHealth businesses.
The Company’s Medicare Advantage and Medicare Part D premium revenues are subject to periodic adjustment under CMS’ risk adjustment payment methodology. CMS deploys a risk adjustment model that apportions premiums paid to all health plans according to health severity and certain demographic factors. The CMS risk adjustment model provides higher per member payments for enrollees diagnosed with certain conditions and lower payments for enrollees who are healthier. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using diagnosis data from hospital inpatient, hospital outpatient and physician treatment settings. The Company and health care providers collect, capture and submit the necessary and available diagnosis data to CMS within prescribed deadlines. The Company estimates risk adjustment premium revenues based upon the diagnosis data submitted and expected to be submitted to CMS. Risk adjustment data for the Company’s plans are subject to review by the government, including audit by regulators. See
Note 12
for additional information regarding these audits.
Products and Services
For the Company’s OptumRx pharmacy care services business, the majority of revenues are derived from products sold through a contracted network of retail pharmacies or home delivery and specialty pharmacy facilities. Product revenues include ingredient costs (net of rebates), a negotiated dispensing fee and customer co-payments for drugs dispensed through the Company’s mail-service pharmacy. In retail pharmacy transactions, revenues recognized exclude the member’s applicable co-payment. Pharmacy products are billed to customers based on the number of transactions occurring during the billing period. Product revenues are recognized when the prescriptions are dispensed through the retail network or received by consumers through the Company’s mail-service pharmacy. The Company has entered into contracts in which it is primarily obligated to pay its network pharmacy providers for benefits provided to their customers regardless of whether the Company is paid. The Company is also involved in establishing the prices charged by retail pharmacies, determining which drugs will be included in formulary listings and selecting which retail pharmacies will be included in the network offered to plan sponsors’ members and accordingly, are reported on a gross basis.
Services revenue consists of fees derived from services performed for customers that self-insure the health care costs of their employees and employees’ dependents. Under service fee contracts, the Company receives monthly, a fixed fee per employee, which is recognized as revenue as the Company performs, or makes available the applicable services to the customer. The customers retain the risk of financing health care costs for their employees and employees’ dependents, and the Company administers the payment of customer funds to physicians and other health care professionals from customer-funded bank accounts. As the Company has neither the obligation for funding the health care costs, nor the primary responsibility for providing the medical care, the Company does not recognize premium revenue and medical costs for these contracts in its Consolidated Financial Statements. For these fee-based customer arrangements, the Company provides coordination and facilitation of medical services; transaction processing; customer, consumer and care professional services; and access to contracted networks of physicians, hospitals and other health care professionals. These services are performed throughout the contract period.
Revenues are also comprised of a number of services and products sold through Optum. OptumHealth’s service revenues include net patient service revenues that are recorded based upon established billing rates, less allowances for contractual adjustments, and are recognized as services are provided. For its financial services offerings, OptumHealth charges fees and earns investment income on managed funds. OptumInsight provides software and information products, advisory consulting arrangements and services outsourcing contracts, which may be delivered over several years. OptumInsight revenues are generally recognized over time and measured each period based on the progress to date as services are performed or made available to customers.
As of
December 31, 2017
, accounts receivables related to products and services were
$3.7 billion
. In
2017
, the Company had no material bad-debt expense and there were no material contract assets, contract liabilities or deferred contract costs
recorded on the Consolidated Balance Sheet as of
December 31, 2017
.
For the year ended
December 31, 2017
, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price), was not material.
Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, contracts where revenue is recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, is not material.
See
Note 13
for disaggregation of revenue by segment and type.
Medical Costs and Medical Costs Payable
The Company’s estimate of medical costs payable represents management’s best estimate of its liability for unpaid medical costs as of December 31, 2017.
Each period, the Company re-examines previously established medical costs payable estimates based on actual claim submissions and other changes in facts and circumstances. As more complete claim information becomes available, the Company adjusts the amount of the estimates and includes the changes in estimates in medical costs in the period in which the change is identified. Approximately
90%
of claims related to medical care services are known and settled within 90 days from the date of service and substantially all within twelve months.
Medical costs and medical costs payable include estimates of the Company’s obligations for medical care services that have been rendered on behalf of insured consumers, but for which claims have either not yet been received, processed, or paid. The Company develops estimates for medical care services incurred but not reported (IBNR), which includes estimates for claims
that have not been received or fully processed, using an actuarial process that is consistently applied, centrally controlled and automated. The actuarial models consider factors such as time from date of service to claim processing, seasonal variances in medical care consumption, health care professional contract rate changes, medical care utilization and other medical cost trends, membership volume and demographics, the introduction of new technologies, benefit plan changes, and business mix changes related to products, customers and geography.
In developing its medical costs payable estimates, the Company applies different estimation methods depending on which incurred claims are being estimated. For the most recent two months, the Company estimates claim costs incurred by applying 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 are available, supplemented by a review of near-term completion factors (actuarial estimates, based upon historical experience and analysis of current trends, of the percentage of incurred claims during a given period that have been adjudicated by the Company at the date of estimation). For months prior to the most recent two months, the Company applies the completion factors to actual claims adjudicated-to-date to estimate the expected amount of ultimate incurred claims for those months.
Cost of Products Sold
The Company’s cost of products sold includes the cost of pharmaceuticals dispensed to unaffiliated customers either directly at its mail and specialty pharmacy locations, or indirectly through its nationwide network of participating pharmacies. Rebates attributable to non-affiliated clients are accrued as rebates receivable and a reduction of cost of products sold with a corresponding payable for the amounts of the rebates to be remitted to those non-affiliated clients in accordance with their contracts and recorded in the Consolidated Statements of Operations as a reduction of product revenue. Cost of products sold also includes the cost of personnel to support the Company’s transaction processing services, system sales, maintenance and professional services.
Cash, Cash Equivalents and Investments
Cash and cash equivalents are highly liquid investments that have an original maturity of three months or less. The fair value of cash and cash equivalents approximates their carrying value because of the short maturity of the instruments.
Investments with maturities of less than one year are classified as short-term. Because of regulatory requirements, certain investments are included in long-term investments regardless of their maturity date. The Company classifies these investments as held-to-maturity and reports them at amortized cost. Substantially all other investments are classified as available-for-sale and reported at fair value based on quoted market prices, where available.
The Company excludes unrealized gains and losses on investments in available-for-sale securities from net earnings and reports them as comprehensive income and, net of income tax effects, as a separate component of equity. To calculate realized gains and losses on the sale of investments, the Company specifically identifies the cost of each investment sold.
The Company evaluates an investment for impairment by considering the length of time and extent to which market value has been less than cost or amortized cost, the financial condition and near-term prospects of the issuer as well as specific events or circumstances that may influence the operations of the issuer and the Company’s intent to sell the security or the likelihood that it will be required to sell the security before recovery of the entire amortized cost.
New information and the passage of time can change these judgments. The Company manages its investment portfolio to limit its exposure to any one issuer or market sector, and largely limits its investments to investment grade quality. Securities downgraded below policy minimums after purchase will be disposed of in accordance with the Company’s investment policy.
Assets Under Management
The Company provides health insurance products and services to members of AARP under a Supplemental Health Insurance Program (the AARP Program) and to AARP members and non-members under separate Medicare Advantage and Medicare Part D arrangements. The products and services under the AARP Program include supplemental Medicare benefits, hospital indemnity insurance, including insurance for individuals between 50 to 64 years of age and other related products.
Pursuant to the Company’s agreement, AARP Program assets are managed separately from the Company’s general investment portfolio and are used to pay costs associated with the AARP Program. These assets are invested at the Company’s discretion, within investment guidelines approved by AARP. The Company does not guarantee any rates of return on these investments and, upon any transfer of the AARP Program contract to another entity, the Company would transfer cash equal in amount to the fair value of these investments at the date of transfer to that entity. Because the purpose of these assets is to fund the medical costs payable, the rate stabilization fund (RSF) liabilities and other related liabilities associated with this AARP contract, assets under management are classified as current assets, consistent with the classification of these liabilities.
The effects of changes in other balance sheet amounts associated with the AARP Program also accrue to the overall benefit of the AARP policyholders through the RSF balance. Accordingly, the Company excludes the effect of such changes in its Consolidated Statements of Cash Flows.
Other Current Receivables
Other current receivables include amounts due from pharmaceutical manufacturers for rebates and Medicare Part D drug discounts and other miscellaneous amounts due to the Company.
The Company’s pharmacy care services businesses contract with pharmaceutical manufacturers, some of which provide rebates based on use of the manufacturers’ products by its affiliated and non-affiliated clients. The Company accrues rebates as they are earned by its clients on a monthly basis based on the terms of the applicable contracts, historical data and current estimates. The pharmacy care services businesses bill these rebates to the manufacturers on a monthly or quarterly basis depending on the contractual terms and record rebates attributable to affiliated clients as a reduction to medical costs. The Company generally receives rebates from two to five months after billing. As of December 31, 2017 and 2016, total pharmaceutical manufacturer rebates receivable included in other receivables in the Consolidated Balance Sheets amounted to
$3.8 billion
and
$3.3 billion
, respectively.
As of December 31, 2017 and 2016, the Company’s Medicare Part D receivables amounted to
$0.5 billion
and
$1.5 billion
, respectively.
Property, Equipment and Capitalized Software
Property, equipment and capitalized software are stated at cost, net of accumulated depreciation and amortization. Capitalized software consists of certain costs incurred in the development of internal-use software, including external direct costs of materials and services and applicable payroll costs of employees devoted to specific software development.
The Company calculates depreciation and amortization using the straight-line method over the estimated useful lives of the assets. The useful lives for property, equipment and capitalized software are:
|
|
|
Furniture, fixtures and equipment
|
3 to 10 years
|
Buildings
|
35 to 40 years
|
Capitalized software
|
3 to 5 years
|
Leasehold improvements are depreciated over the shorter of the remaining lease term or their estimated useful economic life.
Goodwill
To determine whether goodwill is impaired, annually or more frequently if needed, the Company performs a multi-step impairment test. The Company may first assess qualitative factors to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. The Company may also elect to skip the qualitative testing and proceed directly to the quantitative testing. When performing quantitative testing, the Company first estimates the fair values of its reporting units using discounted cash flows. To determine fair values, the Company must make assumptions about a wide variety of internal and external factors. Significant assumptions used in the impairment analysis include financial projections of free cash flow (including significant assumptions about operations, capital requirements and income taxes), long-term growth rates for determining terminal value and discount rates. Comparative market multiples are used to corroborate the results of the discounted cash flow test. If the fair value is less than the carrying value of the reporting unit, then the implied value of goodwill would be calculated and compared to the carrying amount of goodwill to determine whether goodwill is impaired.
There was no impairment of goodwill during the year ended
December 31, 2017
.
Intangible Assets
The Company’s intangible assets are subject to impairment tests when events or circumstances indicate that an intangible asset (or asset group) may be impaired. The Company’s indefinite lived intangible assets are also tested for impairment annually. There was no impairment of intangible assets during the year ended
December 31, 2017
.
Other Current Liabilities
Other current liabilities include health savings account deposits (
$6.4 billion
and
$5.7 billion
as of
December 31, 2017
and
2016
, respectively), deposits under the Medicare Part D program (
$1.6 billion
, and
$0.7 billion
as of
December 31, 2017
and
2016
, respectively), the RSF associated with the AARP Program, accruals for premium rebate payments under the ACA, the current portion of future policy benefits and customer balances.
Policy Acquisition Costs
The Company’s short duration health insurance contracts typically have a one-year term and may be canceled by the customer with at least
30
days’ notice. Costs related to the acquisition and renewal of short duration customer contracts are charged to expense as incurred.
Redeemable Noncontrolling Interests
Redeemable noncontrolling interests in the Company’s subsidiaries whose redemption is outside the control of the Company are classified as temporary equity. The following table provides details of the Company's redeemable noncontrolling interests’ activity for the years ended
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2017
|
|
2016
|
Redeemable noncontrolling interests, beginning of period
|
|
$
|
2,012
|
|
|
$
|
1,736
|
|
Net earnings
|
|
71
|
|
|
16
|
|
Acquisitions
|
|
565
|
|
|
34
|
|
Redemptions
|
|
(309
|
)
|
|
(123
|
)
|
Distributions
|
|
(38
|
)
|
|
(11
|
)
|
Fair value and other adjustments
|
|
(112
|
)
|
|
360
|
|
Redeemable noncontrolling interests, end of period
|
|
$
|
2,189
|
|
|
$
|
2,012
|
|
Share-Based Compensation
The Company recognizes compensation expense for share-based awards, including stock options, stock-settled stock appreciation rights (SARs) and restricted stock and restricted stock units (collectively, restricted shares), on a straight-line basis over the related service period (generally the vesting period) of the award, or to an employee’s eligible retirement date under the award agreement, if earlier. Restricted shares vest ratably, primarily over
two
to
five
years and compensation expense related to restricted shares is based on the share price on date of grant. Stock options and SARs vest ratably primarily over
four
years and may be exercised up to
10
years from the date of grant. Compensation expense related to stock options and SARs is based on the fair value at date of grant, which is estimated on the date of grant using a binomial option-pricing model. Under the Company’s Employee Stock Purchase Plan (ESPP), eligible employees are allowed to purchase the Company’s stock at a discounted price, which is
85%
of the lower market price of the Company’s common stock at the beginning or at the end of the six-month purchase period. Share-based compensation expense for all programs is recognized in operating costs in the Consolidated Statements of Operations.
Net Earnings Per Common Share
The Company computes basic earnings per common share attributable to UnitedHealth Group common shareholders by dividing net earnings attributable to UnitedHealth Group common shareholders by the weighted-average number of common shares outstanding during the period. The Company determines diluted net earnings per common share attributable to UnitedHealth Group common shareholders using the weighted-average number of common shares outstanding during the period, adjusted for potentially dilutive shares associated with stock options, SARs, restricted shares and the ESPP (collectively, common stock equivalents), using the treasury stock method. The treasury stock method assumes a hypothetical issuance of shares to settle the share-based awards, with the assumed proceeds used to purchase common stock at the average market price for the period. Assumed proceeds include the amount the employee must pay upon exercise and any unrecognized compensation cost. The difference between the number of shares assumed issued and number of shares assumed purchased represents the dilutive shares.
Health Insurance Industry Tax
The ACA includes an annual, nondeductible insurance industry tax (Health Insurance Industry Tax) to be levied proportionally across the insurance industry for risk-based health insurance products.
The Company estimates its liability for the Health Insurance Industry Tax based on a ratio of the Company’s applicable net premiums written compared to the U.S. health insurance industry total applicable net premiums, both for the previous calendar year. The Company records in full the estimated liability for the Health Insurance Industry Tax at the beginning of the calendar year with a corresponding deferred cost that is amortized to operating costs on the Consolidated Statements of Operations using a straight-line method over the calendar year. The liability is recorded in accounts payable and accrued liabilities and the corresponding deferred cost is recorded in prepaid expenses and other current assets on the Consolidated Balance Sheets. A provision in the 2016 Federal Budget imposed a one year moratorium for 2017 on the collection of the Health Insurance Industry Tax.
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2016-02, “Leases (Topic 842)” (ASU 2016-02). Under ASU 2016-02, an entity will be required to recognize assets and liabilities for the rights and obligations created by leases on the entity’s balance sheet for both finance and operating leases. For leases with a term of 12 months or less, an entity may elect to not recognize lease assets and lease liabilities and expense the lease over a straight-line basis for the term of the lease. ASU 2016-02 will require new disclosures that depict the amount, timing and uncertainty of cash flows pertaining to an entity’s leases. Companies are currently required to adopt the new standard using a modified retrospective approach for annual and interim periods beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. When adopted, the Company does not expect ASU 2016-02 to have a material impact on its results of operations, equity or cash flows. The impact of ASU 2016-02 on the Company’s consolidated financial position will be based on leases outstanding at the time of adoption.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01). The new guidance changes the current accounting related to (i) the classification and measurement of certain equity investments, (ii) the presentation of changes in the fair value of financial liabilities measured under the fair value option that are due to instrument-specific credit risk, and (iii) certain disclosures associated with the fair value of financial instruments. Most notably, ASU 2016-01 requires that equity investments, with certain exemptions, be measured at fair value with changes in fair value recognized in net income as opposed to other comprehensive income. The Company adopted ASU 2016-01 effective January 1, 2018 as required. ASU 2016-01 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively ASU 2014-09). ASU 2014-09 superseded existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity’s insurance contracts). The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company early adopted the new standard effective January 1, 2017, as allowed, using the modified retrospective approach. A significant majority of the Company’s revenues are not subject to the new guidance. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the year ended December 31, 2017.
The Company has determined that there have been no other recently adopted or issued accounting standards that had, or will have, a material impact on its Consolidated Financial Statements.
3. Investments
A summary of short-term and long-term investments by major security type is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Debt securities - available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
2,673
|
|
|
$
|
1
|
|
|
$
|
(30
|
)
|
|
$
|
2,644
|
|
State and municipal obligations
|
|
7,596
|
|
|
99
|
|
|
(35
|
)
|
|
7,660
|
|
Corporate obligations
|
|
13,181
|
|
|
57
|
|
|
(44
|
)
|
|
13,194
|
|
U.S. agency mortgage-backed securities
|
|
3,942
|
|
|
7
|
|
|
(38
|
)
|
|
3,911
|
|
Non-U.S. agency mortgage-backed securities
|
|
1,018
|
|
|
3
|
|
|
(6
|
)
|
|
1,015
|
|
Total debt securities - available-for-sale
|
|
28,410
|
|
|
167
|
|
|
(153
|
)
|
|
28,424
|
|
Equity securities
|
|
2,026
|
|
|
7
|
|
|
(41
|
)
|
|
1,992
|
|
Debt securities - held-to-maturity:
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
254
|
|
|
1
|
|
|
(1
|
)
|
|
254
|
|
State and municipal obligations
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Corporate obligations
|
|
280
|
|
|
—
|
|
|
—
|
|
|
280
|
|
Total debt securities - held-to-maturity
|
|
536
|
|
|
1
|
|
|
(1
|
)
|
|
536
|
|
Total investments
|
|
$
|
30,972
|
|
|
$
|
175
|
|
|
$
|
(195
|
)
|
|
$
|
30,952
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Debt securities - available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
2,294
|
|
|
$
|
1
|
|
|
$
|
(31
|
)
|
|
$
|
2,264
|
|
State and municipal obligations
|
|
7,120
|
|
|
40
|
|
|
(101
|
)
|
|
7,059
|
|
Corporate obligations
|
|
10,944
|
|
|
41
|
|
|
(58
|
)
|
|
10,927
|
|
U.S. agency mortgage-backed securities
|
|
2,963
|
|
|
7
|
|
|
(43
|
)
|
|
2,927
|
|
Non-U.S. agency mortgage-backed securities
|
|
1,009
|
|
|
3
|
|
|
(10
|
)
|
|
1,002
|
|
Total debt securities - available-for-sale
|
|
24,330
|
|
|
92
|
|
|
(243
|
)
|
|
24,179
|
|
Equity securities
|
|
2,036
|
|
|
52
|
|
|
(47
|
)
|
|
2,041
|
|
Debt securities - held-to-maturity:
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
250
|
|
|
1
|
|
|
—
|
|
|
251
|
|
State and municipal obligations
|
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Corporate obligations
|
|
238
|
|
|
—
|
|
|
—
|
|
|
238
|
|
Total debt securities - held-to-maturity
|
|
493
|
|
|
1
|
|
|
—
|
|
|
494
|
|
Total investments
|
|
$
|
26,859
|
|
|
$
|
145
|
|
|
$
|
(290
|
)
|
|
$
|
26,714
|
|
Nearly all of the Company’s investments in mortgage-backed securities were rated AAA as of
December 31, 2017
.
The amortized cost and fair value of debt securities as of
December 31, 2017
, by contractual maturity, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
Held-to-Maturity
|
(in millions)
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
Due in one year or less
|
|
$
|
3,630
|
|
|
$
|
3,628
|
|
|
$
|
155
|
|
|
$
|
155
|
|
Due after one year through five years
|
|
10,658
|
|
|
10,631
|
|
|
131
|
|
|
130
|
|
Due after five years through ten years
|
|
6,894
|
|
|
6,932
|
|
|
103
|
|
|
103
|
|
Due after ten years
|
|
2,268
|
|
|
2,307
|
|
|
147
|
|
|
148
|
|
U.S. agency mortgage-backed securities
|
|
3,942
|
|
|
3,911
|
|
|
—
|
|
|
—
|
|
Non-U.S. agency mortgage-backed securities
|
|
1,018
|
|
|
1,015
|
|
|
—
|
|
|
—
|
|
Total debt securities
|
|
$
|
28,410
|
|
|
$
|
28,424
|
|
|
$
|
536
|
|
|
$
|
536
|
|
The fair value of available-for-sale investments with gross unrealized losses by major security type and length of time that individual securities have been in a continuous unrealized loss position were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or Greater
|
|
Total
|
(in millions)
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities - available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
1,249
|
|
|
$
|
(8
|
)
|
|
$
|
1,027
|
|
|
$
|
(22
|
)
|
|
$
|
2,276
|
|
|
$
|
(30
|
)
|
State and municipal obligations
|
|
2,599
|
|
|
(21
|
)
|
|
866
|
|
|
(14
|
)
|
|
3,465
|
|
|
(35
|
)
|
Corporate obligations
|
|
5,901
|
|
|
(23
|
)
|
|
1,242
|
|
|
(21
|
)
|
|
7,143
|
|
|
(44
|
)
|
U.S. agency mortgage-backed securities
|
|
1,657
|
|
|
(12
|
)
|
|
1,162
|
|
|
(26
|
)
|
|
2,819
|
|
|
(38
|
)
|
Non-U.S. agency mortgage-backed securities
|
|
411
|
|
|
(3
|
)
|
|
144
|
|
|
(3
|
)
|
|
555
|
|
|
(6
|
)
|
Total debt securities - available-for-sale
|
|
$
|
11,817
|
|
|
$
|
(67
|
)
|
|
$
|
4,441
|
|
|
$
|
(86
|
)
|
|
$
|
16,258
|
|
|
$
|
(153
|
)
|
Equity securities
|
|
$
|
97
|
|
|
$
|
(5
|
)
|
|
$
|
105
|
|
|
$
|
(36
|
)
|
|
$
|
202
|
|
|
$
|
(41
|
)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities - available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
1,794
|
|
|
$
|
(31
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,794
|
|
|
$
|
(31
|
)
|
State and municipal obligations
|
|
4,376
|
|
|
(101
|
)
|
|
—
|
|
|
—
|
|
|
4,376
|
|
|
(101
|
)
|
Corporate obligations
|
|
5,128
|
|
|
(56
|
)
|
|
137
|
|
|
(2
|
)
|
|
5,265
|
|
|
(58
|
)
|
U.S. agency mortgage-backed securities
|
|
2,247
|
|
|
(40
|
)
|
|
79
|
|
|
(3
|
)
|
|
2,326
|
|
|
(43
|
)
|
Non-U.S. agency mortgage-backed securities
|
|
544
|
|
|
(7
|
)
|
|
97
|
|
|
(3
|
)
|
|
641
|
|
|
(10
|
)
|
Total debt securities - available-for-sale
|
|
$
|
14,089
|
|
|
$
|
(235
|
)
|
|
$
|
313
|
|
|
$
|
(8
|
)
|
|
$
|
14,402
|
|
|
$
|
(243
|
)
|
Equity securities
|
|
$
|
93
|
|
|
$
|
(5
|
)
|
|
$
|
91
|
|
|
$
|
(42
|
)
|
|
$
|
184
|
|
|
$
|
(47
|
)
|
The Company’s unrealized losses from all securities as of
December 31, 2017
were generated from approximately
13,000
positions out of a total of
29,000
positions. The Company believes that it will collect the principal and interest due on its debt securities that have an amortized cost in excess of fair value. The unrealized losses were primarily caused by interest rate increases and not by unfavorable changes in the credit quality associated with these securities. At each reporting period, the Company evaluates securities for impairment when the fair value of the investment is less than its amortized cost. The Company evaluated the underlying credit quality and credit ratings of the issuers, noting no significant deterioration since purchase. As of
December 31, 2017
, the Company did not have the intent to sell any of the securities in an unrealized loss position. Therefore, the Company believes these losses to be temporary.
The Company’s investments in equity securities consist of investments in Brazilian real denominated fixed-income funds, employee savings plan related investments and dividend paying stocks. The Company evaluated its investments in equity securities for severity and duration of unrealized loss, overall market volatility and other market factors. Additionally, as of December 31, 2017, the Company’s investments included
$898 million
of equity method investments in operating businesses in the health care sector.
Net realized gains reclassified out of accumulated other comprehensive income were from the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
(in millions)
|
|
2017
|
|
2016
|
|
2015
|
Total other-than-temporary impairment recognized in earnings
|
|
$
|
(9
|
)
|
|
$
|
(45
|
)
|
|
$
|
(22
|
)
|
Gross realized losses from sales
|
|
(33
|
)
|
|
(44
|
)
|
|
(28
|
)
|
Gross realized gains from sales
|
|
125
|
|
|
255
|
|
|
191
|
|
Net realized gains (included in investment and other income on the Consolidated Statements of Operations)
|
|
83
|
|
|
166
|
|
|
141
|
|
Income tax effect (included in provision for income taxes on the Consolidated Statements of Operations)
|
|
(30
|
)
|
|
(60
|
)
|
|
(53
|
)
|
Realized gains, net of taxes
|
|
$
|
53
|
|
|
$
|
106
|
|
|
$
|
88
|
|
4. Fair Value
Certain assets and liabilities are measured at fair value in the Consolidated Financial Statements or have fair values disclosed in the Notes to the Consolidated Financial Statements. These assets and liabilities are classified into one of three levels of a hierarchy defined by GAAP. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement is categorized in its entirety based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The fair value hierarchy is summarized as follows:
Level 1
— Quoted prices (unadjusted) for identical assets/liabilities in active markets.
Level 2
— Other observable inputs, either directly or indirectly, including:
|
|
•
|
Quoted prices for similar assets/liabilities in active markets;
|
|
|
•
|
Quoted prices for identical or similar assets/liabilities in inactive markets (e.g., few transactions, limited information, noncurrent prices, high variability over time);
|
|
|
•
|
Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, implied volatilities, credit spreads); and
|
|
|
•
|
Inputs that are corroborated by other observable market data.
|
Level 3
— Unobservable inputs that cannot be corroborated by observable market data.
Transfers between levels, if any, are recorded as of the beginning of the reporting period in which the transfer occurs; there was
no
transfer between Levels 1, 2 or 3 of any financial assets or liabilities during the year ended
December 31, 2017
or
2016
.
Nonfinancial assets and liabilities or financial assets and liabilities that are measured at fair value on a nonrecurring basis are subject to fair value adjustments only in certain circumstances, such as when the Company records an impairment. There were no significant fair value adjustments for these assets and liabilities recorded during the year ended
December 31, 2017
or
2016
.
The following methods and assumptions were used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument included in the tables below:
Cash and Cash Equivalents.
The carrying value of cash and cash equivalents approximates fair value as maturities are less than three months. Fair values of cash equivalent instruments that do not trade on a regular basis in active markets are classified as Level 2.
Debt and Equity Securities.
Fair values of debt and equity securities are based on quoted market prices, where available. The Company obtains one price for each security primarily from a third-party pricing service (pricing service), which generally uses quoted or other observable inputs for the determination of fair value. The pricing service normally derives the security prices through recently reported trades for identical or similar securities, and, if necessary, makes adjustments through the reporting date based upon available observable market information. For securities not actively traded, the pricing service may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, benchmark yields, credit spreads, default rates, prepayment speeds and nonbinding broker quotes. As the Company is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Company compares the prices received from the pricing service to prices reported by a secondary pricing source, such as its custodian, its investment consultant and third-party investment advisors. Additionally, the Company compares changes in the reported market values and returns to relevant market indices to test the reasonableness of the reported prices. The Company’s internal price verification procedures and reviews of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
Fair values of debt securities that do not trade on a regular basis in active markets but are priced using other observable inputs are classified as Level 2.
Fair value estimates for Level 1 and Level 2 equity securities are based on quoted market prices for actively traded equity securities and/or other market data for the same or comparable instruments and transactions in establishing the prices.
The fair values of Level 3 investments in venture capital portfolios are estimated using a market valuation technique that relies heavily on management assumptions and qualitative observations. Under the market approach, the fair values of the Company’s various venture capital investments are computed using limited quantitative and qualitative observations of activity for similar companies in the current market. The Company’s market modeling utilizes, as applicable, transactions for comparable companies in similar industries that also have similar revenue and growth characteristics and preferences in their capital structure. Key significant unobservable inputs in the market technique include implied earnings before interest, taxes,
depreciation and amortization (EBITDA) multiples and revenue multiples. Additionally, the fair values of certain of the Company’s venture capital securities are based on recent transactions in inactive markets for identical or similar securities. Significant changes in any of these inputs could result in significantly lower or higher fair value measurements.
Throughout the procedures discussed above in relation to the Company’s processes for validating third-party pricing information, the Company validates the understanding of assumptions and inputs used in security pricing and determines the proper classification in the hierarchy based on that understanding.
Assets Under Management.
Assets under management consists of debt securities and other investments held to fund costs associated with the AARP Program and are priced and classified using the same methodologies as the Company’s investments in debt and equity securities.
Long-Term Debt.
The fair values of the Company’s long-term debt are estimated and classified using the same methodologies as the Company’s investments in debt securities.
The following table presents a summary of fair value measurements by level and carrying values for items measured at fair value on a recurring basis in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
Other
Observable
Inputs
(Level 2)
|
|
Unobservable
Inputs
(Level 3)
|
|
Total
Fair and Carrying
Value
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,718
|
|
|
$
|
263
|
|
|
$
|
—
|
|
|
$
|
11,981
|
|
Debt securities - available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
2,428
|
|
|
216
|
|
|
—
|
|
|
2,644
|
|
State and municipal obligations
|
|
—
|
|
|
7,660
|
|
|
—
|
|
|
7,660
|
|
Corporate obligations
|
|
65
|
|
|
12,989
|
|
|
140
|
|
|
13,194
|
|
U.S. agency mortgage-backed securities
|
|
—
|
|
|
3,911
|
|
|
—
|
|
|
3,911
|
|
Non-U.S. agency mortgage-backed securities
|
|
—
|
|
|
1,015
|
|
|
—
|
|
|
1,015
|
|
Total debt securities - available-for-sale
|
|
2,493
|
|
|
25,791
|
|
|
140
|
|
|
28,424
|
|
Equity securities
|
|
1,784
|
|
|
14
|
|
|
194
|
|
|
1,992
|
|
Assets under management
|
|
1,117
|
|
|
1,984
|
|
|
—
|
|
|
3,101
|
|
Total assets at fair value
|
|
$
|
17,112
|
|
|
$
|
28,052
|
|
|
$
|
334
|
|
|
$
|
45,498
|
|
Percentage of total assets at fair value
|
|
38
|
%
|
|
61
|
%
|
|
1
|
%
|
|
100
|
%
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,386
|
|
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
10,430
|
|
Debt securities - available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
2,017
|
|
|
247
|
|
|
—
|
|
|
2,264
|
|
State and municipal obligations
|
|
—
|
|
|
7,059
|
|
|
—
|
|
|
7,059
|
|
Corporate obligations
|
|
21
|
|
|
10,804
|
|
|
102
|
|
|
10,927
|
|
U.S. agency mortgage-backed securities
|
|
—
|
|
|
2,927
|
|
|
—
|
|
|
2,927
|
|
Non-U.S. agency mortgage-backed securities
|
|
—
|
|
|
1,002
|
|
|
—
|
|
|
1,002
|
|
Total debt securities - available-for-sale
|
|
2,038
|
|
|
22,039
|
|
|
102
|
|
|
24,179
|
|
Equity securities
|
|
1,591
|
|
|
13
|
|
|
437
|
|
|
2,041
|
|
Assets under management
|
|
1,064
|
|
|
2,041
|
|
|
—
|
|
|
3,105
|
|
Total assets at fair value
|
|
$
|
15,079
|
|
|
$
|
24,137
|
|
|
$
|
539
|
|
|
$
|
39,755
|
|
Percentage of total assets at fair value
|
|
38
|
%
|
|
61
|
%
|
|
1
|
%
|
|
100
|
%
|
The following table presents a summary of fair value measurements by level and carrying values for certain financial instruments not measured at fair value on a recurring basis in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
Other
Observable
Inputs
(Level 2)
|
|
Unobservable
Inputs
(Level 3)
|
|
Total
Fair
Value
|
|
Total Carrying Value
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Debt securities - held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
251
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
254
|
|
|
$
|
254
|
|
State and municipal obligations
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
2
|
|
Corporate obligations
|
|
16
|
|
|
1
|
|
|
263
|
|
|
280
|
|
|
280
|
|
Total debt securities - held-to-maturity
|
|
$
|
267
|
|
|
$
|
4
|
|
|
$
|
265
|
|
|
$
|
536
|
|
|
$
|
536
|
|
Long-term debt and other financing obligations
|
|
$
|
—
|
|
|
$
|
34,504
|
|
|
$
|
—
|
|
|
$
|
34,504
|
|
|
$
|
31,542
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Debt securities - held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
251
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
251
|
|
|
$
|
250
|
|
State and municipal obligations
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
|
5
|
|
Corporate obligations
|
|
20
|
|
|
8
|
|
|
210
|
|
|
238
|
|
|
238
|
|
Total debt securities - held-to-maturity
|
|
$
|
271
|
|
|
$
|
8
|
|
|
$
|
215
|
|
|
$
|
494
|
|
|
$
|
493
|
|
Long-term debt and other financing obligations
|
|
$
|
—
|
|
|
$
|
31,295
|
|
|
$
|
—
|
|
|
$
|
31,295
|
|
|
$
|
29,337
|
|
The carrying amounts reported on the Consolidated Balance Sheets for other current financial assets and liabilities approximate fair value because of their short-term nature. These assets and liabilities are not listed in the table above.
5. Property, Equipment and Capitalized Software
A summary of property, equipment and capitalized software is as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
December 31, 2017
|
|
December 31, 2016
|
Land and improvements
|
|
$
|
405
|
|
|
$
|
324
|
|
Buildings and improvements
|
|
3,664
|
|
|
3,148
|
|
Computer equipment
|
|
1,829
|
|
|
2,021
|
|
Furniture and fixtures
|
|
1,208
|
|
|
999
|
|
Less accumulated depreciation
|
|
(2,488
|
)
|
|
(2,621
|
)
|
Property and equipment, net
|
|
4,618
|
|
|
3,871
|
|
Capitalized software
|
|
3,601
|
|
|
3,158
|
|
Less accumulated amortization
|
|
(1,206
|
)
|
|
(1,128
|
)
|
Capitalized software, net
|
|
2,395
|
|
|
2,030
|
|
Total property, equipment and capitalized software, net
|
|
$
|
7,013
|
|
|
$
|
5,901
|
|
Depreciation expense for property and equipment for the years ended
December 31, 2017
,
2016
and
2015
was
$799 million
,
$698 million
and
$613 million
, respectively. Amortization expense for capitalized software for the years ended
December 31, 2017
,
2016
and
2015
was
$550 million
,
$475 million
and
$430 million
, respectively.
6. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill, by reportable segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
UnitedHealthcare
|
|
OptumHealth
|
|
OptumInsight
|
|
OptumRx
|
|
Consolidated
|
Balance at January 1, 2016
|
|
$
|
22,925
|
|
|
$
|
5,660
|
|
|
$
|
4,296
|
|
|
$
|
11,572
|
|
|
$
|
44,453
|
|
Acquisitions
|
|
526
|
|
|
683
|
|
|
—
|
|
|
1,387
|
|
|
2,596
|
|
Foreign currency effects and adjustments, net
|
|
403
|
|
|
(21
|
)
|
|
153
|
|
|
—
|
|
|
535
|
|
Balance at December 31, 2016
|
|
23,854
|
|
|
6,322
|
|
|
4,449
|
|
|
12,959
|
|
|
47,584
|
|
Acquisitions
|
|
690
|
|
|
5,189
|
|
|
1,221
|
|
|
—
|
|
|
7,100
|
|
Foreign currency effects and adjustments, net
|
|
(60
|
)
|
|
(23
|
)
|
|
4
|
|
|
(49
|
)
|
|
(128
|
)
|
Balance at December 31, 2017
|
|
$
|
24,484
|
|
|
$
|
11,488
|
|
|
$
|
5,674
|
|
|
$
|
12,910
|
|
|
$
|
54,556
|
|
The gross carrying value, accumulated amortization and net carrying value of other intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
(in millions)
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
Customer-related
|
|
$
|
10,832
|
|
|
$
|
(3,743
|
)
|
|
$
|
7,089
|
|
|
$
|
10,942
|
|
|
$
|
(3,416
|
)
|
|
$
|
7,526
|
|
Trademarks and technology
|
|
1,054
|
|
|
(432
|
)
|
|
622
|
|
|
720
|
|
|
(323
|
)
|
|
397
|
|
Trademarks and other indefinite-lived
|
|
561
|
|
|
—
|
|
|
561
|
|
|
468
|
|
|
—
|
|
|
468
|
|
Other
|
|
351
|
|
|
(134
|
)
|
|
217
|
|
|
258
|
|
|
(108
|
)
|
|
150
|
|
Total
|
|
$
|
12,798
|
|
|
$
|
(4,309
|
)
|
|
$
|
8,489
|
|
|
$
|
12,388
|
|
|
$
|
(3,847
|
)
|
|
$
|
8,541
|
|
The acquisition date fair values and weighted-average useful lives assigned to finite-lived intangible assets acquired in business combinations consisted of the following by year of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
(in millions, except years)
|
|
Fair Value
|
|
Weighted-Average Useful Life
|
|
Fair Value
|
|
Weighted-Average Useful Life
|
Customer-related
|
|
$
|
324
|
|
|
13 years
|
|
$
|
785
|
|
|
17 years
|
Trademarks and technology
|
|
367
|
|
|
11 years
|
|
82
|
|
|
4 years
|
Other
|
|
82
|
|
|
6 years
|
|
22
|
|
|
5 years
|
Total acquired finite-lived intangible assets
|
|
$
|
773
|
|
|
11 years
|
|
$
|
889
|
|
|
16 years
|
Estimated full year amortization expense relating to intangible assets for each of the next five years ending December 31 is as follows:
|
|
|
|
|
|
(in millions)
|
|
|
2018
|
|
$
|
833
|
|
2019
|
|
756
|
|
2020
|
|
665
|
|
2021
|
|
600
|
|
2022
|
|
528
|
|
Amortization expense relating to intangible assets for the years ended
December 31, 2017
,
2016
and
2015
was
$896 million
,
$882 million
and
$650 million
, respectively.
7. Medical Costs Payable
The following table shows the components of the change in medical costs payable for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2017
|
|
2016
|
|
2015
|
Medical costs payable, beginning of period
|
|
$
|
16,391
|
|
|
$
|
14,330
|
|
|
$
|
12,040
|
|
Acquisitions
|
|
83
|
|
|
—
|
|
|
—
|
|
Reported medical costs:
|
|
|
|
|
|
|
Current year
|
|
130,726
|
|
|
117,258
|
|
|
104,195
|
|
Prior years
|
|
(690
|
)
|
|
(220
|
)
|
|
(320
|
)
|
Total reported medical costs
|
|
130,036
|
|
|
117,038
|
|
|
103,875
|
|
Medical payments:
|
|
|
|
|
|
|
Payments for current year
|
|
(113,811
|
)
|
|
(101,696
|
)
|
|
(90,630
|
)
|
Payments for prior years
|
|
(14,828
|
)
|
|
(13,281
|
)
|
|
(10,955
|
)
|
Total medical payments
|
|
(128,639
|
)
|
|
(114,977
|
)
|
|
(101,585
|
)
|
Medical costs payable, end of period
|
|
$
|
17,871
|
|
|
$
|
16,391
|
|
|
$
|
14,330
|
|
For the year ended
December 31, 2017
, medical cost reserve development was primarily driven by lower than expected health system utilization levels. For the years ended
December 31, 2016
and
2015
, no individual factors were significant
.
Medical costs payable included IBNR of
$12.3 billion
and
$11.6 billion
at
December 31, 2017
and
2016
, respectively. Substantially all of the IBNR balance as of
December 31, 2017
relates to the current year. The following is information about incurred and paid medical cost development as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Net Incurred Medical Costs
|
(in millions)
|
|
For the Years ended December 31,
|
Year
|
|
2016
|
|
2017
|
2016
|
|
$
|
117,258
|
|
|
$
|
116,622
|
|
2017
|
|
|
|
130,726
|
|
Total
|
|
|
|
$
|
247,348
|
|
|
|
|
|
|
|
|
Net Cumulative Medical Payments
|
(in millions)
|
|
For the Years ended December 31,
|
Year
|
|
2016
|
|
2017
|
2016
|
|
$
|
(101,696
|
)
|
|
$
|
(116,187
|
)
|
2017
|
|
|
|
(113,811
|
)
|
Total
|
|
|
|
(229,998
|
)
|
Net remaining outstanding liabilities prior to 2016
|
|
|
|
521
|
|
Total medical costs payable
|
|
|
|
$
|
17,871
|
|
8. Commercial Paper and Long-Term Debt
Commercial paper and senior unsecured long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
(in millions, except percentages)
|
|
Par
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
Par
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Commercial paper
|
|
$
|
150
|
|
|
$
|
150
|
|
|
$
|
150
|
|
|
$
|
3,633
|
|
|
$
|
3,633
|
|
|
$
|
3,633
|
|
Floating rate notes due January 2017
|
|
—
|
|
|
—
|
|
|
—
|
|
|
750
|
|
|
750
|
|
|
750
|
|
6.000% notes due June 2017
|
|
—
|
|
|
—
|
|
|
—
|
|
|
441
|
|
|
446
|
|
|
450
|
|
1.450% notes due July 2017
|
|
—
|
|
|
—
|
|
|
—
|
|
|
750
|
|
|
750
|
|
|
751
|
|
1.400% notes due October 2017
|
|
—
|
|
|
—
|
|
|
—
|
|
|
625
|
|
|
624
|
|
|
626
|
|
6.000% notes due November 2017
|
|
—
|
|
|
—
|
|
|
—
|
|
|
156
|
|
|
159
|
|
|
163
|
|
1.400% notes due December 2017
|
|
—
|
|
|
—
|
|
|
—
|
|
|
750
|
|
|
751
|
|
|
750
|
|
6.000% notes due February 2018
|
|
1,100
|
|
|
1,101
|
|
|
1,106
|
|
|
1,100
|
|
|
1,107
|
|
|
1,153
|
|
1.900% notes due July 2018
|
|
1,500
|
|
|
1,499
|
|
|
1,501
|
|
|
1,500
|
|
|
1,496
|
|
|
1,507
|
|
1.700% notes due February 2019
|
|
750
|
|
|
749
|
|
|
747
|
|
|
750
|
|
|
748
|
|
|
748
|
|
1.625% notes due March 2019
|
|
500
|
|
|
501
|
|
|
497
|
|
|
500
|
|
|
501
|
|
|
498
|
|
2.300% notes due December 2019
|
|
500
|
|
|
495
|
|
|
501
|
|
|
500
|
|
|
498
|
|
|
504
|
|
2.700% notes due July 2020
|
|
1,500
|
|
|
1,496
|
|
|
1,517
|
|
|
1,500
|
|
|
1,495
|
|
|
1,523
|
|
Floating rate notes due October 2020
|
|
300
|
|
|
299
|
|
|
300
|
|
|
—
|
|
|
—
|
|
|
—
|
|
3.875% notes due October 2020
|
|
450
|
|
|
446
|
|
|
467
|
|
|
450
|
|
|
450
|
|
|
474
|
|
1.950% notes due October 2020
|
|
900
|
|
|
895
|
|
|
892
|
|
|
—
|
|
|
—
|
|
|
—
|
|
4.700% notes due February 2021
|
|
400
|
|
|
403
|
|
|
425
|
|
|
400
|
|
|
409
|
|
|
433
|
|
2.125% notes due March 2021
|
|
750
|
|
|
746
|
|
|
744
|
|
|
750
|
|
|
745
|
|
|
741
|
|
3.375% notes due November 2021
|
|
500
|
|
|
493
|
|
|
516
|
|
|
500
|
|
|
497
|
|
|
519
|
|
2.875% notes due December 2021
|
|
750
|
|
|
741
|
|
|
760
|
|
|
750
|
|
|
748
|
|
|
760
|
|
2.875% notes due March 2022
|
|
1,100
|
|
|
1,054
|
|
|
1,114
|
|
|
1,100
|
|
|
1,057
|
|
|
1,114
|
|
3.350% notes due July 2022
|
|
1,000
|
|
|
996
|
|
|
1,033
|
|
|
1,000
|
|
|
995
|
|
|
1,030
|
|
2.375% notes due October 2022
|
|
900
|
|
|
893
|
|
|
891
|
|
|
—
|
|
|
—
|
|
|
—
|
|
0.000% notes due November 2022
|
|
15
|
|
|
12
|
|
|
12
|
|
|
15
|
|
|
11
|
|
|
12
|
|
2.750% notes due February 2023
|
|
625
|
|
|
606
|
|
|
626
|
|
|
625
|
|
|
609
|
|
|
622
|
|
2.875% notes due March 2023
|
|
750
|
|
|
762
|
|
|
759
|
|
|
750
|
|
|
771
|
|
|
753
|
|
3.750% notes due July 2025
|
|
2,000
|
|
|
1,987
|
|
|
2,108
|
|
|
2,000
|
|
|
1,986
|
|
|
2,070
|
|
3.100% notes due March 2026
|
|
1,000
|
|
|
995
|
|
|
1,007
|
|
|
1,000
|
|
|
994
|
|
|
986
|
|
3.450% notes due January 2027
|
|
750
|
|
|
745
|
|
|
776
|
|
|
750
|
|
|
745
|
|
|
762
|
|
3.375% notes due April 2027
|
|
625
|
|
|
618
|
|
|
642
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2.950% notes due October 2027
|
|
950
|
|
|
937
|
|
|
947
|
|
|
—
|
|
|
—
|
|
|
—
|
|
4.625% notes due July 2035
|
|
1,000
|
|
|
991
|
|
|
1,165
|
|
|
1,000
|
|
|
991
|
|
|
1,090
|
|
5.800% notes due March 2036
|
|
850
|
|
|
837
|
|
|
1,105
|
|
|
850
|
|
|
837
|
|
|
1,034
|
|
6.500% notes due June 2037
|
|
500
|
|
|
491
|
|
|
698
|
|
|
500
|
|
|
491
|
|
|
643
|
|
6.625% notes due November 2037
|
|
650
|
|
|
641
|
|
|
923
|
|
|
650
|
|
|
640
|
|
|
850
|
|
6.875% notes due February 2038
|
|
1,100
|
|
|
1,075
|
|
|
1,596
|
|
|
1,100
|
|
|
1,075
|
|
|
1,497
|
|
5.700% notes due October 2040
|
|
300
|
|
|
296
|
|
|
389
|
|
|
300
|
|
|
296
|
|
|
366
|
|
5.950% notes due February 2041
|
|
350
|
|
|
345
|
|
|
466
|
|
|
350
|
|
|
345
|
|
|
437
|
|
4.625% notes due November 2041
|
|
600
|
|
|
588
|
|
|
685
|
|
|
600
|
|
|
588
|
|
|
634
|
|
4.375% notes due March 2042
|
|
502
|
|
|
483
|
|
|
555
|
|
|
502
|
|
|
483
|
|
|
509
|
|
3.950% notes due October 2042
|
|
625
|
|
|
607
|
|
|
650
|
|
|
625
|
|
|
606
|
|
|
609
|
|
4.250% notes due March 2043
|
|
750
|
|
|
734
|
|
|
822
|
|
|
750
|
|
|
734
|
|
|
765
|
|
4.750% notes due July 2045
|
|
2,000
|
|
|
1,972
|
|
|
2,362
|
|
|
2,000
|
|
|
1,972
|
|
|
2,203
|
|
4.200% notes due January 2047
|
|
750
|
|
|
738
|
|
|
808
|
|
|
750
|
|
|
737
|
|
|
759
|
|
4.250% notes due April 2047
|
|
725
|
|
|
717
|
|
|
798
|
|
|
—
|
|
|
—
|
|
|
—
|
|
3.750% notes due October 2047
|
|
950
|
|
|
933
|
|
|
969
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total commercial paper and long-term debt
|
|
$
|
31,417
|
|
|
$
|
31,067
|
|
|
$
|
34,029
|
|
|
$
|
33,022
|
|
|
$
|
32,770
|
|
|
$
|
34,728
|
|
In 2017, the Company repaid
$926 million
in debt assumed in connection with an acquisition. The Company’s long-term debt obligations also included
$625 million
and
$200 million
of other financing obligations, of which
$107 million
and
$80 million
were current as of
December 31, 2017
and
2016
, respectively.
Maturities of commercial paper and long-term debt for the years ending December 31 are as follows:
|
|
|
|
|
|
(in millions)
|
|
|
2018
|
|
$
|
2,857
|
|
2019
|
|
1,850
|
|
2020
|
|
3,250
|
|
2021
|
|
2,500
|
|
2022
|
|
3,115
|
|
Thereafter
|
|
18,470
|
|
Commercial Paper and Revolving Bank Credit Facilities
Commercial paper consists of short-duration, senior unsecured debt privately placed on a discount basis through broker-dealers. As of
December 31, 2017
, the Company’s outstanding commercial paper had a weighted-average annual interest rate of
1.5%
.
The Company has
$3.0 billion
five-year,
$3.0 billion
three-year and
$4.0 billion
364-day revolving bank credit facilities with
26
banks, which mature in
December 2022
,
December 2020
and
December 2018
, respectively. These facilities provide liquidity support for the Company’s commercial paper program and are available for general corporate purposes. As of
December 31, 2017
, no amounts had been drawn on any of the bank credit facilities. The annual interest rates, which are variable based on term, are calculated based on the London Interbank Offered Rate (LIBOR) plus a credit spread based on the Company’s senior unsecured credit ratings. If amounts had been drawn on the bank credit facilities as of
December 31, 2017
, annual interest rates would have ranged from
2.4%
to
2.7%
.
Debt Covenants
The Company’s bank credit facilities contain various covenants, including requiring the Company to maintain a debt to debt-plus-shareholders’ equity ratio of not more than
55%
. The Company was in compliance with its debt covenants as of
December 31, 2017
.
9. Income Taxes
The current income tax provision reflects the tax consequences of revenues and expenses currently taxable or deductible on various income tax returns for the year reported. The deferred income tax provision or benefit generally reflects the net change in deferred income tax assets and liabilities during the year, excluding any deferred income tax assets and liabilities of acquired businesses. The components of the provision for income taxes for the years ended
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2017
|
|
2016
|
|
2015
|
Current Provision:
|
|
|
|
|
|
|
Federal
|
|
$
|
3,597
|
|
|
$
|
4,302
|
|
|
$
|
4,109
|
|
State and local
|
|
314
|
|
|
312
|
|
|
281
|
|
Foreign
|
|
254
|
|
|
95
|
|
|
46
|
|
Total current provision
|
|
4,165
|
|
|
4,709
|
|
|
4,436
|
|
Deferred (benefit) provision
|
|
(965
|
)
|
|
81
|
|
|
(73
|
)
|
Total provision for income taxes
|
|
$
|
3,200
|
|
|
$
|
4,790
|
|
|
$
|
4,363
|
|
.
The reconciliation of the tax provision at the U.S. federal statutory rate to the provision for income taxes and the effective tax rate for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except percentages)
|
|
2017
|
|
2016
|
|
2015
|
Tax provision at the U.S. federal statutory rate
|
|
$
|
4,908
|
|
|
35.0
|
%
|
|
$
|
4,152
|
|
|
35.0
|
%
|
|
$
|
3,581
|
|
|
35.0
|
%
|
Change in tax law
|
|
(1,199
|
)
|
|
(8.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
State income taxes, net of federal benefit
|
|
197
|
|
|
1.4
|
|
|
205
|
|
|
1.7
|
|
|
145
|
|
|
1.4
|
|
Share-based awards - excess tax benefit
|
|
(319
|
)
|
|
(2.3
|
)
|
|
(158
|
)
|
|
(1.3
|
)
|
|
—
|
|
|
—
|
|
Non-deductible compensation
|
|
175
|
|
|
1.3
|
|
|
128
|
|
|
1.1
|
|
|
103
|
|
|
1.0
|
|
Health insurance industry tax
|
|
—
|
|
|
—
|
|
|
645
|
|
|
5.4
|
|
|
627
|
|
|
6.1
|
|
Foreign rate differential
|
|
(282
|
)
|
|
(2.0
|
)
|
|
(105
|
)
|
|
(0.9
|
)
|
|
(34
|
)
|
|
(0.3
|
)
|
Other, net
|
|
(280
|
)
|
|
(2.0
|
)
|
|
(77
|
)
|
|
(0.6
|
)
|
|
(59
|
)
|
|
(0.6
|
)
|
Provision for income taxes
|
|
$
|
3,200
|
|
|
22.8
|
%
|
|
$
|
4,790
|
|
|
40.4
|
%
|
|
$
|
4,363
|
|
|
42.6
|
%
|
Deferred income tax assets and liabilities are recognized for the differences between the financial and income tax reporting bases of assets and liabilities based on enacted tax rates and laws. The components of deferred income tax assets and liabilities as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2017
|
|
2016
|
Deferred income tax assets:
|
|
|
|
|
Accrued expenses and allowances
|
|
$
|
544
|
|
|
$
|
820
|
|
U.S. federal and state net operating loss carryforwards
|
|
216
|
|
|
147
|
|
Share-based compensation
|
|
97
|
|
|
126
|
|
Nondeductible liabilities
|
|
169
|
|
|
236
|
|
Non-U.S. tax loss carryforwards
|
|
445
|
|
|
434
|
|
Other-domestic
|
|
167
|
|
|
476
|
|
Other-non-U.S.
|
|
198
|
|
|
175
|
|
Subtotal
|
|
1,836
|
|
|
2,414
|
|
Less: valuation allowances
|
|
(64
|
)
|
|
(55
|
)
|
Total deferred income tax assets
|
|
1,772
|
|
|
2,359
|
|
Deferred income tax liabilities:
|
|
|
|
|
U.S. federal and state intangible assets
|
|
(1,998
|
)
|
|
(3,055
|
)
|
Non-U.S. goodwill and intangible assets
|
|
(602
|
)
|
|
(584
|
)
|
Capitalized software
|
|
(530
|
)
|
|
(707
|
)
|
Depreciation and amortization
|
|
(236
|
)
|
|
(332
|
)
|
Prepaid expenses
|
|
(223
|
)
|
|
(228
|
)
|
Outside basis in partnerships
|
|
(279
|
)
|
|
(132
|
)
|
Other-non-U.S.
|
|
(86
|
)
|
|
(82
|
)
|
Total deferred income tax liabilities
|
|
(3,954
|
)
|
|
(5,120
|
)
|
Net deferred income tax liabilities
|
|
$
|
(2,182
|
)
|
|
$
|
(2,761
|
)
|
On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Reform). Tax Reform changed existing United States tax law, including a reduction of the U.S. corporate income tax rate. The Company re-measured deferred taxes as of the date of enactment, which resulted in the
$1.2 billion
reduction of net deferred income tax liabilities. The Company’s measurement of the income tax effects of Tax Reform for the year ended December 31, 2017 is reasonably estimated and, therefore, included in these financial statements in accordance with SEC Staff Accounting Bulletin No. 118.
Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. The valuation allowances primarily relate to future tax benefits on certain federal, state and non-U.S. net operating loss carryforwards. Federal net operating loss carryforwards of
$235 million
expire beginning in 2022 through 2037; state net operating loss carryforwards expire beginning in 2018 through 2037. Substantially all of the non-U.S. tax loss carryforwards have indefinite carryforward periods.
As of
December 31, 2017
, the Company’s undistributed earnings from non-U.S. subsidiaries are intended to be indefinitely reinvested in non-U.S. operations, and therefore no U.S. deferred taxes have been recorded. Taxes payable on the remittance of such earnings would be minimal.
A reconciliation of the beginning and ending amount of unrecognized tax benefits as of December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2017
|
|
2016
|
|
2015
|
Gross unrecognized tax benefits, beginning of period
|
|
$
|
263
|
|
|
$
|
224
|
|
|
$
|
92
|
|
Gross increases:
|
|
|
|
|
|
|
|
|
|
Current year tax positions
|
|
356
|
|
|
37
|
|
|
—
|
|
Prior year tax positions
|
|
40
|
|
|
24
|
|
|
55
|
|
Acquired reserves
|
|
—
|
|
|
—
|
|
|
89
|
|
Gross decreases:
|
|
|
|
|
|
|
|
|
|
Prior year tax positions
|
|
(33
|
)
|
|
(4
|
)
|
|
(2
|
)
|
Settlements
|
|
(24
|
)
|
|
(6
|
)
|
|
(1
|
)
|
Statute of limitations lapses
|
|
(4
|
)
|
|
(12
|
)
|
|
(9
|
)
|
Gross unrecognized tax benefits, end of period
|
|
$
|
598
|
|
|
$
|
263
|
|
|
$
|
224
|
|
The Company believes it is reasonably possible that its liability for unrecognized tax benefits will decrease in the next twelve months by
$210 million
as a result of audit settlements and the expiration of statutes of limitations.
The Company classifies interest and penalties associated with uncertain income tax positions as income taxes within its Consolidated Statements of Operations. During the years ended
December 31, 2017
,
2016
and
2015
, the Company recognized
$14 million
,
$11 million
and
$11 million
of interest and penalties, respectively. The Company had
$84 million
and
$70 million
of accrued interest and penalties for uncertain tax positions as of
December 31, 2017
and
2016
, respectively. These amounts are not included in the reconciliation above. As of
December 31, 2017
, there were
$472 million
of unrecognized tax benefits that, if recognized, would affect the effective tax rate.
The Company currently files income tax returns in the United States, various states and localities and non-U.S. jurisdictions. The U.S. Internal Revenue Service (IRS) has completed exams on the consolidated income tax returns for fiscal years
2016
and prior. The Company’s
2017
tax year is under advance review by the IRS under its Compliance Assurance Program. With the exception of a few states, the Company is no longer subject to income tax examinations prior to the 2011 tax year. In general, the Company is subject to examination in non-U.S. jurisdictions for years 2012 and forward.
10. Shareholders' Equity
Regulatory Capital and Dividend Restrictions
The Company’s regulated insurance and HMO subsidiaries in the United States are subject to regulations and standards in their respective jurisdictions. These standards, among other things, require these subsidiaries to maintain specified levels of statutory capital, as defined by each jurisdiction, and restrict the timing and amount of dividends and other distributions that may be paid to their parent companies. In the United States, most of these regulations and standards are generally consistent with model regulations established by the National Association of Insurance Commissioners. These standards generally permit dividends to be paid from statutory unassigned surplus of the regulated subsidiary and are limited based on the regulated subsidiary’s level of statutory net income and statutory capital and surplus. These dividends are referred to as “ordinary dividends” and generally may be paid without prior regulatory approval. If the dividend, together with other dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid from sources other than earned surplus, it is generally considered an “extraordinary dividend” and must receive prior regulatory approval.
For the year ended
December 31, 2017
, the Company’s regulated subsidiaries paid their parent companies dividends of
$3.7 billion
, including
$1.1 billion
of extraordinary dividends. For the year ended
December 31, 2016
, the Company’s regulated subsidiaries paid their parent companies dividends of
$3.9 billion
, including
$3.3 billion
of extraordinary dividends.
The Company's regulated subsidiaries had estimated aggregate statutory capital and surplus of
$20.7 billion
as of
December 31, 2017
. The estimated statutory capital and surplus necessary to satisfy regulatory requirements of the Company's regulated subsidiaries was approximately
$12.2 billion
as of
December 31, 2017
.
Optum Bank must meet minimum requirements for Tier 1 leverage capital, Tier 1 risk-based capital, common equity Tier 1 risk-based capital and total risk-based capital of the Federal Deposit Insurance Corporation (FDIC) to be considered “Well
Capitalized” under the capital adequacy rules to which it is subject. At
December 31, 2017
, the Company believes that Optum Bank met the FDIC requirements to be considered “Well Capitalized.”
Share Repurchase Program
Under its Board of Directors’ authorization, the Company maintains a share repurchase program. The objectives of the share repurchase program are to optimize the Company’s capital structure and cost of capital, thereby improving returns to shareholders, as well as to offset the dilutive impact of share-based awards. Repurchases may be made from time to time in open market purchases or other types of transactions (including prepaid or structured share repurchase programs), subject to certain Board restrictions. In June 2014, the Board renewed the Company’s share repurchase program with an authorization to
repurchase up to
100 million
shares of its common stock.
A summary of common share repurchases for the years ended December 31, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in millions, except per share data)
|
|
2017
|
|
2016
|
Common share repurchases, shares
|
|
9
|
|
|
10
|
|
Common share repurchases, average price per share
|
|
$
|
173.54
|
|
|
$
|
128.97
|
|
Common share repurchases, aggregate cost
|
|
$
|
1,500
|
|
|
$
|
1,280
|
|
Board authorized shares remaining
|
|
42
|
|
|
51
|
|
Dividends
In June 2017, the Company’s Board of Directors increased the Company’s quarterly cash dividend to shareholders to equal an annual dividend rate of
$3.00
per share compared to the annual dividend rate of
$2.50
per share, which the Company had paid since June 2016. Declaration and payment of future quarterly dividends is at the discretion of the Board and may be adjusted as business needs or market conditions change.
11. Share-Based Compensation
The Company’s outstanding share-based awards consist mainly of non-qualified stock options, SARs and restricted shares. As of
December 31, 2017
, the Company had
51 million
shares available for future grants of share-based awards under the Plan. As of
December 31, 2017
, there were also
9 million
shares of common stock available for issuance under the ESPP.
Stock Options and SARs
Stock option and SAR activity for the year ended
December 31, 2017
is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
|
|
(in millions)
|
|
|
|
(in years)
|
|
(in millions)
|
Outstanding at beginning of period
|
36
|
|
|
$
|
84
|
|
|
|
|
|
Granted
|
15
|
|
|
111
|
|
|
|
|
|
Exercised
|
(12
|
)
|
|
55
|
|
|
|
|
|
Forfeited
|
(2
|
)
|
|
125
|
|
|
|
|
|
Outstanding at end of period
|
37
|
|
|
102
|
|
|
6.6
|
|
|
$
|
4,443
|
|
Exercisable at end of period
|
16
|
|
|
67
|
|
|
4.8
|
|
|
2,412
|
|
Vested and expected to vest, end of period
|
36
|
|
|
101
|
|
|
6.6
|
|
|
4,363
|
|
Restricted Shares
Restricted share activity for the year ended
December 31, 2017
is summarized in the table below:
|
|
|
|
|
|
|
|
|
(shares in millions)
|
|
Shares
|
|
Weighted-Average
Grant Date
Fair Value
per Share
|
Nonvested at beginning of period
|
|
7
|
|
|
$
|
96
|
|
Granted
|
|
3
|
|
|
163
|
|
Vested
|
|
(3
|
)
|
|
84
|
|
Nonvested at end of period
|
|
7
|
|
|
128
|
|
Other Share-Based Compensation Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts)
|
|
For the Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Stock Options and SARs
|
|
|
|
|
|
|
Weighted-average grant date fair value of shares granted, per share
|
|
$
|
29
|
|
|
$
|
20
|
|
|
$
|
22
|
|
Total intrinsic value of stock options and SARs exercised
|
|
1,473
|
|
|
595
|
|
|
482
|
|
Restricted Shares
|
|
|
|
|
|
|
Weighted-average grant date fair value of shares granted, per share
|
|
163
|
|
|
115
|
|
|
110
|
|
Total fair value of restricted shares vested
|
|
$
|
460
|
|
|
$
|
274
|
|
|
$
|
460
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
Number of shares purchased
|
|
2
|
|
|
2
|
|
|
2
|
|
Share-Based Compensation Items
|
|
|
|
|
|
|
Share-based compensation expense, before tax
|
|
$
|
597
|
|
|
$
|
485
|
|
|
$
|
406
|
|
Share-based compensation expense, net of tax effects
|
|
531
|
|
|
417
|
|
|
348
|
|
Income tax benefit realized from share-based award exercises
|
|
431
|
|
|
236
|
|
|
247
|
|
|
|
|
|
|
|
(in millions, except years)
|
|
December 31, 2017
|
Unrecognized compensation expense related to share awards
|
|
$
|
593
|
|
Weighted-average years to recognize compensation expense
|
|
1.3
|
|
Share-Based Compensation Recognition and Estimates
The principal assumptions the Company used in calculating grant-date fair value for stock options and SARs were as follows:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Risk-free interest rate
|
|
1.9% - 2.1%
|
|
1.2% - 1.4%
|
|
1.6% - 1.7%
|
Expected volatility
|
|
18.5% - 20.7%
|
|
20.8% - 22.5%
|
|
22.3% - 24.1%
|
Expected dividend yield
|
|
1.4% - 1.6%
|
|
1.8%
|
|
1.4% - 1.7%
|
Forfeiture rate
|
|
5.0%
|
|
5.0%
|
|
5.0%
|
Expected life in years
|
|
5.7
|
|
5.6 - 5.9
|
|
5.5 - 6.1
|
Risk-free interest rates are based on U.S. Treasury yields in effect at the time of grant. Expected volatilities are based on the historical volatility of the Company’s common stock and the implied volatility from exchange-traded options on the Company’s common stock. Expected dividend yields are based on the per share cash dividend paid by the Company. The Company uses historical data to estimate option and SAR exercises and forfeitures within the valuation model. The expected lives of options and SARs granted represents the period of time that the awards granted are expected to be outstanding based on historical exercise patterns.
Other Employee Benefit Plans
The Company offers a 401(k) plan for its employees. Compensation expense related to this plan was not material for 2017, 2016 and 2015.
In addition, the Company maintains non-qualified, deferred compensation plans, which allow certain members of senior management and executives to defer portions of their salary or bonus and receive certain Company contributions on such deferrals, subject to plan limitations. The deferrals are recorded within long-term investments with an approximately equal amount in other liabilities in the Consolidated Balance Sheets. The total deferrals are distributable based upon termination of employment or other periods, as elected under each plan and were
$865 million
and
$672 million
as of
December 31, 2017
and
2016
, respectively.
12. Commitments and Contingencies
The Company leases facilities and equipment under long-term operating leases that are non-cancelable and expire on various dates. Rent expense under all operating leases for the years ended
December 31, 2017
,
2016
and
2015
was
$710 million
,
$608 million
and
$555 million
, respectively.
As of
December 31, 2017
, future minimum annual lease payments, net of sublease income, under all non-cancelable operating leases were as follows:
|
|
|
|
|
|
(in millions)
|
|
Future Minimum Lease Payments
|
2018
|
|
$
|
538
|
|
2019
|
|
470
|
|
2020
|
|
414
|
|
2021
|
|
350
|
|
2022
|
|
501
|
|
Thereafter
|
|
809
|
|
The Company provides guarantees related to its service level under certain contracts. If minimum standards are not met, the Company may be financially at risk up to a stated percentage of the contracted fee or a stated dollar amount. None of the amounts accrued, paid or charged to income for service level guarantees were material as of
December 31, 2017
,
2016
or
2015
.
As of
December 31, 2017
, the Company had outstanding, undrawn letters of credit with financial institutions of
$72 million
and surety bonds outstanding with insurance companies of
$1.4 billion
, primarily to bond contractual performance.
Pending Acquisition
In December 2017, the Company entered into agreements to acquire two companies in the health care sector for a total of approximately
$7.7 billion
. One of the acquisitions closed in January 2018; the other is expected to close later in 2018, subject to regulatory approval and other customary closing conditions.
Legal Matters
Because of the nature of its businesses, the Company is frequently made party to a variety of legal actions and regulatory inquiries, including class actions and suits brought by members, care providers, consumer advocacy organizations, customers and regulators, relating to the Company’s businesses, including management and administration of health benefit plans and other services. These matters include medical malpractice, employment, intellectual property, antitrust, privacy and contract claims and claims related to health care benefits coverage and other business practices.
The Company records liabilities for its estimates of probable costs resulting from these matters where appropriate. Estimates of costs resulting from legal and regulatory matters involving the Company are inherently difficult to predict, particularly where the matters: involve indeterminate claims for monetary damages or may involve fines, penalties or punitive damages; present novel legal theories or represent a shift in regulatory policy; involve a large number of claimants or regulatory bodies; are in the early stages of the proceedings; or could result in a change in business practices. Accordingly, the Company is often unable to estimate the losses or ranges of losses for those matters where there is a reasonable possibility or it is probable that a loss may be incurred.
Government Investigations, Audits and Reviews
The Company has been involved or is currently involved in various governmental investigations, audits and reviews. These include routine, regular and special investigations, audits and reviews by the CMS, state insurance and health and welfare departments, the Brazilian national regulatory agency for private health insurance and plans (the Agência Nacional de Saúde Suplementar), state attorneys general, the Office of the Inspector General, the Office of Personnel Management, the Office of Civil Rights, the Government Accountability Office, the Federal Trade Commission, U.S. Congressional committees, the U.S. Department of Justice, the SEC, the Internal Revenue Service, the U.S. Drug Enforcement Administration, the Brazilian federal revenue service (the Secretaria da Receita Federal), the U.S. Department of Labor, the Federal Deposit Insurance Corporation, the Defense Contract Audit Agency and other governmental authorities. Certain of the Company’s businesses have been reviewed or are currently under review, including for, among other matters, compliance with coding and other requirements under the Medicare risk-adjustment model. CMS has selected certain of the Company’s local plans for risk adjustment data validation (RADV) audits to validate the coding practices of and supporting documentation maintained by health care providers and such audits may result in retrospective adjustments to payments made to the Company’s health plans.
On February 14, 2017, the Department of Justice (DOJ) announced its decision to pursue certain claims within a lawsuit initially asserted against the Company and filed under seal by a whistleblower in 2011. The whistleblower’s complaint, which was unsealed on February 15, 2017, alleges that the Company, along with a number of other Medicare Advantage plans, made improper risk adjustment submissions and violated the False Claims Act. On March 24, 2017, DOJ intervened in a separate lawsuit initially asserted against the Company and filed by a whistleblower in 2009 concerning risk adjustment submissions by Medicare Advantage plans. On October 5, 2017, in one of the cases, the district court dismissed certain of DOJ’s claims with prejudice, and dismissed all of DOJ’s remaining claims with leave to file a further amended complaint; on October 12, the DOJ filed a notice of dismissal without prejudice of the case. The other case is now pending in the U.S. District Court for the Central District of California. The Company cannot reasonably estimate the outcome that may result from this remaining matter given its current posture.
13. Segment Financial Information
Factors used to determine the Company’s reportable segments include the nature of operating activities, economic characteristics, existence of separate senior management teams and the type of information used by the Company’s chief operating decision maker to evaluate its results of operations. Reportable segments with similar economic characteristics, products and services, customers, distribution methods and operational processes that operate in a similar regulatory environment are combined.
The following is a description of the types of products and services from which each of the Company’s
four
reportable segments derives its revenues:
|
|
•
|
UnitedHealthcare
includes the combined results of operations of UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement, UnitedHealthcare Community & State and UnitedHealthcare Global. The U.S. businesses share significant common assets, including a contracted network of physicians, health care professionals, hospitals and other facilities, information technology infrastructure and other resources. UnitedHealthcare Employer & Individual offers an array of consumer-oriented health benefit plans and services for large national employers, public sector employers, mid-sized employers, small businesses and individuals nationwide. UnitedHealthcare Medicare & Retirement provides health care coverage and health and well-being services to individuals age 50 and older, addressing their unique needs for preventive and acute health care services as well as services dealing with chronic disease and other specialized issues for older individuals. UnitedHealthcare Community & State’s primary customers oversee Medicaid plans, the Children’s Health Insurance Program and other federal, state and community health care programs. UnitedHealthcare Global is a diversified global health services business with a variety of offerings, including international commercial health and dental benefits and health care delivery.
|
|
|
•
|
OptumHealth
serves the physical, emotional and health-related financial needs of individuals, enabling population health management through programs offered by employers, payers, government entities and directly with the care delivery system. OptumHealth offers access to networks of care provider specialists, health management services, care delivery, consumer engagement and financial services.
|
|
|
•
|
OptumInsight
provides services, technology and health care expertise to major participants in the health care industry. Hospital systems, physicians, health plans, governments, life sciences companies and other organizations that comprise the health care industry depend on OptumInsight to help them improve performance, achieve efficiency, reduce costs, meet compliance mandates and modernize their core operating systems to meet the changing needs of the health system.
|
|
|
•
|
OptumRx
offers pharmacy care services and programs, including retail network contracting, home delivery and specialty pharmacy services, purchasing and clinical capabilities, and develops programs in areas such as step therapy, formulary management, drug adherence and disease/drug therapy management.
|
The Company’s accounting policies for reportable segment operations are consistent with those described in the Summary of Significant Accounting Policies (see
Note 2
). Transactions between reportable segments principally consist of sales of pharmacy care products and services to UnitedHealthcare customers by OptumRx, certain product offerings and care management and local care delivery services sold to UnitedHealthcare by OptumHealth, and health information and technology solutions, consulting and other services sold to UnitedHealthcare by OptumInsight. These transactions are recorded at management’s estimate of fair value. Intersegment transactions are eliminated in consolidation. Assets and liabilities that are jointly used are assigned to each reportable segment using estimates of pro-rata usage. Cash and investments are assigned such that each reportable segment has working capital and/or at least minimum specified levels of regulatory capital.
As a percentage of the Company’s total consolidated revenues, premium revenues from CMS were
28%
,
25%
and
26%
for
2017
,
2016
and
2015
, respectively, most of which were generated by UnitedHealthcare Medicare & Retirement and included in the UnitedHealthcare segment. U.S. customer revenue represented approximately
96%
,
97%
and
96%
of consolidated total revenues for
2017
,
2016
and
2015
, respectively. Long-lived fixed assets located in the United States represented approximately
77%
and
75%
of the total long-lived fixed assets as of
December 31, 2017
and
2016
, respectively. The non-U.S. revenues and fixed assets are primarily related to UnitedHealthcare Global.
The following table presents the reportable segment financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optum
|
|
|
|
|
(in millions)
|
|
UnitedHealthcare
|
|
OptumHealth
|
|
OptumInsight
|
|
OptumRx
|
|
Optum Eliminations
|
|
Optum
|
|
Corporate and
Eliminations
|
|
Consolidated
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
154,709
|
|
|
$
|
3,744
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,744
|
|
|
$
|
—
|
|
|
$
|
158,453
|
|
Products
|
|
—
|
|
|
44
|
|
|
106
|
|
|
26,216
|
|
|
—
|
|
|
26,366
|
|
|
—
|
|
|
26,366
|
|
Services
|
|
7,890
|
|
|
4,013
|
|
|
2,849
|
|
|
565
|
|
|
—
|
|
|
7,427
|
|
|
—
|
|
|
15,317
|
|
Total revenues - unaffiliated customers
|
|
162,599
|
|
|
7,801
|
|
|
2,955
|
|
|
26,781
|
|
|
—
|
|
|
37,537
|
|
|
—
|
|
|
200,136
|
|
Total revenues - affiliated customers
|
|
—
|
|
|
12,429
|
|
|
5,127
|
|
|
36,954
|
|
|
(1,227
|
)
|
|
53,283
|
|
|
(53,283
|
)
|
|
—
|
|
Investment and other income
|
|
658
|
|
|
340
|
|
|
5
|
|
|
20
|
|
|
—
|
|
|
365
|
|
|
—
|
|
|
1,023
|
|
Total revenues
|
|
$
|
163,257
|
|
|
$
|
20,570
|
|
|
$
|
8,087
|
|
|
$
|
63,755
|
|
|
$
|
(1,227
|
)
|
|
$
|
91,185
|
|
|
$
|
(53,283
|
)
|
|
$
|
201,159
|
|
Earnings from operations
|
|
$
|
8,498
|
|
|
$
|
1,823
|
|
|
$
|
1,770
|
|
|
$
|
3,118
|
|
|
$
|
—
|
|
|
$
|
6,711
|
|
|
$
|
—
|
|
|
$
|
15,209
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,186
|
)
|
|
(1,186
|
)
|
Earnings before income taxes
|
|
$
|
8,498
|
|
|
$
|
1,823
|
|
|
$
|
1,770
|
|
|
$
|
3,118
|
|
|
$
|
—
|
|
|
$
|
6,711
|
|
|
$
|
(1,186
|
)
|
|
$
|
14,023
|
|
Total assets
|
|
$
|
76,676
|
|
|
$
|
26,931
|
|
|
$
|
11,273
|
|
|
$
|
29,551
|
|
|
$
|
—
|
|
|
$
|
67,755
|
|
|
$
|
(5,373
|
)
|
|
$
|
139,058
|
|
Purchases of property, equipment and capitalized software
|
|
737
|
|
|
510
|
|
|
588
|
|
|
188
|
|
|
—
|
|
|
1,286
|
|
|
—
|
|
|
2,023
|
|
Depreciation and amortization
|
|
758
|
|
|
380
|
|
|
614
|
|
|
493
|
|
|
—
|
|
|
1,487
|
|
|
—
|
|
|
2,245
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
140,455
|
|
|
$
|
3,663
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,663
|
|
|
$
|
—
|
|
|
$
|
144,118
|
|
Products
|
|
1
|
|
|
48
|
|
|
103
|
|
|
26,506
|
|
|
—
|
|
|
26,657
|
|
|
—
|
|
|
26,658
|
|
Services
|
|
7,514
|
|
|
2,498
|
|
|
2,670
|
|
|
554
|
|
|
—
|
|
|
5,722
|
|
|
—
|
|
|
13,236
|
|
Total revenues - unaffiliated customers
|
|
147,970
|
|
|
6,209
|
|
|
2,773
|
|
|
27,060
|
|
|
—
|
|
|
36,042
|
|
|
—
|
|
|
184,012
|
|
Total revenues - affiliated customers
|
|
—
|
|
|
10,491
|
|
|
4,559
|
|
|
33,372
|
|
|
(1,088
|
)
|
|
47,334
|
|
|
(47,334
|
)
|
|
—
|
|
Investment and other income
|
|
611
|
|
|
208
|
|
|
1
|
|
|
8
|
|
|
—
|
|
|
217
|
|
|
—
|
|
|
828
|
|
Total revenues
|
|
$
|
148,581
|
|
|
$
|
16,908
|
|
|
$
|
7,333
|
|
|
$
|
60,440
|
|
|
$
|
(1,088
|
)
|
|
$
|
83,593
|
|
|
$
|
(47,334
|
)
|
|
$
|
184,840
|
|
Earnings from operations
|
|
$
|
7,307
|
|
|
$
|
1,428
|
|
|
$
|
1,513
|
|
|
$
|
2,682
|
|
|
$
|
—
|
|
|
$
|
5,623
|
|
|
$
|
—
|
|
|
$
|
12,930
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,067
|
)
|
|
(1,067
|
)
|
Earnings before income taxes
|
|
$
|
7,307
|
|
|
$
|
1,428
|
|
|
$
|
1,513
|
|
|
$
|
2,682
|
|
|
$
|
—
|
|
|
$
|
5,623
|
|
|
$
|
(1,067
|
)
|
|
$
|
11,863
|
|
Total assets
|
|
$
|
70,505
|
|
|
$
|
18,656
|
|
|
$
|
9,017
|
|
|
$
|
29,066
|
|
|
$
|
—
|
|
|
$
|
56,739
|
|
|
$
|
(4,434
|
)
|
|
$
|
122,810
|
|
Purchases of property, equipment and capitalized software
|
|
640
|
|
|
345
|
|
|
571
|
|
|
149
|
|
|
—
|
|
|
1,065
|
|
|
—
|
|
|
1,705
|
|
Depreciation and amortization
|
|
724
|
|
|
297
|
|
|
559
|
|
|
475
|
|
|
—
|
|
|
1,331
|
|
|
—
|
|
|
2,055
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
124,011
|
|
|
$
|
3,152
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,152
|
|
|
$
|
—
|
|
|
$
|
127,163
|
|
Products
|
|
2
|
|
|
31
|
|
|
108
|
|
|
17,171
|
|
|
—
|
|
|
17,310
|
|
|
—
|
|
|
17,312
|
|
Services
|
|
6,776
|
|
|
2,375
|
|
|
2,390
|
|
|
381
|
|
|
—
|
|
|
5,146
|
|
|
—
|
|
|
11,922
|
|
Total revenues - unaffiliated customers
|
|
130,789
|
|
|
5,558
|
|
|
2,498
|
|
|
17,552
|
|
|
—
|
|
|
25,608
|
|
|
—
|
|
|
156,397
|
|
Total revenues - affiliated customers
|
|
—
|
|
|
8,216
|
|
|
3,697
|
|
|
30,718
|
|
|
(791
|
)
|
|
41,840
|
|
|
(41,840
|
)
|
|
—
|
|
Investment and other income
|
|
554
|
|
|
153
|
|
|
1
|
|
|
2
|
|
|
—
|
|
|
156
|
|
|
—
|
|
|
710
|
|
Total revenues
|
|
$
|
131,343
|
|
|
$
|
13,927
|
|
|
$
|
6,196
|
|
|
$
|
48,272
|
|
|
$
|
(791
|
)
|
|
$
|
67,604
|
|
|
$
|
(41,840
|
)
|
|
$
|
157,107
|
|
Earnings from operations
|
|
$
|
6,754
|
|
|
$
|
1,240
|
|
|
$
|
1,278
|
|
|
$
|
1,749
|
|
|
$
|
—
|
|
|
$
|
4,267
|
|
|
$
|
—
|
|
|
$
|
11,021
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(790
|
)
|
|
(790
|
)
|
Earnings before income taxes
|
|
$
|
6,754
|
|
|
$
|
1,240
|
|
|
$
|
1,278
|
|
|
$
|
1,749
|
|
|
$
|
—
|
|
|
$
|
4,267
|
|
|
$
|
(790
|
)
|
|
$
|
10,231
|
|
Total assets
|
|
$
|
64,212
|
|
|
$
|
14,600
|
|
|
$
|
8,335
|
|
|
$
|
26,844
|
|
|
$
|
—
|
|
|
$
|
49,779
|
|
|
$
|
(2,737
|
)
|
|
$
|
111,254
|
|
Purchases of property, equipment and capitalized software
|
|
653
|
|
|
252
|
|
|
572
|
|
|
79
|
|
|
—
|
|
|
903
|
|
|
—
|
|
|
1,556
|
|
Depreciation and amortization
|
|
718
|
|
|
251
|
|
|
492
|
|
|
232
|
|
|
—
|
|
|
975
|
|
|
—
|
|
|
1,693
|
|
14. Quarterly Financial Data (Unaudited)
Selected quarterly financial information for all quarters of
2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
(in millions, except per share data)
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
48,723
|
|
|
$
|
50,053
|
|
|
$
|
50,322
|
|
|
$
|
52,061
|
|
Operating costs
|
|
45,310
|
|
|
46,322
|
|
|
46,234
|
|
|
48,084
|
|
Earnings from operations
|
|
3,413
|
|
|
3,731
|
|
|
4,088
|
|
|
3,977
|
|
Net earnings
|
|
2,191
|
|
|
2,350
|
|
|
2,561
|
|
|
3,721
|
|
Net earnings attributable to UnitedHealth Group common shareholders
|
|
2,172
|
|
|
2,284
|
|
|
2,485
|
|
|
3,617
|
|
Net earnings per share attributable to UnitedHealth Group common shareholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
2.28
|
|
|
2.37
|
|
|
2.57
|
|
|
3.73
|
|
Diluted
|
|
2.23
|
|
|
2.32
|
|
|
2.51
|
|
|
3.65
|
|
2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
44,527
|
|
|
$
|
46,485
|
|
|
$
|
46,293
|
|
|
$
|
47,535
|
|
Operating costs
|
|
41,567
|
|
|
43,282
|
|
|
42,713
|
|
|
44,348
|
|
Earnings from operations
|
|
2,960
|
|
|
3,203
|
|
|
3,580
|
|
|
3,187
|
|
Net earnings
|
|
1,627
|
|
|
1,760
|
|
|
1,978
|
|
|
1,708
|
|
Net earnings attributable to UnitedHealth Group common shareholders
|
|
1,611
|
|
|
1,754
|
|
|
1,968
|
|
|
1,684
|
|
Net earnings per share attributable to UnitedHealth Group common shareholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
1.69
|
|
|
1.84
|
|
|
2.07
|
|
|
1.77
|
|
Diluted
|
|
1.67
|
|
|
1.81
|
|
|
2.03
|
|
|
1.74
|
|