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January 22, 2009 06:00 AM Eastern Time

UnitedHealth Group Reports 2008 Financial Results

MINNEAPOLIS--(BUSINESS WIRE)--UnitedHealth Group (NYSE:UNH):

UnitedHealth Group (NYSE:UNH) today reported fourth quarter and full year 2008 results, which included strong cash flows from operations, a continued strong balance sheet and financial position, and key financial measures and medical cost trends well in line with Company expectations. Continuing growth in the Public and Senior Markets Group drove total net growth of 95,000 people served across all medical benefit product categories in the fourth quarter of 2008.

Stephen J. Hemsley, president and chief executive officer of UnitedHealth Group, said, “During 2008 we effectively strengthened performance, improving our position despite the challenging economic environment. In 2009 we expect meaningful growth in our government-sponsored businesses as well as a year-over-year improvement in their product mix. There is strong interest in our Medicare market offerings and continued expansion from our state and public health program relationships, including growth in public sector specialty benefits. Notable improvements in our commercial health benefit businesses are taking root, including gains in fundamental operating performance and local market momentum.”

Full year net earnings were $2.40 per share; adjusted for special items, the Company earned $2.95 per share in 2008.

Fourth quarter net earnings of $0.60 per share included an $0.18 per share charge to operating costs for the previously announced resolution of class action litigation for out of network medical services; adjusted fourth quarter net earnings were $0.78 per share. Both reported and adjusted fourth quarter earnings per share included $0.03 per share in net realized capital losses, primarily due to venture capital investment write-downs, partially offset by $0.01 per share pertaining to an insurance recovery on a previously reported legal settlement. The net realized capital losses, the costs of the legal matter from third quarter 2008 and the subsequent fourth quarter insurance recovery have not been treated as special items in the Company’s financial statements.

Earnings Outlook

The Company is maintaining its previously announced 2009 outlook for net earnings in the range of $2.90 to $3.15 per share.

UnitedHealth Group

Management views year-over-year comparisons of results to be generally more meaningful than sequential comparisons, given the seasonality of revenues, medical expenses, operating costs and earnings from operations in important business lines such as Medicare Part D drug programs, high deductible insurance products and health informatics offerings.

UnitedHealth Group Highlights

• Full year revenues of $81.2 billion increased $5.8 billion or 8 percent year-over-year, with fourth quarter revenues of $20.5 billion increasing $1.7 billion or 9 percent year-over-year. UnitedHealth Group served 73 million people at year end, an increase of 1.9 million people year-over-year. The UnitedHealthcare, Ovations, AmeriChoice, OptumHealth, and Ingenix businesses each reported revenue increases in 2008.
• Full year adjusted earnings from operations were $6.35 billion and adjusted net earnings were $3.7 billion¹. Fourth quarter adjusted earnings from operations were $1.6 billion and adjusted net earnings were $941 million¹. The adjusted full year operating margin of 7.8 percent in 2008 decreased 280 basis points from the prior year. The decreases in earnings and margins were primarily driven by a reduction in gross margin in risk-based health benefit products, as well as a 100 basis point year-over-year increase in the level of operating costs as a percentage of revenue and a $373 million year-over-year reduction in investment and other income, including $6 million in net realized capital losses in 2008.
• On an adjusted basis, full year net earnings were $2.95 per share and fourth quarter net earnings were $0.78 per share. Full year 2008 net earnings were $2.40 per share; fourth quarter earnings were $0.60 per share.

• The 2008 consolidated medical care ratio of 82.0 percent increased 140 basis points year-over-year, as premium rates advanced more slowly than medical costs in 2008 for certain risk-based products in the commercial, senior and behavioral care markets. These factors also caused the fourth quarter 2008 medical care ratio to increase 90 basis points year-over-year to 80.8 percent.
• For full year 2008 the Company realized $230 million in net favorable development in its estimates of medical costs incurred in prior years, compared to $420 million in 2007. This includes $20 million of prior year favorable development realized in the fourth quarter of 2008, compared to $70 million in the fourth quarter of 2007.
• In fourth quarter 2008 the Company also realized $150 million in favorable development in its estimates of medical costs incurred during the first nine months of the year, compared to $10 million in the fourth quarter of 2007.
• Full year adjusted operating costs of 14.8 percent¹ of revenues increased 100 basis points in 2008 from 13.8 percent¹ in 2007. The full year increase reflected changes in business mix, as well as increases in the Company’s operating cost structure in excess of business growth in the first half of 2008. Adjusted operating costs were 15.4 percent¹ and 14.4 percent of revenues in the fourth quarters of 2008 and 2007, respectively, reflecting higher seasonal cost levels. Since the first quarter of 2008, UnitedHealth Group has taken actions to reduce annual run rate operating costs by about $470 million, a portion of which has been reinvested into the business.
• UnitedHealth Group realized a net capital loss of $6 million from its $21.6 billion investment portfolio in 2008. Fourth quarter 2008 results included $14 million in net realized capital losses on fixed income investments and a $50 million write-down on the Company’s approximately $200 million venture capital investment program.
• The 2008 adjusted income tax rate of 35.9 percent¹ decreased 40 basis points year-over-year, due to an increased proportion of tax-free income. The fourth quarter adjusted income tax rate was 35.7 percent¹.
• Fourth quarter 2008 days sales outstanding of 9 compares to 9 days sales outstanding in the third quarter of 2008 and 8 days outstanding at the end of 2007.
• Consolidated medical costs days payable of 53 days in the fourth quarter of 2008 compares to 54 days in the third quarter of 2008 and 57 days at the end of 2007. The year-over-year decrease in medical days payable was driven by an increased mix of pharmacy benefit business, which has shorter claims payment cycles, as well as the timing of certain pharmacy benefit claims payments made at year end 2008.
• Cash flows from operations of $1.6 billion increased $531 million from $1.1 billion in last year’s fourth quarter, reflecting strong cash collections in the quarter. Full year adjusted cash flows from operations¹ were 1.3 times 2008 adjusted net earnings¹.
• UnitedHealth Group reduced its debt to debt plus equity ratio to 38.1 percent at December 31, 2008, down from 39.2 percent at September 30, 2008. Fourth quarter net repayments of $485 million in commercial paper obligations left only $101 million in commercial paper outstanding at the end of the year. The Company also repurchased 8 million shares of its stock during the fourth quarter of 2008.
• The Company closed the year with $865 million in unrestricted cash.

UnitedHealthcare

Ovations

AmeriChoice

Business Description – Health Care Services

Health Care Services provides network-based health care benefits and services for a full spectrum of customers. UnitedHealthcare serves employers ranging from sole proprietorships to large, multi-site and national employers, as well as students and individuals. In the Public and Senior Markets Group, Ovations delivers health and well-being services to Americans over the age of 50, while AmeriChoice manages health care services for state Medicaid and other publicly funded programs and their beneficiaries.

Key Developments for Health Care Services

• Full year Health Care Services revenues increased $4.7 billion or 7 percent to $75.9 billion, with growth in revenues balanced across the commercial, senior and public sector businesses. Fourth quarter 2008 revenues increased $1.5 billion or 9 percent year-over-year to $19.1 billion. The revenue increases were driven by premium increases, targeted acquisitions and an increase in customers served in the Public and Senior Markets Group, partially offset by a decline in consumers served through commercial risk-based products.
• Full year Health Care Services earnings from operations decreased $1.5 billion year-over-year to $5.1 billion; fourth quarter Health Care Services earnings from operations were $1.3 billion. Reductions in commercial product margins and risk-based enrollment, and margin pressures on certain senior market offerings negatively impacted profitability year-over-year in the fourth quarter and for full year 2008.

• Full year UnitedHealthcare revenues of $41.8 billion increased by $1.6 billion or 4 percent year-over-year. Fourth quarter revenues of $10.5 billion for UnitedHealthcare increased $423 million or 4 percent year-over-year.
• At year end UnitedHealthcare served 26 million people, an increase of 0.8 million consumers during 2008. UnitedHealthcare fourth quarter membership decreased, as expected, with growth of 10,000 people using fee-based products offset by a decline of 135,000 risk-based consumers in the quarter.

• UnitedHealthcare’s 2008 medical care ratio of 83.5 percent increased 90 basis points from 82.6 percent in 2007, due principally to premium yield increases advancing more slowly than medical cost trends. The fourth quarter 2008 medical care ratio was 83.9 percent, slightly ahead of Company expectations.
• UnitedHealthcare continued to advance its leadership position in consumer-directed health benefit products in 2008, ending the year with a total of 2.7 million people in consumer-directed offerings, an increase of 420,000 people or 18 percent year-over-year. More than 24,000 employer groups now offer a UnitedHealthcare consumer-directed health benefit plan.
• Full year Ovations revenues of $28.1 billion increased $1.6 billion or 6 percent year-over-year, with revenue advances in its AARP Medicare Supplement, SecureHorizons Medicare Advantage and Evercare businesses, offset by a decrease in Part D prescription drug plan revenues. Ovations revenues were $6.8 billion in the fourth quarter, up $570 million or 9 percent year-over-year.
• For Medicare Advantage programs, Ovations reported fourth quarter growth of 15,000 people and a full year increase of 125,000 people or 9 percent. 2009 Medicare Advantage new sales results have also been very solid to date.
• Strong growth in Medicare Supplement products also continued, with Ovations increasing the number of seniors served in this product family by 30,000 in the fourth quarter, and 140,000 or 6 percent on a year-over-year basis.
• As expected, the medical care ratio for the Ovations businesses in total increased year-over-year in the fourth quarter and for full year 2008 due to margin pressures affecting Special Needs Plans, Medicare Part D prescription drug plans and Medicare Advantage products, where risk-adjusted revenue yields have been lower than originally anticipated.
• AmeriChoice full year revenues of $6.0 billion increased $1.5 billion or 34 percent in 2008, driven by increased membership from organic growth and geographic expansion via acquisition. Fourth quarter revenues increased $515 million or 43 percent year-over-year to $1.7 billion.
• The Company serves 2.5 million people in state-based public market programs, an increase of 805,000 people in 2008. Medicaid membership grew organically by 425,000 people or 25 percent year-over-year, including growth of 175,000 people in the fourth quarter. Growth highlights in 2008 include the states of Florida, Tennessee, Arizona, and Connecticut, and the District of Columbia, awarding or renewing significant multi-year contracts with AmeriChoice for services commencing in 2008 and 2009.

OptumHealth(SM)

Business Description – OptumHealth

OptumHealth is one of the nation’s leading health and wellness companies. Employers, payers and public sector organizations use OptumHealth behavioral benefit solutions, clinical care management, financial services and specialty benefit products such as dental and vision. OptumHealth helps consumers navigate the health care system, finance their health care needs and achieve their health and well-being goals.

Key Developments for OptumHealth

• Full year OptumHealth revenues increased $304 million or 6 percent to $5.2 billion, including an increase of $51 million or 4 percent year-over-year in the fourth quarter. OptumHealth provided services to approximately 60 million consumers at year end, an increase of 1 million people in 2008.
• Full year 2008 earnings from operations decreased by $177 million or 20 percent to $718 million. Fourth quarter earnings from operations of $177 million decreased $62 million or 26 percent year-over-year. These decreases were primarily due to the mix effect of declining commercial risk-based membership and margin pressure in the behavioral health business, partially offset by growth in lower margin public sector accounts. OptumHealth’s operating margin was 13.6 percent in the fourth quarter and 13.7 percent for full year 2008.
• OptumHealth’s public sector service business continues to grow strongly, with significant benefits sales in New York, Tennessee and New Mexico each taking effect in 2008 or expected to commence in 2009.
• OptumHealth Financial Services, the nation’s largest dedicated health banking organization, ended 2008 with $660 million in assets under management, an increase of 43 percent year-over-year. OptumHealth Financial Services electronically transmitted $26 billion in medical payments to physicians and other health care providers in 2008, a year-over-year increase of 38 percent.
• OptumHealth closed 2008 as the market-leading operator of independent web-based health care portal services, with more than 1,000 private health portals under management, including its recently launched flagship, myoptumhealth.com.

Ingenix(R)

Business Description – Ingenix

Ingenix is a leader in the field of health care information, services and consulting, serving pharmaceutical companies, health insurers and other payers, physicians and other health care providers, large employers and governments.

Key Developments for Ingenix

• On a full year basis, Ingenix revenues increased $248 million or 19 percent to $1.6 billion, including an increase of $12 million or 3 percent year-over-year to $426 million in the fourth quarter of 2008.
• Ingenix contract revenue backlog grew approximately $140 million or 8 percent on a year-over-year basis to approximately $1.85 billion at year end. Sales growth of 28 percent across the payer, provider, government and other market segments has been offset by the impact of cancellations in the pharmaceutical services business in 2008.
• Ingenix full year 2008 earnings from operations of $229 million decreased $37 million or 14 percent year-over-year, with fourth quarter decreasing $44 million or 37 percent year-over-year. Lower full year and fourth quarter 2008 operating margins were attributable to costs related to cancelled contract research projects, employee severance and lower customer utilization of consulting services.

• In 2008 Ingenix made important strides in the public sector, where sales increased 106 percent, and in growing its international health services consulting business, winning contracts to operate 6 primary care trusts in England.

Prescription Solutions(R)

Business Description – Prescription Solutions

Prescription Solutions offers a comprehensive array of pharmacy benefit management and specialty pharmacy management services to employer groups, union trusts, seniors through Medicare prescription drug plans, and commercial health plans.

Key Developments for Prescription Solutions

• Prescription Solutions full year 2008 revenues of $12.6 billion decreased $676 million or 5 percent year-over-year and fourth quarter revenues of $3.1 billion decreased $194 million or 6 percent year-over-year. These decreases were due to the continuing market shift to lower-priced generic drugs and a reduction in the number of people served through Medicare Part D prescription drug plans from the re-assignment of dual-eligible enrollees in certain regions by CMS in 2008.
• In 2008 Prescription Solutions grew the number of consumers served through unaffiliated benefit plans by 15 percent, or more than 400,000 people. The people served through these channels now represent 30 percent of Prescription Solutions 10.6 million consumers.
• Full year 2008 earnings from operations of $363 million increased by $94 million or 35 percent year-over-year and fourth quarter earnings from operations grew $2 million or 3 percent year-over-year to $80 million. Increased profits were driven by steady gains in mail service drug fulfillment and by a continuing favorable mix shift to generic pharmaceuticals.
• These trends also drove 90 basis points of full year 2008 margin improvement to 2.9 percent at Prescription Solutions, with fourth quarter operating margin increasing 20 basis points year-over-year to 2.6 percent. Generic usage exceeded 68 percent of prescriptions filled in the fourth quarter of 2008, an increase of more than 4 percentage points year-over-year.

About UnitedHealth Group

UnitedHealth Group is a diversified health and well-being company dedicated to making health care work better. Headquartered in Minneapolis, Minn., UnitedHealth Group offers a broad spectrum of products and services through six operating businesses: UnitedHealthcare, Ovations, AmeriChoice, OptumHealth, Ingenix and Prescription Solutions. Through its family of businesses, UnitedHealth Group serves more than 70 million individuals nationwide. Visit www.unitedhealthgroup.com for more information.

Earnings Conference Call

As previously announced, UnitedHealth Group will discuss the Company’s results, strategy and future outlook on a conference call with investors at 8:45 a.m. Eastern time today. UnitedHealth Group will host a live webcast of this conference call from the Investors page of the Company’s Web site (www.unitedhealthgroup.com). The webcast replay of the call will be available on the same site through February 5, 2009 following the live call. The conference call replay can also be accessed by dialing 1-800-642-1687, conference ID #28401255. This earnings release and the Form 8-K dated January 22, 2009, which may also be accessed from the Investors page of the Company’s web site, include a reconciliation of non-GAAP financial measures.

Forward-Looking Statements

This press release may contain statements, estimates, projections, guidance or outlook that constitute “forward-looking” statements as defined under U.S. federal securities laws. Generally the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “project,” “will,” “should” and similar expressions, identify forward-looking statements, which generally are not historical in nature. These statements may contain information about financial prospects, economic conditions, trends and uncertainties and involve risks and uncertainties. We caution that actual results could differ materially from those that management expects, depending on the outcome of certain factors. Some factors that could cause results to differ materially from the forward-looking statements include: the potential consequences of various governmental reviews and litigation matters related to our historical stock option practices and the potential consequences of each of these matters on our business, credit ratings and debt; increases in health care costs that are higher than we anticipated in establishing our premium rates, including increased consumption or costs of medical services; heightened competition as a result of new entrants into our market, and consolidation of health care companies and suppliers; events that may negatively affect our contracts with AARP; uncertainties regarding changes in Medicare, including coordination of information systems and accuracy of certain assumptions; funding risks with respect to revenues received from Medicare and Medicaid programs; failure to achieve business growth targets, including membership and enrollment; increases in costs and other liabilities associated with increased litigation, legislative activity and government regulation and review of our industry; our ability to execute contracts on competitive terms with physicians, hospitals and other service professionals; regulatory and other risks associated with the pharmacy benefits management industry; failure to maintain effective and efficient information systems, which could result in the loss of existing customers, difficulties in attracting new customers, difficulties in determining medical costs estimates and appropriate pricing, customer and physician and health care professional disputes, regulatory violations, increases in operating costs, or other adverse consequences; possible impairment of the value of our intangible assets if future results do not adequately support goodwill and intangible assets recorded for businesses that we acquire; potential noncompliance by our business associates with patient privacy data; misappropriation of our proprietary technology; failure to complete or receive anticipated benefits of acquisitions; change in debt to total capital ratio that is lower or higher than we anticipated; and the potential impact of the adverse conditions in the global economy and extreme disruption of financial markets on our revenues, sources of liquidity, investment portfolio, and our results of operations.

This list of important factors is not intended to be exhaustive. A further list and description of some of these risks and uncertainties can be found in our reports filed with the Securities and Exchange Commission from time to time, including the cautionary statements in our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Any or all forward-looking statements we make may turn out to be wrong. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. We do not undertake to update or revise any forward-looking statements.

¹ Further explanations of the non-GAAP measures referred to in this release and reconciliations to the comparable GAAP measures are included in the attached financial schedules.