10-Q 1 unh331201710-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 MARCH 31, 2017
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
__________________________________________________________ 
    uhglogo1a01a01a09.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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
[X]
 
Accelerated filer
[ ]
 
Non-accelerated filer
[ ]
 
Smaller reporting company
[ ]
 
Emerging growth company
[ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
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 April 28, 2017, there were 963,661,565 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)
 
March 31,
2017
 
December 31,
2016
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
16,142

 
$
10,430

Short-term investments
 
3,210

 
2,845

Accounts receivable, net
 
9,595

 
8,152

Other current receivables, net
 
6,609

 
7,499

Assets under management
 
2,886

 
3,105

Prepaid expenses and other current assets
 
2,547

 
1,848

Total current assets
 
40,989

 
33,879

Long-term investments
 
25,760

 
23,868

Property, equipment and capitalized software, net
 
6,329

 
5,901

Goodwill
 
52,376

 
47,584

Other intangible assets, net
 
8,618

 
8,541

Other assets
 
3,085

 
3,037

Total assets
 
$
137,157

 
$
122,810

Liabilities, redeemable noncontrolling interests and equity
 
 
 
 
Current liabilities:
 
 
 
 
Medical costs payable
 
$
17,650

 
$
16,391

Accounts payable and accrued liabilities
 
13,473

 
13,361

Commercial paper and current maturities of long-term debt
 
7,747

 
7,193

Unearned revenues
 
6,475

 
1,968

Other current liabilities
 
12,198

 
10,339

Total current liabilities
 
57,543

 
49,252

Long-term debt, less current maturities
 
26,154

 
25,777

Future policy benefits
 
2,519

 
2,524

Deferred income taxes
 
2,894

 
2,761

Other liabilities
 
2,385

 
2,307

Total liabilities
 
91,495

 
82,621

Commitments and contingencies (Note 7)
 


 


Redeemable noncontrolling interests
 
1,667

 
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; 965 and 952 issued and outstanding
 
10

 
10

Additional paid-in capital
 
1,819

 

Retained earnings
 
42,521

 
40,945

Accumulated other comprehensive loss
 
(2,447
)
 
(2,681
)
Nonredeemable noncontrolling interest
 
2,092

 
(97
)
Total equity
 
43,995

 
38,177

Total liabilities, redeemable noncontrolling interests and equity
 
$
137,157

 
$
122,810



1


UnitedHealth Group
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended March 31,
(in millions, except per share data)
 
2017
 
2016
Revenues:
 
 
 
 
Premiums
 
$
38,938

 
$
34,811

Products
 
6,129

 
6,393

Services
 
3,434

 
3,140

Investment and other income
 
222

 
183

Total revenues
 
48,723

 
44,527

Operating costs:
 
 
 
 
Medical costs
 
32,079

 
28,430

Operating costs
 
7,022

 
6,758

Cost of products sold
 
5,676

 
5,877

Depreciation and amortization
 
533

 
502

Total operating costs
 
45,310

 
41,567

Earnings from operations
 
3,413

 
2,960

Interest expense
 
(283
)
 
(259
)
Earnings before income taxes
 
3,130

 
2,701

Provision for income taxes
 
(939
)
 
(1,074
)
Net earnings
 
2,191

 
1,627

Earnings attributable to noncontrolling interests
 
(19
)
 
(16
)
Net earnings attributable to UnitedHealth Group common shareholders
 
$
2,172

 
$
1,611

Earnings per share attributable to UnitedHealth Group common shareholders:
 
 
 
 
Basic
 
$
2.28

 
$
1.69

Diluted
 
$
2.23

 
$
1.67

Basic weighted-average number of common shares outstanding
 
954

 
953

Dilutive effect of common share equivalents
 
21

 
14

Diluted weighted-average number of common shares outstanding
 
975

 
967

Anti-dilutive shares excluded from the calculation of dilutive effect of common share equivalents
 
9

 
7

Cash dividends declared per common share
 
$
0.625

 
$
0.500



2



UnitedHealth Group
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
 
Three Months Ended March 31,
(in millions)
 
2017
 
2016
Net earnings
 
$
2,191

 
$
1,627

Other comprehensive income:
 
 
 
 
Gross unrealized gains on investment securities during the period
 
99

 
260

Income tax effect
 
(32
)
 
(96
)
Total unrealized gains, net of tax
 
67

 
164

Gross reclassification adjustment for net realized gains included in net earnings
 
(21
)
 
(35
)
Income tax effect
 
8

 
13

Total reclassification adjustment, net of tax
 
(13
)
 
(22
)
Total foreign currency translation gains
 
180

 
388

Other comprehensive income
 
234

 
530

Comprehensive income
 
2,425

 
2,157

Comprehensive income attributable to noncontrolling interests
 
(19
)
 
(16
)
Comprehensive income attributable to UnitedHealth Group common shareholders
 
$
2,406

 
$
2,141



3


UnitedHealth Group
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
Income
 
Nonredeemable Noncontrolling Interest
 
Total
Equity
(in millions)
 
Shares
 
Amount
 
 
 
Net Unrealized (Losses) Gains on Investments
 
Foreign Currency Translation (Losses) Gains
 
 
Balance at January 1, 2017
 
952

 
$
10

 
$

 
$
40,945

 
$
(97
)
 
$
(2,584
)
 
$
(97
)
 
$
38,177

Net earnings
 
 
 
 
 
 
 
2,172

 
 
 
 
 
9

 
2,181

Other comprehensive income
 
 
 
 
 
 
 
 
 
54

 
180

 
 
 
234

Issuances of common stock,
and related tax effects
 
17

 

 
1,923

 
 
 
 
 
 
 
 
 
1,923

Share-based compensation
 
 
 
 
 
189

 
 
 
 
 
 
 
 
 
189

Common share repurchases
 
(4
)
 

 
(682
)
 

 
 
 
 
 
 
 
(682
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(596
)
 
 
 
 
 
 
 
(596
)
 Redeemable noncontrolling interests fair value and other adjustments
 
 
 
 
 
389

 
 
 
 
 
 
 
 
 
389

Acquisition of nonredeemable noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
2,191

 
2,191

Distribution to nonredeemable noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
(11
)
 
(11
)
Balance at March 31, 2017
 
965

 
$
10

 
$
1,819

 
$
42,521

 
$
(43
)
 
$
(2,404
)
 
$
2,092

 
$
43,995

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
1,611

 
 
 
 
 
11

 
1,622

Other comprehensive income
 
 
 
 
 
 
 
 
 
142

 
388

 
 
 
530

Issuances of common stock,
 and related tax effects
 
5

 

 
56

 
 
 
 
 
 
 
 
 
56

Share-based compensation
 
 
 
 
 
150

 
 
 
 
 
 
 
 
 
150

Common share repurchases
 
(4
)
 

 
(176
)
 
(324
)
 
 
 
 
 
 
 
(500
)
Cash dividends paid on common shares
 
 
 
 
 
 
 
(477
)
 
 
 
 
 
 
 
(477
)
Redeemable noncontrolling interests fair value and other adjustments
 
 
 
 
 
(59
)
 
 
 
 
 
 
 
 
 
(59
)
Distribution to nonredeemable noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
(8
)
 
(8
)
Balance at March 31, 2016
 
954

 
$
10

 
$

 
$
37,963

 
$
198

 
$
(3,002
)
 
$
(102
)
 
$
35,067




4


UnitedHealth Group
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended March 31,
(in millions)
 
2017
 
2016
Operating activities
 
 
 
 
Net earnings
 
$
2,191

 
$
1,627

Noncash items:
 
 
 
 
Depreciation and amortization
 
533

 
502

Deferred income taxes
 
(89
)
 
145

Share-based compensation
 
196

 
157

Other, net
 
43

 
6

Net change in other operating items, net of effects from acquisitions and changes in AARP balances:
 
 
 
 
Accounts receivable
 
(1,232
)
 
(1,110
)
Other assets
 
(998
)
 
(2,162
)
Medical costs payable
 
1,024

 
1,368

Accounts payable and other liabilities
 
292

 
2,036

Unearned revenues
 
4,496

 
(251
)
Cash flows from operating activities
 
6,456

 
2,318

Investing activities
 
 
 
 
Purchases of investments
 
(3,683
)
 
(5,173
)
Sales of investments
 
1,018

 
2,122

Maturities of investments
 
1,326

 
978

Cash paid for acquisitions, net of cash assumed
 
(468
)
 
(1,697
)
Purchases of property, equipment and capitalized software
 
(507
)
 
(425
)
Other, net
 
25

 
14

Cash flows used for investing activities
 
(2,289
)
 
(4,181
)
Financing activities
 
 
 
 
Common share repurchases
 
(682
)
 
(500
)
Cash dividends paid
 
(596
)
 
(477
)
Proceeds from common stock issuances
 
270

 
198

Proceeds from issuance of long-term debt
 
1,342

 
2,485

Repayments of long-term debt
 
(1,392
)
 
(601
)
Repayments of commercial paper, net
 
(139
)
 
(285
)
Customer funds administered
 
3,217

 
1,067

Other, net
 
(495
)
 
(385
)
Cash flows from financing activities
 
1,525

 
1,502

Effect of exchange rate changes on cash and cash equivalents
 
20

 
34

Increase (decrease) in cash and cash equivalents
 
5,712

 
(327
)
Cash and cash equivalents, beginning of period
 
10,430

 
10,923

Cash and cash equivalents, end of period
 
$
16,142

 
$
10,596

 
 
 
 
 
Supplemental Schedule of Noncash Investing Activities
 
 
 
 
Common stock issued for acquisition
 
$
1,860

 
$



5


UnitedHealth Group
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
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 helping to make 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. These core competencies are deployed within the Company’s two distinct, but strategically aligned, business platforms: health benefits operating under UnitedHealthcare and health services operating under Optum.
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” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the SEC (2016 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.
Revenues
The Company’s revenues include premium, product, and service revenues. 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 more information about the Company’s revenues, see Notes 2 and 13 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2016 10-K. See Note 8 for disaggregation of revenue by segment and type.
As of March 31, 2017, accounts receivables related to products and services were $3.3 billion. For the three months ended March 31, 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 Condensed Consolidated Balance Sheet as of March 31, 2017.
For the three months ended March 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.
Health Insurance Industry Tax
The Patient Protection and Affordable Care Act (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. The Company has experienced a lower effective income tax rate in 2017 as compared to 2016 primarily due to the moratorium.
The remainder of the accounting policies disclosed in Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2016 10-K remain unchanged.

6


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. 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 new guidance is effective for annual and interim reporting periods beginning after December 15, 2017. As of March 31, 2017, based on equity securities held, the Company does not expect ASU 2016-01 to have a material impact on its consolidated financial position, results of operations, equity or cash flows. The Company will continue to evaluate any changes in its mix of investments or market conditions and the related impact of ASU 2016-01.
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 three months ended March 31, 2017. The Company has included the disclosures required by ASU 2014-09 above.
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
March 31, 2017
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
2,529

 
$
2

 
$
(28
)
 
$
2,503

State and municipal obligations
 
7,020

 
64

 
(64
)
 
7,020

Corporate obligations
 
11,879

 
48

 
(46
)
 
11,881

U.S. agency mortgage-backed securities
 
3,345

 
7

 
(44
)
 
3,308

Non-U.S. agency mortgage-backed securities
 
999

 
2

 
(10
)
 
991

Total debt securities - available-for-sale
 
25,772

 
123

 
(192
)
 
25,703

Equity securities
 
2,120

 
43

 
(42
)
 
2,121

Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
259

 
1

 

 
260

State and municipal obligations
 
5

 

 

 
5

Corporate obligations
 
288

 

 

 
288

Total debt securities - held-to-maturity
 
552

 
1

 

 
553

Total investments
 
$
28,444

 
$
167

 
$
(234
)
 
$
28,377

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

The amortized cost and fair value of debt securities as of March 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
 
$
3,291

 
$
3,293

 
$
191

 
$
191

Due after one year through five years
 
10,041

 
10,049

 
111

 
111

Due after five years through ten years
 
6,090

 
6,069

 
120

 
120

Due after ten years
 
2,006

 
1,993

 
130

 
131

U.S. agency mortgage-backed securities
 
3,345

 
3,308

 

 

Non-U.S. agency mortgage-backed securities
 
999

 
991

 

 

Total debt securities
 
$
25,772

 
$
25,703

 
$
552

 
$
553


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
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
2,077

 
$
(28
)
 
$

 
$

 
$
2,077

 
$
(28
)
State and municipal obligations
 
3,187

 
(64
)
 

 

 
3,187

 
(64
)
Corporate obligations
 
4,567

 
(44
)
 
81

 
(2
)
 
4,648

 
(46
)
U.S. agency mortgage-backed securities
 
2,406

 
(41
)
 
76

 
(3
)
 
2,482

 
(44
)
Non-U.S. agency mortgage-backed securities
 
616

 
(8
)
 
47

 
(2
)
 
663

 
(10
)
Total debt securities - available-for-sale
 
$
12,853

 
$
(185
)
 
$
204

 
$
(7
)
 
$
13,057

 
$
(192
)
Equity securities
 
$
75

 
$
(4
)
 
$
101

 
$
(38
)
 
$
176

 
$
(42
)
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 March 31, 2017 were generated from more than 10,000 positions out of a total of 27,000 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 March 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, venture capital funds, 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 March 31, 2017, the Company’s investments included $594 million in equity method investments that were obtained as part of a 2017 acquisition.
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.
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 4 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2016 10-K.

9


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:
(in millions)
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
Fair and Carrying
Value
March 31, 2017
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
16,101

 
$
41

 
$

 
$
16,142

Debt securities - available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
2,220

 
283

 

 
2,503

State and municipal obligations
 

 
7,020

 

 
7,020

Corporate obligations
 
26

 
11,744

 
111

 
11,881

U.S. agency mortgage-backed securities
 

 
3,308

 

 
3,308

Non-U.S. agency mortgage-backed securities
 

 
991

 

 
991

Total debt securities - available-for-sale
 
2,246

 
23,346

 
111

 
25,703

Equity securities
 
1,666

 
12

 
443

 
2,121

Assets under management
 
888

 
1,998

 

 
2,886

Interest rate swap assets
 

 
45

 

 
45

Total assets at fair value

$
20,901

 
$
25,442

 
$
554

 
$
46,897

Percentage of total assets at fair value
 
45
%
 
54
%
 
1
%
 
100
%
Interest rate swap liabilities
 
$

 
$
19

 
$

 
$
19

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

Interest rate swap assets
 

 
55

 

 
55

Total assets at fair value
 
$
15,079

 
$
24,192

 
$
539

 
$
39,810

Percentage of total assets at fair value
 
38
%
 
61
%
 
1
%
 
100
%
Interest rate swap liabilities
 
$

 
$
14

 
$

 
$
14

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 three months ended March 31, 2017 or 2016.

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
March 31, 2017
 
 
 
 
 
 
 
 
 
 
Debt securities - held-to-maturity:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
 
$
257

 
$
3

 
$

 
$
260

 
$
259

State and municipal obligations
 

 

 
5

 
5

 
5

Corporate obligations
 
18

 
2

 
268

 
288

 
288

Total debt securities - held-to-maturity
 
$
275

 
$
5

 
$
273

 
$
553

 
$
552

Other assets
 
$

 
$
468

 
$

 
$
468

 
$
465

Long-term debt and other financing obligations
 
$

 
$
32,489

 
$

 
$
32,489

 
$
30,399

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

Other assets
 
$

 
$
476

 
$

 
$
476

 
$
471

Long-term debt and other financing obligations
 
$

 
$
31,295

 
$

 
$
31,295

 
$
29,337

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 three months ended March 31, 2017 or 2016.
4.    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 March 31, 2017 and December 31, 2016, total pharmaceutical manufacturer rebates receivable included in other receivables in the Condensed Consolidated Balance Sheets amounted to $4.0 billion and $3.3 billion, respectively. See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2016 10-K for more information on the Company’s pharmaceutical manufacturer rebates.
5.    Medical Costs Payable
The following table shows the components of the change in medical costs payable for the three months ended March 31:
(in millions)
 
2017
 
2016
Medical costs payable, beginning of period
 
$
16,391

 
$
14,330

Acquisitions
 
76

 

Reported medical costs:
 
 
 
 
Current year
 
32,529

 
28,790

Prior years
 
(450
)
 
(360
)
Total reported medical costs
 
32,079

 
28,430

Medical payments:
 
 
 
 
Payments for current year
 
(18,742
)
 
(15,797
)
Payments for prior years
 
(12,154
)
 
(11,140
)
Total medical payments
 
(30,896
)
 
(26,937
)
Medical costs payable, end of period
 
$
17,650

 
$
15,823

For the three months ended March 31, 2017 and 2016 the medical cost reserve development included no individual factors that were material. Medical costs payable included reserves for claims incurred by insured customers but not yet reported to the Company of $12.5 billion and $11.6 billion at March 31, 2017 and December 31, 2016, respectively.

11


6.     Commercial Paper and Long-Term Debt
Commercial paper and senior unsecured long-term debt consisted of the following:
 
 
March 31, 2017
 
December 31, 2016
(in millions, except percentages)
 
Par
Value
 
Carrying
Value
 
Fair
Value
 
Par
Value
 
Carrying
Value
 
Fair
Value
Commercial paper
 
$
3,502

 
$
3,502

 
$
3,502

 
$
3,633

 
$
3,633

 
$
3,633

Floating rate notes due January 2017
 

 

 

 
750

 
750

 
750

6.000% notes due June 2017
 
441

 
443

 
445

 
441

 
446

 
450

1.450% notes due July 2017
 
750

 
750

 
751

 
750

 
750

 
751

1.400% notes due October 2017
 
625

 
625

 
625

 
625

 
624

 
626

6.000% notes due November 2017
 
156

 
158

 
161

 
156

 
159

 
163

1.400% notes due December 2017
 
750

 
750

 
750

 
750

 
751

 
750

6.000% notes due February 2018
 
1,100

 
1,106

 
1,142

 
1,100

 
1,107

 
1,153

1.900% notes due July 2018
 
1,500

 
1,497

 
1,507

 
1,500

 
1,496

 
1,507

1.700% notes due February 2019
 
750

 
748

 
750

 
750

 
748

 
748

1.625% notes due March 2019
 
500

 
501

 
498

 
500

 
501

 
498

2.300% notes due December 2019
 
500

 
497

 
505

 
500

 
498

 
504

2.700% notes due July 2020
 
1,500

 
1,495

 
1,530

 
1,500

 
1,495

 
1,523

3.875% notes due October 2020
 
450

 
449

 
475

 
450

 
450

 
474

4.700% notes due February 2021
 
400

 
407

 
433

 
400

 
409

 
433

2.125% notes due March 2021
 
750

 
746

 
744

 
750

 
745

 
741

3.375% notes due November 2021
 
500

 
496

 
520

 
500

 
497

 
519

2.875% notes due December 2021
 
750

 
746

 
765

 
750

 
748

 
760

2.875% notes due March 2022
 
1,100

 
1,056

 
1,122

 
1,100

 
1,057

 
1,114

3.350% notes due July 2022
 
1,000

 
995

 
1,035

 
1,000

 
995

 
1,030

0.000% notes due November 2022
 
15

 
11

 
12

 
15

 
11

 
12

2.750% notes due February 2023
 
625

 
608

 
623

 
625

 
609

 
622

2.875% notes due March 2023
 
750

 
768

 
752

 
750

 
771

 
753

3.750% notes due July 2025
 
2,000

 
1,986

 
2,089

 
2,000

 
1,986

 
2,070

3.100% notes due March 2026
 
1,000

 
994

 
992

 
1,000

 
994

 
986

3.450% notes due January 2027
 
750

 
745

 
761

 
750

 
745

 
762

3.375% notes due April 2027
 
625

 
618

 
629

 

 

 

4.625% notes due July 2035
 
1,000

 
991

 
1,090

 
1,000

 
991

 
1,090

5.800% notes due March 2036
 
850

 
837

 
1,048

 
850

 
837

 
1,034

6.500% notes due June 2037
 
500

 
491

 
655

 
500

 
491

 
643

6.625% notes due November 2037
 
650

 
640

 
865

 
650

 
640

 
850

6.875% notes due February 2038
 
1,100

 
1,075

 
1,495

 
1,100

 
1,075

 
1,497

5.700% notes due October 2040
 
300

 
296

 
365

 
300

 
296

 
366

5.950% notes due February 2041
 
350

 
345

 
441

 
350

 
345

 
437

4.625% notes due November 2041
 
600

 
588

 
637

 
600

 
588

 
634

4.375% notes due March 2042
 
502

 
483

 
520

 
502

 
483

 
509

3.950% notes due October 2042
 
625

 
606

 
608

 
625

 
606

 
609

4.250% notes due March 2043
 
750

 
734

 
764

 
750

 
734

 
765

4.750% notes due July 2045
 
2,000

 
1,972

 
2,192

 
2,000

 
1,972

 
2,203

4.200% notes due January 2047
 
750

 
738

 
762

 
750

 
737

 
759

4.250% notes due April 2047
 
725

 
717

 
740

 

 

 

Total commercial paper and long-term debt
 
$
33,491

 
$
33,210

 
$
35,300

 
$
33,022

 
$
32,770

 
$
34,728

During the first quarter of 2017, the Company assumed $926 million in debt of an acquired company, of which $642 million was repaid in the first quarter. The Company repaid the remainder of the acquired debt in the second quarter of 2017. The Company’s long-term debt obligations also included $407 million and $200 million of other financing obligations, of which $129 million and $80 million were classified as current as of March 31, 2017 and December 31, 2016, respectively.

12


Commercial Paper and Bank Credit Facilities
Commercial paper consists of short-duration, senior unsecured debt privately placed on a discount basis through broker-dealers. As of March 31, 2017, the Company’s outstanding commercial paper had a weighted-average annual interest rate of 1.1%.
The Company has $3.0 billion five-year, $2.0 billion three-year and $1.0 billion 364-day revolving bank credit facilities with 23 banks, which mature in December 2021, December 2019 and December 2017, respectively. These facilities provide liquidity support for the Company’s commercial paper program and are available for general corporate purposes. As of March 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 March 31, 2017, annual interest rates would have ranged from 1.8% to 2.3%.
Debt Covenants
The Company’s bank credit facilities contain various covenants, including covenants requiring the Company to maintain a defined debt to debt-plus-shareholders’ equity ratio of not more than 55%. The Company was in compliance with its debt covenants as of March 31, 2017.
7.    Commitments and Contingencies
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.
Litigation Matters
California Claims Processing Matter. On January 25, 2008, the California Department of Insurance (CDI) issued an Order to Show Cause to PacifiCare Life and Health Insurance Company, a subsidiary of the Company, alleging violations of certain insurance statutes and regulations related to an alleged failure to include certain language in standard claims correspondence, timeliness and accuracy of claims processing, interest payments, care provider contract implementation, care provider dispute resolution and other related matters. Although the Company believes that CDI had never before issued a fine in excess of $8 million, CDI advocated a fine of approximately $325 million in this matter. The matter was the subject of an administrative hearing before a California administrative law judge beginning in December 2009, and in August 2013, the administrative law judge issued a nonbinding proposed decision recommending a fine of $11.5 million. The California Insurance Commissioner rejected the administrative law judge’s recommendation and on June 9, 2014, issued his own decision imposing a fine of approximately $174 million. On July 10, 2014, the Company filed a lawsuit in California state court challenging the Commissioner’s decision. On September 8, 2015, in the first phase of that lawsuit, the California state court issued an order invalidating certain of the regulations the Commissioner had relied upon in issuing his decision and penalty. In March 2017, the court entered a tentative ruling reversing all of the penalties imposed and remanding certain further issues to the Commissioner. A final order is expected later this year. The Company cannot reasonably estimate the range of loss, if any, that may result from this matter given the procedural status of the dispute, the wide range of possible outcomes, the legal issues presented (including the legal basis for the majority of the alleged violations), the inherent difficulty in predicting a regulatory fine in the event of a remand, and the various remedies and levels of judicial review that remain available to the Company.
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

13


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. Both cases are now pending in the U.S. District Court for the Central District of California. DOJ filed its complaint in one case on May 1, 2017, and has been ordered to file its complaint in the other case by May 16, 2017. The Company cannot reasonably estimate the outcome that may result from these matters given their current posture.
8.    Segment Financial Information
The Company’s four reportable segments are UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. For more information on the Company’s segments see Part I, Item I, “Business” and Note 13 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements” in the 2016 10-K.
As of March 31, 2017, OptumHealth’s total assets were $24.7 billion as compared to $18.7 billion as of December 31, 2016. The increase was due to an acquisition completed during the three months ended March 31, 2017. Goodwill at the OptumHealth reportable segment increased during the first quarter of 2017 by $4.6 billion.
The following tables present reportable segment financial information:
 
 
 
 
Optum
 
 
 
 
(in millions)
 
UnitedHealthcare
 
OptumHealth
 
OptumInsight
 
OptumRx
 
Optum Eliminations
 
Optum
 
Corporate and
Eliminations
 
Consolidated
Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues - external customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums
 
$
38,053

 
$
885

 
$

 
$

 
$

 
$
885

 
$

 
$
38,938

Products
 

 
12

 
21

 
6,096

 

 
6,129

 

 
6,129

Services
 
1,922

 
721

 
642

 
149

 

 
1,512

 

 
3,434

Total revenues - external customers
 
39,975

 
1,618

 
663

 
6,245

 

 
8,526

 

 
48,501

Total revenues - intersegment
 

 
3,059

 
1,179

 
8,698

 
(286
)
 
12,650

 
(12,650
)