10-Q 1 unh930201610-q.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________ 
Form 10-Q
__________________________________________________________ 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number: 1-10864
__________________________________________________________ 
    uhglogo1a01a01a08.jpg
UnitedHealth Group Incorporated
(Exact name of registrant as specified in its charter)
 __________________________________________________________ 
Delaware
 
41-1321939
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
UnitedHealth Group Center
9900 Bren Road East
Minnetonka, Minnesota
 
55343
(Address of principal executive offices)
 
(Zip Code)
(952) 936-1300
(Registrant’s telephone number, including area code)
__________________________________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
[X]
 
Accelerated filer
[ ]
 
Non-accelerated filer
[ ]
 
Smaller reporting company
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [ ] No [X]

As of October 31, 2016, there were 951,816,220 shares of the registrant’s Common Stock, $.01 par value per share, issued and outstanding.
 
 
 
 
 




UNITEDHEALTH GROUP
Table of Contents
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I
ITEM 1.    FINANCIAL STATEMENTS
UnitedHealth Group
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except per share data)
 
September 30,
2016
 
December 31,
2015
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
12,796

 
$
10,923

Short-term investments
 
2,871

 
1,988

Accounts receivable, net
 
7,347

 
6,523

Other current receivables, net
 
7,502

 
6,801

Assets under management
 
2,952

 
2,998

Prepaid expenses and other current assets
 
2,300

 
2,406

Total current assets
 
35,768

 
31,639

Long-term investments
 
23,324

 
18,792

Property, equipment and capitalized software, net
 
5,524

 
4,861

Goodwill
 
47,183

 
44,453

Other intangible assets, net
 
8,719

 
8,391

Other assets
 
3,124

 
3,118

Total assets
 
$
123,642

 
$
111,254

Liabilities, redeemable noncontrolling interests and equity
 
 
 
 
Current liabilities:
 
 
 
 
Medical costs payable
 
$
16,500

 
$
14,330

Accounts payable and accrued liabilities
 
12,994

 
11,994

Other policy liabilities
 
8,670

 
7,798

Commercial paper and current maturities of long-term debt
 
7,202

 
6,634

Unearned revenues
 
5,730

 
2,142

Total current liabilities
 
51,096

 
42,898

Long-term debt, less current maturities
 
26,022

 
25,331

Future policy benefits
 
2,509

 
2,496

Deferred income taxes
 
2,492

 
3,587

Other liabilities
 
2,032

 
1,481

Total liabilities
 
84,151

 
75,793

Commitments and contingencies (Note 9)
 


 


Redeemable noncontrolling interests
 
1,937

 
1,736

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; 952 and 953 issued and outstanding
 
10

 
10

Additional paid-in capital
 

 
29

Retained earnings
 
39,945

 
37,125

Accumulated other comprehensive loss
 
(2,303
)
 
(3,334
)
Nonredeemable noncontrolling interest
 
(98
)
 
(105
)
Total equity
 
37,554

 
33,725

Total liabilities, redeemable noncontrolling interests and equity
 
$
123,642

 
$
111,254


See Notes to the Condensed Consolidated Financial Statements

1


UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except per share data)
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
 
Premiums
 
$
36,142

 
$
31,801

 
$
107,366

 
$
95,436

Products
 
6,696

 
6,482

 
19,699

 
8,935

Services
 
3,264

 
3,036

 
9,673

 
8,607

Investment and other income
 
191

 
170

 
567

 
530

Total revenues
 
46,293

 
41,489

 
137,305

 
113,508

Operating costs:
 
 
 
 
 
 
 
 
Medical costs
 
29,040

 
25,729

 
87,342

 
77,646

Operating costs
 
7,033

 
6,178

 
20,584

 
17,750

Cost of products sold
 
6,125

 
6,112

 
18,108

 
8,350

Depreciation and amortization
 
515

 
452

 
1,528

 
1,209

Total operating costs
 
42,713

 
38,471

 
127,562

 
104,955

Earnings from operations
 
3,580

 
3,018

 
9,743

 
8,553

Interest expense
 
(269
)
 
(229
)
 
(799
)
 
(530
)
Earnings before income taxes
 
3,311

 
2,789

 
8,944

 
8,023

Provision for income taxes
 
(1,333
)
 
(1,171
)
 
(3,579
)
 
(3,407
)
Net earnings
 
1,978

 
1,618

 
5,365

 
4,616

Earnings attributable to noncontrolling interests
 
(10
)
 
(21
)
 
(32
)
 
(21
)
Net earnings attributable to UnitedHealth Group common shareholders
 
$
1,968

 
$
1,597

 
$
5,333

 
$
4,595

Earnings per share attributable to UnitedHealth Group common shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
2.07

 
$
1.68

 
$
5.60

 
$
4.82

Diluted
 
$
2.03

 
$
1.65

 
$
5.51

 
$
4.75

Basic weighted-average number of common shares outstanding
 
952

 
953

 
952

 
953

Dilutive effect of common share equivalents
 
17

 
14

 
16

 
14

Diluted weighted-average number of common shares outstanding
 
969

 
967

 
968

 
967

Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents
 
1

 
8

 
3

 
8

Cash dividends declared per common share
 
$
0.625

 
$
0.500

 
$
1.750

 
$
1.375


See Notes to the Condensed Consolidated Financial Statements

2



UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
 
2016
 
2015
 
2016
 
2015
Net earnings
 
$
1,978

 
$
1,618

 
$
5,365

 
$
4,616

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Gross unrealized (losses) gains on investment securities during the period
 
(21
)
 
66

 
473

 
(51
)
Income tax effect
 
7

 
(26
)
 
(173
)
 
17

Total unrealized (losses) gains, net of tax
 
(14
)
 
40

 
300

 
(34
)
Gross reclassification adjustment for net realized gains included in net earnings
 
(26
)
 
(28
)
 
(97
)
 
(99
)
Income tax effect
 
9

 
11

 
35

 
37

Total reclassification adjustment, net of tax
 
(17
)
 
(17
)
 
(62
)
 
(62
)
Total foreign currency translation (losses) gains
 
(69
)
 
(1,063
)
 
793

 
(1,859
)
Other comprehensive (loss) income
 
(100
)
 
(1,040
)
 
1,031

 
(1,955
)
Comprehensive income
 
1,878

 
578

 
6,396

 
2,661

Comprehensive income attributable to noncontrolling interests
 
(10
)
 
(21
)
 
(32
)
 
(21
)
Comprehensive income attributable to UnitedHealth Group common shareholders
 
$
1,868

 
$
557

 
$
6,364

 
$
2,640


See Notes to the Condensed Consolidated Financial Statements

3


UnitedHealth Group
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Nonredeemable Noncontrolling Interest
 
Total
Equity
(in millions)
 
Shares
 
Amount
 
 
 
Net Unrealized Gains (Losses) on Investments
 
Foreign Currency Translation (Losses) Gains
 
 
Balance at January 1, 2016
 
953

 
$
10

 
$
29

 
$
37,125

 
$
56

 
$
(3,390
)
 
$
(105
)
 
$
33,725

Adjustment to adopt
ASU 2016-09
 
 
 
 
 
 
 
28

 
 
 
 
 
 
 
28

Net earnings
 
 
 
 
 
 
 
5,333

 
 
 
 
 
31

 
5,364

Other comprehensive income
 
 
 
 
 
 
 
 
 
238

 
793

 
 
 
1,031

Issuances of common stock,
and related tax effects
 
8

 

 
187

 
 
 
 
 
 
 
 
 
187

Share-based compensation
 
 
 
 
 
350

 
 
 
 
 
 
 
 
 
350

Common share repurchases
 
(9
)
 

 
(242
)
 
(875
)
 
 
 
 
 
 
 
(1,117
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(1,666
)
 
 
 
 
 
 
 
(1,666
)
Acquisition of redeemable noncontrolling interest shares
 
 
 
 
 
(143
)
 
 
 
 
 
 
 
 
 
(143
)
 Redeemable noncontrolling interests fair value and other adjustments
 
 
 
 
 
(181
)
 
 
 
 
 
 
 
 
 
(181
)
Distribution to nonredeemable noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
(24
)
 
(24
)
Balance at September 30, 2016
 
952

 
$
10

 
$

 
$
39,945

 
$
294

 
$
(2,597
)
 
$
(98
)
 
$
37,554

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
 
954

 
$
10

 
$

 
$
33,836

 
$
223

 
$
(1,615
)
 
$

 
$
32,454

Net earnings
 
 
 
 
 
 
 
4,595

 
 
 
 
 
11

 
4,606

Other comprehensive loss
 
 
 
 
 
 
 
 
 
(96
)
 
(1,859
)
 
 
 
(1,955
)
Issuances of common stock,
 and related tax effects
 
9

 

 
112

 
 
 
 
 
 
 
 
 
112

Share-based compensation,
and related tax benefits
 
 
 
 
 
477

 
 
 
 
 
 
 
 
 
477

Common share repurchases
 
(10
)
 

 
(391
)
 
(739
)
 
 
 
 
 
 
 
(1,130
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(1,310
)
 
 
 
 
 
 
 
(1,310
)
Redeemable noncontrolling interests fair value and other adjustments
 
 
 
 
 
(129
)
 
 
 
 
 
 
 
 
 
(129
)
Acquisition of nonredeemable noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
9

 
9

Distribution to nonredeemable noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
(12
)
 
(12
)
Balance at September 30, 2015
 
953

 
$
10

 
$
69

 
$
36,382

 
$
127

 
$
(3,474
)
 
$
8

 
$
33,122



See Notes to the Condensed Consolidated Financial Statements

4


UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended September 30,
(in millions)
 
2016
 
2015
Operating activities
 
 
 
 
Net earnings
 
$
5,365

 
$
4,616

Noncash items:
 
 
 
 
Depreciation and amortization
 
1,528

 
1,209

Deferred income taxes
 
(405
)
 
(49
)
Share-based compensation
 
369

 
306

Other, net
 
(68
)
 
(208
)
Net change in other operating items, net of effects from acquisitions and changes in AARP balances:
 
 
 
 
Accounts receivable
 
(580
)
 
(907
)
Other assets
 
(1,835
)
 
(1,686
)
Medical costs payable
 
1,984

 
2,137

Accounts payable and other liabilities
 
1,004

 
616

Other policy liabilities
 
276

 
374

Unearned revenues
 
3,566

 
(179
)
Cash flows from operating activities
 
11,204

 
6,229

Investing activities
 
 
 
 
Purchases of investments
 
(12,231
)
 
(6,712
)
Sales of investments
 
4,422

 
4,041

Maturities of investments
 
3,040

 
2,557

Cash paid for acquisitions, net of cash assumed
 
(2,727
)
 
(16,183
)
Purchases of property, equipment and capitalized software
 
(1,220
)
 
(1,072
)
Other, net
 
(25
)
 
(51
)
Cash flows used for investing activities
 
(8,741
)
 
(17,420
)
Financing activities
 
 
 
 
Common share repurchases
 
(1,117
)
 
(1,130
)
Acquisition of redeemable noncontrolling interest shares
 
(257
)
 
(113
)
Cash dividends paid
 
(1,666
)
 
(1,310
)
Proceeds from common stock issuances
 
387

 
366

Proceeds from issuance of long-term debt
 
2,485

 
11,982

Repayments of long-term debt
 
(2,101
)
 
(416
)
Proceeds from commercial paper, net
 
693

 
2,665

Customer funds administered
 
1,249

 
119

Other, net
 
(333
)
 
(333
)
Cash flows (used for) from financing activities
 
(660
)
 
11,830

Effect of exchange rate changes on cash and cash equivalents
 
70

 
(151
)
Increase in cash and cash equivalents
 
1,873

 
488

Cash and cash equivalents, beginning of period
 
10,923

 
7,495

Cash and cash equivalents, end of period
 
$
12,796

 
$
7,983


See Notes to the Condensed Consolidated Financial Statements

5


UnitedHealth Group
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
UnitedHealth Group Incorporated (individually and together with its subsidiaries, “UnitedHealth Group” and “the Company”) is a diversified health and well-being company dedicated to helping people live healthier lives and making the health system work better for everyone. Through its diversified family of businesses, the Company leverages core competencies in advanced, enabling technology; health care data, information and intelligence; and clinical care management and coordination to help meet the demands of the health system. The Company offers a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services; and Optum, which provides pharmacy care services and information and technology-enabled health services.
The Company has prepared the Condensed Consolidated Financial Statements according to U.S. Generally Accepted Accounting Principles (GAAP) and has included the accounts of UnitedHealth Group and its subsidiaries. The year-end condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. In accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC), the Company has omitted certain footnote disclosures that would substantially duplicate the disclosures contained in its annual audited Consolidated Financial Statements. Therefore, these Condensed Consolidated Financial Statements should be read together with the Consolidated Financial Statements and the Notes included in Part II, Item 8, “Financial Statements” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the SEC (2015 10-K). The accompanying Condensed Consolidated Financial Statements include all normal recurring adjustments necessary to present the interim financial statements fairly.
Use of Estimates
These Condensed 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 valuations of certain investments. 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.
The accounting policies disclosed in Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2015 10-K remain unchanged.
Reclassification
During the fourth quarter of 2015, the Company aligned its accounting policy to conform the presentation of certain pharmacy fulfillment costs related to an acquired OptumRx business. These costs are now included in medical costs and cost of products sold, whereas they were previously included in operating costs. Prior periods have been reclassified to conform to the current period presentation. The reclassification increased medical expenses by $111 million and $313 million, decreased operating costs by $123 million and $352 million and increased cost of products sold by $12 million and $39 million for the three and nine months ended September 30, 2015, respectively. The reclassification had no impact on total operating costs, earnings from operations, net earnings, earnings per share or total equity.
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 can 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 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. The Company is currently evaluating the effect of the new leasing guidance.
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

6


comprehensive income. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating the effect of the new financial instruments guidance.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09) as modified by ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” and ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” ASU 2014-09 will supersede 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. In addition, new and enhanced disclosures will be required. Companies may adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon adoption approach. The Company will early adopt the new standard effective January 1, 2017, as allowed by the standard, using the modified retrospective approach. The adoption of ASU 2014-09 will not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09). ASU 2016-09 modifies several aspects of the accounting for share-based payment awards, including income tax consequences, and classification on the statement of cash flows. The Company early adopted ASU 2016-09 in the first quarter of 2016. The provisions of ASU 2016-09 related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures were adopted using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of January 1, 2016. The provisions of ASU 2016-09 related to the recognition of excess tax benefits in the income statement and classification in the statement of cash flows were adopted prospectively and the prior periods were not retrospectively adjusted. The adoption of ASU 2016-09 did not materially impact the Company’s consolidated financial position, results of operations, equity or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (ASU 2015-17). ASU 2015-17 requires entities to present deferred tax assets and deferred tax liabilities as noncurrent on the balance sheet. Prior to the issuance of ASU 2015-17, deferred taxes were required to be presented as a net current asset or liability and a net noncurrent asset or liability. The Company adopted ASU 2015-17 on a prospective basis in the first quarter of 2016 and the prior period was not retrospectively adjusted. The adoption of ASU 2015-17 did not impact the Company’s consolidated financial position, results of operations, equity or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). ASU 2015-03 requires debt issuance costs to be presented as a reduction of the carrying amount of the related debt liability. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as an asset in the balance sheet. The Company adopted ASU 2015-03 on a retrospective basis, as required, in the first quarter of 2016. The Company reclassified $129 million in debt issuance costs that were recorded in other assets on the Consolidated Balance Sheet as of December 31, 2015 to long-term debt, less current maturities.
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 Condensed Consolidated Financial Statements.

7


2.    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
September 30, 2016
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
2,301

 
$
12

 
$
(2
)
 
$
2,311

State and municipal obligations
 
7,207

 
213

 
(3
)
 
7,417

Corporate obligations
 
10,292

 
176

 
(6
)
 
10,462

U.S. agency mortgage-backed securities
 
2,571

 
42

 
(1
)
 
2,612

Non-U.S. agency mortgage-backed securities
 
931

 
24

 
(3
)
 
952

Total debt securities - available-for-sale
 
23,302

 
467

 
(15
)
 
23,754

Equity securities - available-for-sale
 
1,919

 
58

 
(41
)
 
1,936

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
174

 
2

 

 
176

State and municipal obligations
 
8

 

 

 
8

Corporate obligations
 
323

 

 

 
323

Total debt securities - held-to-maturity
 
505

 
2

 

 
507

Total investments
 
$
25,726

 
$
527

 
$
(56
)
 
$
26,197

December 31, 2015
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
1,982

 
$
1

 
$
(6
)
 
$
1,977

State and municipal obligations
 
6,022

 
149

 
(3
)
 
6,168

Corporate obligations
 
7,446

 
41

 
(81
)
 
7,406

U.S. agency mortgage-backed securities
 
2,127

 
13

 
(16
)
 
2,124

Non-U.S. agency mortgage-backed securities
 
962

 
5

 
(11
)
 
956

Total debt securities - available-for-sale
 
18,539

 
209

 
(117
)
 
18,631

Equity securities - available-for-sale
 
1,638

 
58

 
(57
)
 
1,639

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
163

 
1

 

 
164

State and municipal obligations
 
8

 

 

 
8

Corporate obligations
 
339

 

 

 
339

Total debt securities - held-to-maturity
 
510

 
1

 

 
511

Total investments
 
$
20,687

 
$
268

 
$
(174
)
 
$
20,781


The amortized cost and fair value of debt securities as of September 30, 2016, 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
 
$
2,971

 
$
2,975

 
$
141

 
$
141

Due after one year through five years
 
9,024

 
9,132

 
168

 
169

Due after five years through ten years
 
5,543

 
5,735

 
103

 
103

Due after ten years
 
2,262

 
2,348

 
93

 
94

U.S. agency mortgage-backed securities
 
2,571

 
2,612

 

 

Non-U.S. agency mortgage-backed securities
 
931

 
952

 

 

Total debt securities
 
$
23,302

 
$
23,754

 
$
505

 
$
507


8


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
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
705

 
$
(2
)
 
$

 
$

 
$
705

 
$
(2
)
State and municipal obligations
 
1,007

 
(3
)
 

 

 
1,007

 
(3
)
Corporate obligations
 
1,285

 
(3
)
 
271

 
(3
)
 
1,556

 
(6
)
U.S. agency mortgage-backed securities
 

 

 
86

 
(1
)
 
86

 
(1
)
Non-U.S. agency mortgage-backed securities
 

 

 
114

 
(3
)
 
114

 
(3
)
Total debt securities - available-for-sale
 
$
2,997

 
$
(8
)
 
$
471

 
$
(7
)
 
$
3,468

 
$
(15
)
Equity securities - available-for-sale
 
$
83

 
$
(4
)
 
$
109

 
$
(37
)
 
$
192

 
$
(41
)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
1,473

 
$
(6
)
 
$

 
$

 
$
1,473

 
$
(6
)
State and municipal obligations
 
650

 
(3
)
 

 

 
650

 
(3
)
Corporate obligations
 
4,629

 
(63
)
 
339

 
(18
)
 
4,968

 
(81
)
U.S. agency mortgage-backed securities
 
1,304

 
(12
)
 
116

 
(4
)
 
1,420

 
(16
)
Non-U.S. agency mortgage-backed securities
 
593

 
(7
)
 
127

 
(4
)
 
720

 
(11
)
Total debt securities - available-for-sale
 
$
8,649

 
$
(91
)
 
$
582

 
$
(26
)
 
$
9,231

 
$
(117
)
Equity securities - available-for-sale
 
$
112

 
$
(11
)
 
$
89

 
$
(46
)
 
$
201

 
$
(57
)
The Company’s unrealized losses from all securities as of September 30, 2016 were generated from approximately 4,000 positions out of a total of 28,000 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. As of September 30, 2016, 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.
Net realized gains reclassified out of accumulated other comprehensive income were from the following sources:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
 
2016
 
2015
 
2016
 
2015
Total other than temporary impairments recognized in earnings
 
$
(21
)
 
$
(4
)
 
$
(43
)
 
$
(8
)
Gross realized losses from sales
 
(3
)
 
(9
)
 
(38
)
 
(20
)
Gross realized gains from sales
 
50

 
41

 
178

 
127

Net realized gains (included in investment and other income on the Condensed Consolidated Statements of Operations)
 
26

 
28

 
97

 
99

Income tax effect (included in provision for income taxes on the Condensed Consolidated Statements of Operations)
 
(9
)
 
(11
)
 
(35
)
 
(37
)
Realized gains, net of taxes
 
$
17

 
$
17

 
$
62

 
$
62

3.    Fair Value
Certain assets and liabilities are measured at fair value in the Condensed Consolidated Financial Statements or have fair values disclosed in the Notes to the Condensed Consolidated Financial Statements. These assets and liabilities are classified into one of three levels of a hierarchy defined by GAAP.

9


For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see Note 5 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2015 10-K.
The Company elected to measure the entirety of the Supplemental Health Insurance Program (AARP Program) assets under management at fair value pursuant to the fair value option. See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2015 10-K for further detail on the AARP Program.
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 Condensed Consolidated Balance Sheets, excluding assets and liabilities related to the AARP Program:
(in millions)
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
Fair and Carrying
Value
September 30, 2016
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
12,744

 
$
52

 
$

 
$
12,796

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
2,054

 
257

 

 
2,311

State and municipal obligations
 

 
7,417

 

 
7,417

Corporate obligations
 
36

 
10,319

 
107

 
10,462

U.S. agency mortgage-backed securities
 

 
2,612

 

 
2,612

Non-U.S. agency mortgage-backed securities
 

 
952

 

 
952

Total debt securities - available-for-sale
 
2,090

 
21,557

 
107

 
23,754

Equity securities - available-for-sale
 
1,488

 
12

 
436

 
1,936

Interest rate swap assets
 

 
242

 

 
242

Total assets at fair value

$
16,322

 
$
21,863

 
$
543

 
$
38,728

Percentage of total assets at fair value
 
42
%
 
57
%
 
1
%
 
100
%
December 31, 2015
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
10,906

 
$
17

 
$

 
$
10,923

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
1,779

 
198

 

 
1,977

State and municipal obligations
 

 
6,168

 

 
6,168

Corporate obligations
 
5

 
7,308

 
93

 
7,406

U.S. agency mortgage-backed securities
 

 
2,124

 

 
2,124

Non-U.S. agency mortgage-backed securities
 

 
951

 
5

 
956

Total debt securities - available-for-sale
 
1,784

 
16,749

 
98

 
18,631

Equity securities - available-for-sale
 
1,223

 
14

 
402

 
1,639

Interest rate swap assets
 

 
93

 

 
93

Total assets at fair value
 
$
13,913

 
$
16,873

 
$
500

 
$
31,286

Percentage of total assets at fair value
 
44
%
 
54
%
 
2
%
 
100
%
Interest rate swap liabilities
 
$

 
$
11

 
$

 
$
11

Transfers between levels, if any, are recorded as of the beginning of the reporting period in which the transfer occurs; there were no transfers between Levels 1, 2 or 3 of any financial assets or liabilities during the nine months ended September 30, 2016 or 2015.

10


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 Condensed 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
September 30, 2016
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
176

 
$

 
$

 
$
176

 
$
174

State and municipal obligations
 

 

 
8

 
8

 
8

Corporate obligations
 
94

 
9

 
220

 
323

 
323

Total debt securities - held-to-maturity
 
$
270

 
$
9

 
$
228

 
$
507

 
$
505

Other assets
 
$

 
$
481

 
$

 
$
481

 
$
477

Long-term debt and other financing obligations
 
$

 
$
31,654

 
$

 
$
31,654

 
$
28,544

December 31, 2015
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
164

 
$

 
$

 
$
164

 
$
163

State and municipal obligations
 

 

 
8

 
8

 
8

Corporate obligations
 
91

 
10

 
238

 
339

 
339

Total debt securities - held-to-maturity
 
$
255

 
$
10

 
$
246

 
$
511

 
$
510

Other assets
 
$

 
$
493

 
$

 
$
493

 
$
500

Long-term debt and other financing obligations
 
$

 
$
29,455

 
$

 
$
29,455

 
$
27,978

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 nine months ended September 30, 2016 or 2015.
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows:
 
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
Debt
Securities
 
Equity
Securities
 
Total
 
Debt
Securities
 
Equity
Securities
 
Total
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
101

 
$
388

 
$
489

 
$
98

 
$
402

 
$
500

Purchases
 
6

 
71

 
77

 
10

 
91

 
101

Sales
 

 
(15
)
 
(15
)
 
(7
)
 
(19
)
 
(26
)
Net unrealized gains (losses) in accumulated other comprehensive income
 

 
1

 
1

 
6

 
(13
)
 
(7
)
Net realized losses in investment and other income
 

 
(9
)
 
(9
)
 

 
(25
)
 
(25
)
Balance at end of period
 
$
107

 
$
436

 
$
543

 
$
107

 
$
436

 
$
543

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
84

 
$
319

 
$
403

 
$
74

 
$
310

 
$
384

Purchases
 
12

 
45

 
57

 
22

 
59

 
81

Sales
 
(2
)
 
(6
)
 
(8
)
 
(4
)
 
(20
)
 
(24
)
Net unrealized gains in accumulated other comprehensive income
 

 
6

 
6

 
2

 
1

 
3

Net realized (losses) gains in investment and other income
 
(1
)
 
(1
)
 
(2
)
 
(1
)
 
13

 
12

Balance at end of period
 
$
93

 
$
363

 
$
456

 
$
93

 
$
363

 
$
456


11


4.    Medicare Part D Pharmacy Benefits
The Condensed Consolidated Balance Sheets include the following amounts associated with the Medicare Part D program:
 
 
September 30, 2016
 
December 31, 2015
(in millions)
 
Subsidies
 
Drug Discount
 
Risk-Share
 
Subsidies
 
Drug Discount
 
Risk-Share
Other current receivables
 
$
986

 
$
708

 
$

 
$
1,703

 
$
423

 
$

Other policy liabilities
 

 
345

 
714

 

 
58

 
496

See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2015 10-K for further detail on Medicare Part D.
5.    Other Current Receivables
The Company’s pharmacy care services businesses contract with pharmaceutical manufacturers, some of which provide rebates based on use of the manufacturers’ products by the Company’s clients. As of September 30, 2016 and December 31, 2015, total pharmaceutical manufacturer rebates receivable included in other receivables in the Condensed Consolidated Balance Sheets amounted to $3.5 billion and $2.6 billion, respectively. See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2015 10-K for more information on the Company’s pharmaceutical manufacturer rebates.
6.    Medical Costs Reserve Development
The following table provides details of the Company’s medical cost reserve development:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
 
2016
 
2015
 
2016
 
2015
Related to prior years
 
$
(110
)
 
$
100

 
$
190

 
$
230

Related to current year
 
230

 
50

 
N/A

 
N/A

For the three and nine months ended September 30, 2016 and September 30, 2015, the medical cost reserve development included a number of individual items, none of which were material.

12


7.     Commercial Paper and Long-Term Debt
Commercial paper, term loan and senior unsecured long-term debt consisted of the following:
 
 
September 30, 2016
 
December 31, 2015
(in millions, except percentages)
 
Par
Value
 
Carrying
Value
 
Fair
Value
 
Par
Value
 
Carrying
Value (a)
 
Fair
Value
Commercial paper
 
$
4,680

 
$
4,680

 
$
4,680

 
$
3,987

 
$
3,987

 
$
3,987

Floating rate term loan due July 2016
 

 

 

 
1,500

 
1,500

 
1,500

5.375% notes due March 2016
 

 

 

 
601

 
605

 
606

1.875% notes due November 2016
 
400

 
400

 
400

 
400

 
400

 
403

5.360% notes due November 2016
 
95

 
95

 
95

 
95

 
95

 
98

Floating rate notes due January 2017
 
750

 
750

 
751

 
750

 
749

 
751

6.000% notes due June 2017
 
441

 
449

 
455

 
441

 
458

 
469

1.450% notes due July 2017
 
750

 
749

 
752

 
750

 
749

 
750

1.400% notes due October 2017
 
625

 
624

 
626

 
625

 
624

 
624

6.000% notes due November 2017
 
156

 
160

 
164

 
156

 
162

 
168

1.400% notes due December 2017
 
750

 
751

 
752

 
750

 
751

 
748

6.000% notes due February 2018
 
1,100

 
1,109

 
1,169

 
1,100

 
1,114

 
1,196

1.900% notes due July 2018
 
1,500

 
1,496

 
1,516

 
1,500

 
1,494

 
1,505

1.700% notes due February 2019
 
750

 
748

 
755

 

 

 

1.625% notes due March 2019
 
500

 
502

 
503

 
500

 
502

 
494

2.300% notes due December 2019
 
500

 
507

 
514

 
500

 
499

 
502

2.700% notes due July 2020
 
1,500

 
1,494

 
1,559

 
1,500

 
1,493

 
1,516

3.875% notes due October 2020
 
450

 
462

 
488

 
450

 
452

 
476

4.700% notes due February 2021
 
400