What drove the strong 2002 earnings growth?

Earnings growth came mainly from improved medical cost management (the commercial medical care ratio fell 230 basis points to 81.8%), operating cost efficiencies from process and technology improvements, and a shift toward higher-margin fee-based products. Withdrawing from unprofitable risk-based contracts and Medicare+Choice markets also contributed. Part of the reported 48% net earnings increase reflects the elimination of goodwill amortization under FAS 142, so the comparable-basis growth of about 35% is the more conservative measure.

How exposed is UnitedHealth to Medicare and the AARP contract?

Exposure is significant. Medicare+Choice premiums fell $850 million to $1.6 billion as the company withdrew from counties where reimbursement was insufficient, and it cannot re-enter those counties for two years. The AARP Medicare Supplement contract generates about $3.7 billion in premium revenue and depends on AARP's continued support, pricing competitiveness, and regulatory conditions. The 10-year contract began in 1998 and runs to about 2008.

What litigation risks does the company face?

The main exposure is MDL No. 1334, a consolidated class action in the Southern District of Florida alleging ERISA and RICO violations, along with prompt-pay and contract claims by consumers and providers. The U.S. Supreme Court heard argument on arbitration limits in February 2003. A separate AMA lawsuit challenges non-network reimbursement rates. Management does not believe these matters will have a material adverse effect, but the damages sought could be large, including treble and punitive damages.

How is the balance sheet positioned for the future?

The balance sheet is solid. Debt totaled $1.76 billion against equity of $4.43 billion, for a 28.5% debt-to-capital ratio, and management targets 25–30%. Cash and investments of $6.3 billion, $2.5 billion in statutory capital at regulated subsidiaries, and $900 million in credit facilities provide liquidity. Near-term maturities of $811 million are planned for refinancing with new term debt in 2003, and the company has the capacity to keep repurchasing shares.

UNH 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 19, 2003. Cited figures are marked; the original filing is the authoritative source.

UnitedHealth Group's 2002 Form 10-K (filed March 19, 2003) reports a record year: revenues rose 7% to $25.0 billion^a, earnings from operations grew 40% to $2.2 billion, and net earnings reached $1.35 billion, up 48% on a reported basis.

Diluted EPS was $4.25^b, up 52% from $2.79, and return on shareholders' equity improved to 33.0% from 24.5%. Much of the improvement came from operational efficiencies, a shift toward higher-margin fee-based products, and improved commercial medical cost ratios (the consolidated medical care ratio fell from 85.3% to 83.0%). Part of the margin gain also came from withdrawing from unprofitable risk-based contracts and Medicare+Choice markets.

Note that the comparison includes the FAS No. 142 change: goodwill amortization of $93 million^c in 2001 was eliminated, so the company presents a comparable basis showing diluted EPS growth of about 38%. Balance sheet and cash flow remained solid. Operating cash flow was $2.4 billion, up 31%.

Cash and investments totaled $6.3 billion^d, and debt-to-total-capital was 28.5%, within management's 25–30% target. The company repurchased 22.3 million shares for about $1.8 billion and acquired AmeriChoice in September 2002 for roughly $577 million in stock and cash.

Goodwill rose to $3.4 billion. Key risks disclosed include Medicare+Choice reimbursement pressures, which led to market withdrawals and a 35% drop in UnitedHealthcare Medicare enrollment, dependence on the AARP contract ($3.7 billion in premiums), and the ongoing MDL 1334 managed care class action litigation involving ERISA and RICO claims, which management does not expect to be material.

02—Key points

Key Highlights

Record 2002 results: revenues of $25.0 billion (+7%), earnings from operations of $2.2 billion (+40% reported), and net earnings of $1.35 billion (+48% reported).
Diluted EPS of $4.25, up 52% reported (about 38% on a FAS 142 comparable basis); return on shareholders' equity rose to 33.0% from 24.5%.
Consolidated medical care ratio improved to 83.0% from 85.3%, with the operating margin up to 8.7% from 6.7%, aided by a mix shift toward fee-based products.
Operating cash flow of $2.4 billion (+31%) and cash and investments of $6.3 billion, supporting a debt-to-capital ratio of 28.5%.
Capital returned through $1.8 billion in share repurchases (22.3 million shares) and a $0.03 annual dividend; $16.5 million shares remain authorized.
Acquired AmeriChoice (Medicaid, September 2002) for about $577 million, adding goodwill of $472 million; Medicaid enrollment rose 390,000.
Medicare+Choice exits and benefit changes cut Medicare enrollment 35%, and the AARP contract ($3.7 billion premiums) remains a concentration risk.

03—Questions

Frequently Asked Questions

What drove the strong 2002 earnings growth?
Earnings growth came mainly from improved medical cost management (the commercial medical care ratio fell 230 basis points to 81.8%), operating cost efficiencies from process and technology improvements, and a shift toward higher-margin fee-based products. Withdrawing from unprofitable risk-based contracts and Medicare+Choice markets also contributed. Part of the reported 48% net earnings increase reflects the elimination of goodwill amortization under FAS 142, so the comparable-basis growth of about 35% is the more conservative measure.
How exposed is UnitedHealth to Medicare and the AARP contract?
Exposure is significant. Medicare+Choice premiums fell $850 million to $1.6 billion as the company withdrew from counties where reimbursement was insufficient, and it cannot re-enter those counties for two years. The AARP Medicare Supplement contract generates about $3.7 billion in premium revenue and depends on AARP's continued support, pricing competitiveness, and regulatory conditions. The 10-year contract began in 1998 and runs to about 2008.
What litigation risks does the company face?
The main exposure is MDL No. 1334, a consolidated class action in the Southern District of Florida alleging ERISA and RICO violations, along with prompt-pay and contract claims by consumers and providers. The U.S. Supreme Court heard argument on arbitration limits in February 2003. A separate AMA lawsuit challenges non-network reimbursement rates. Management does not believe these matters will have a material adverse effect, but the damages sought could be large, including treble and punitive damages.
How is the balance sheet positioned for the future?
The balance sheet is solid. Debt totaled $1.76 billion against equity of $4.43 billion, for a 28.5% debt-to-capital ratio, and management targets 25–30%. Cash and investments of $6.3 billion, $2.5 billion in statutory capital at regulated subsidiaries, and $900 million in credit facilities provide liquidity. Near-term maturities of $811 million are planned for refinancing with new term debt in 2003, and the company has the capacity to keep repurchasing shares.

04—Continue

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