UNITEDHEALTH GROUP INC. The following discussion should be read together with the accompanying
Consolidated Financial Statements and Notes to the Consolidated Financial Statements thereto included in Item 8, "Financial Statements and Supplementary Data." Readers are cautioned that the statements, estimates, projections or outlook contained in this report, including discussions regarding financial prospects, economic conditions, trends and uncertainties contained in this Item 7, may constitute forward-looking statements within the meaning of the PSLRA. These forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations expressed or implied in the forward-looking statements. A description of some of the risks and uncertainties can be found further below in this Item 7 and in Part I, Item 1A, "Risk Factors." Discussions of year-over-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Form 10-K for the fiscal year endedDecember 31, 2018 . 24
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Table of Contents EXECUTIVE OVERVIEW GeneralUnitedHealth Group is a diversified health care company dedicated to helping people live healthier lives and helping make the health system work better for everyone. Through our diversified businesses, we leverage core competencies in data analytics and health information; advanced technology; and clinical expertise. These core competencies are deployed within two distinct, but strategically aligned, business platforms: health benefits operating under UnitedHealthcare and health services operating under Optum. We have four reportable segments across our two business platforms, UnitedHealthcare and Optum: • UnitedHealthcare, which includes UnitedHealthcare Employer & Individual,
UnitedHealthcare Medicare & Retirement,
and UnitedHealthcare Global;
•OptumHealth ; •OptumInsight ; and •OptumRx .
Further information on our business and reportable segments is presented in
Part I, Item 1, "Business" and in Note 14 of Notes to the Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data." Business Trends Our businesses participate inthe United States ,South America and certain other international health markets. Inthe United States , health care spending has grown consistently for many years and comprises 18% of gross domestic product (GDP). We expect overall spending on health care to continue to grow in the future, due to inflation, medical technology and pharmaceutical advancement, regulatory requirements, demographic trends in the population and national interest in health and well-being. The rate of market growth may be affected by a variety of factors, including macro-economic conditions and regulatory changes, which could impact our results of operations, including our continued efforts to control health care costs. Pricing Trends. To price our health care benefit products, we start with our view of expected future costs. We frequently evaluate and adjust our approach in each of the local markets we serve, considering relevant factors, such as product positioning, price competitiveness and environmental, competitive, legislative and regulatory considerations, including minimum MLR thresholds. We will continue seeking to balance growth and profitability across all of these dimensions. The commercial risk market remains highly competitive in both the small group and large group segments. We expect broad-based competition to continue as the industry adapts to individual and employer needs. The ACA, which includes three distinct taxes (ACA Tax), has 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 2018 federal budget imposed a one year moratorium for 2019 on the collection of the Health Insurance Industry Tax. Pricing for contracts that cover some portion of calendar year 2020 reflect the return of the Health Insurance Industry Tax. The ACA Tax was permanently repealed byCongress , effectiveJanuary 1, 2021 . Medicare Advantage funding continues to be pressured, as discussed below in "Regulatory Trends and Uncertainties." We expect Medicaid revenue growth due to anticipated changes in mix and increases in the number of people we serve; we also believe that the payment rate environment creates the risk of continued downward pressure on Medicaid margin percentages. We continue to take a prudent, market-sustainable posture for both new business and maintenance of existing relationships. We continue to advocate for actuarially sound rates that are commensurate with our medical cost trends and we remain dedicated to partnering with those states that are committed to the long-term viability of their programs. Medical Cost Trends. Our medical cost trends primarily relate to changes in unit costs, health system utilization and prescription drug costs. We endeavor to mitigate those increases by engaging physicians and consumers with information and helping them make clinically sound choices, with the objective of helping them achieve high-quality, affordable care. Delivery System and Payment Modernization. The health care market continues to change based on demographic shifts, new regulations, political forces and both payer and patient expectations. Health plans and care providers are being called upon to work together to close gaps in care and improve overall care quality, improve the health of populations and reduce costs. We continue to see a greater number of people enrolled in plans with underlying incentive-based care provider payment models that reward high-quality, affordable care and foster collaboration. We work together with clinicians to leverage our data and analytics to provide the necessary information to close gaps in care and improve overall health outcomes for patients. 25
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We are increasingly rewarding care providers for delivering improvements in quality and cost-efficiency. As ofDecember 31, 2019 , we served over 17 million people through some form of aligned contractual arrangement, including full-risk, shared-risk and bundled episode-of-care and performance incentive payment approaches. As ofDecember 31, 2019 , our contracts with value-based elements totaled$79 billion in annual spending, including$20 billion through risk-transfer agreements. This trend is creating needs for health management services that can coordinate care around the primary care physician, including new primary care channels, and for investments in new clinical and administrative information and management systems, which we believe provide growth opportunities for our Optum business platform. Regulatory Trends and Uncertainties Following is a summary of management's view of the trends and uncertainties related to some of the key provisions of the ACA and other regulatory matters. For additional information regarding the ACA and regulatory trends and uncertainties, see Part I, Item 1 "Business - Government Regulation" and Item 1A, "Risk Factors." Medicare Advantage Rates. Final 2020 Medicare Advantage rates resulted in an increase in industry base rates of approximately 2.5%, short of the industry forward medical cost trend. This combined with the return of the Health Insurance Industry Tax creates continued pressure in the Medicare Advantage program. The ongoing Medicare Advantage funding pressure places continued importance on effective medical management and ongoing improvements in administrative efficiency. There are a number of adjustments we have made to partially offset these rate pressures and reductions. In some years, these adjustments impact the majority of the seniors we serve through Medicare Advantage. For example, we seek to intensify our medical and operating cost management, make changes to the size and composition of our care provider networks, adjust members' benefits and implement or increase the member premiums that supplement the monthly payments we receive from the government. Additionally, we decide annually on a county-by-county basis where we will offer Medicare Advantage plans. Our Medicare Advantage rates are currently enhanced by CMS quality bonuses in certain counties based on our local plans' Star ratings. The level of Star ratings from CMS, based upon specified clinical and operational performance standards, will impact future quality bonuses. ACA Tax. A provision in the 2019 Federal Budget imposed a one year moratorium for 2019 on the collection of the Health Insurance Industry Tax. In 2020, the industry-wide amount of the Health Insurance Industry Tax, which is primarily borne by customers, will be$15.5 billion and we expect our portion to be approximately$3.0 billion . The ACA Tax was repealed byCongress , effectiveJanuary 1, 2021 . SELECTED OPERATING PERFORMANCE ITEMS The following represents a summary of select 2019 year-over-year operating comparisons to 2018. • Consolidated revenues increased by 7%, UnitedHealthcare revenues increased
6% and Optum revenues grew 12%.
• UnitedHealthcare served 575,000 additional people domestically as a result
of growth in commercial business and services to seniors, partially offset
by the proactive withdrawal from the
• Earnings from operations increased by 13%, including increases of 13% at
UnitedHealthcare and 14% at Optum.
• Diluted earnings per common share increased 18% to
• Cash flows from operations were
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RESULTS SUMMARY The following table summarizes our consolidated results of operations and other financial information: (in millions, except percentages For the Years Ended December 31, Change and per share data) 2019 2018 2017 2019 vs. 2018 Revenues: Premiums$ 189,699 $ 178,087 $ 158,453 $ 11,612 7 % Products 31,597 29,601 26,366 1,996 7 Services 18,973 17,183 15,317 1,790 10 Investment and other income 1,886 1,376 1,023 510 37 Total revenues 242,155 226,247 201,159 15,908 7 Operating costs: Medical costs 156,440 145,403 130,036 11,037 8 Operating costs 35,193 34,074 29,557 1,119 3 Cost of products sold 28,117 26,998 24,112 1,119 4 Depreciation and amortization 2,720 2,428 2,245 292 12 Total operating costs 222,470 208,903 185,950 13,567 6 Earnings from operations 19,685 17,344 15,209 2,341 13 Interest expense (1,704 ) (1,400 ) (1,186 ) (304 ) 22 Earnings before income taxes 17,981 15,944 14,023 2,037 13 Provision for income taxes (3,742 ) (3,562 ) (3,200 ) (180 ) 5 Net earnings 14,239 12,382 10,823 1,857 15 Earnings attributable to noncontrolling interests (400 ) (396 ) (265 ) (4 ) 1 Net earnings attributable toUnitedHealth Group common shareholders$ 13,839 $ 11,986 $ 10,558 $ 1,853 15 % Diluted earnings per share attributable to UnitedHealth Group common shareholders$ 14.33 $ 12.19 $ 10.72 $ 2.14 18 % Medical care ratio (a) 82.5 % 81.6 % 82.1 % 0.9 % Operating cost ratio 14.5 15.1 14.7 (0.6 ) Operating margin 8.1 7.7 7.6 0.4 Tax rate 20.8 22.3 22.8 (1.5 ) Net earnings margin (b) 5.7 5.3 5.2 0.4 Return on equity (c) 25.7 % 24.4 % 24.4 % 1.3 %
(a) Medical care ratio is calculated as medical costs divided by premium
revenue.
(b) Net earnings margin attributable to
(c) Return on equity is calculated as net earnings attributable to UnitedHealth
Group common shareholders divided by average shareholders' equity. Average
shareholders' equity is calculated using the shareholders' equity balance at
the end of the preceding year and the shareholders' equity balances at the
end of each of the four quarters of the year presented.
2019 RESULTS OF OPERATIONS COMPARED TO 2018 RESULTS
Consolidated Financial Results
Revenue
The increase in revenue was primarily driven by the increase in the number of
individuals served through Medicare Advantage; pricing trends; and organic and
acquisition growth across the Optum business, primarily due to expansion in
pharmacy care services and care delivery, partially offset by the moratorium of
the Health Insurance Industry Tax in 2019.
Medical Costs and MCR
Medical costs increased due to growth in people served through Medicare
Advantage and medical cost trends, partially offset by increased prior year
favorable medical development. The MCR increased due to the revenue effects of
the Health Insurance Industry Tax moratorium.
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Reportable Segments
See Note 14 of Notes to the Consolidated Financial Statements included in Part
II, Item 8, "Financial Statements and Supplementary Data" for more information
on our segments. The following table presents a summary of the reportable
segment financial information:
For the Years Ended December 31, Change
(in millions, except percentages) 2019 2018 2017 2019 vs. 2018
Revenues
UnitedHealthcare $ 193,842 $ 183,476 $ 163,257 $ 10,366 6 %
OptumHealth 30,317 24,145 20,570 6,172 26
OptumInsight 10,006 9,008 8,087 998 11
OptumRx 74,288 69,536 63,755 4,752 7
Optum eliminations (1,661 ) (1,409 ) (1,227 ) (252 ) 18
Optum 112,950 101,280 91,185 11,670 12
Eliminations (64,637 ) (58,509 ) (53,283 ) (6,128 ) 10
Consolidated revenues $ 242,155 $ 226,247 $ 201,159 $ 15,908 7 %
Earnings from operations
UnitedHealthcare $ 10,326 $ 9,113 $ 8,498 $ 1,213 13 %
OptumHealth 2,963 2,430 1,823 533 22
OptumInsight 2,494 2,243 1,770 251 11
OptumRx 3,902 3,558 3,118 344 10
Optum 9,359 8,231 6,711 1,128 14
Consolidated earnings from operations $ 19,685 $ 17,344 $ 15,209 $ 2,341 13 %
Operating margin
UnitedHealthcare 5.3 % 5.0 % 5.2 % 0.3 %
OptumHealth 9.8 10.1 8.9 (0.3 )
OptumInsight 24.9 24.9 21.9 -
OptumRx 5.3 5.1 4.9 0.2
Optum 8.3 8.1 7.4 0.2
Consolidated operating margin 8.1 % 7.7 % 7.6 % 0.4 %
UnitedHealthcare
The following table summarizes UnitedHealthcare revenues by business:
For the Years Ended December 31, Change
(in millions, except percentages) 2019 2018 2017 2019 vs. 2018
UnitedHealthcare Employer & Individual
$ 52,066 $ 2,184 4 % UnitedHealthcare Medicare & Retirement 83,252 75,473 65,995 7,779 10 UnitedHealthcare Community & State 43,790 43,426 37,443 364 1 UnitedHealthcare Global 9,855 9,816 7,753 39 -
Total UnitedHealthcare revenues
$ 163,257 $ 10,366 6 % 28
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The following table summarizes the number of individuals served by our UnitedHealthcare businesses, by major market segment and funding arrangement:
December 31 ,
Change
(in thousands, except percentages) 2019 2018 2017 2019 vs. 2018 Commercial: Risk-based 8,575 8,495 8,420 80 1 % Fee-based 19,185 18,420 18,595 765 4 Fee-based TRICARE - - 2,850 - - Total commercial 27,760 26,915 29,865 845 3 Medicare Advantage 5,270 4,945 4,430 325 7 Medicaid 5,900 6,450 6,705 (550 ) (9 ) Medicare Supplement (Standardized) 4,500 4,545 4,445 (45 ) (1 ) Total public and senior 15,670 15,940 15,580 (270 ) (2 ) Total UnitedHealthcare - domestic medical 43,430 42,855 45,445 575 1 International 5,720 6,220 4,080 (500 ) (8 ) Total UnitedHealthcare - medical 49,150 49,075 49,525 75 - % Supplemental Data: Medicare Part D stand-alone 4,405 4,710 4,940 (305 ) (6 )% Fee-based commercial group business increased primarily due to an acquisition. Medicare Advantage increased due to the growth in people served through individual and employer-sponsored group Medicare Advantage plans. The decrease in people served through Medicaid was primarily driven by the proactive withdrawal from theIowa market as well as by states adding new carriers to existing programs and managing eligibility, partially offset by increases in Dual Special Needs Plans. The decrease in people served internationally is a result of our continued affordability efforts and underwriting discipline. UnitedHealthcare's revenue and earnings from operations increased due to growth in the number of individuals served through Commercial and Medicare Advantage, including a greater mix of people with a higher acuity needs. Revenue increases were partially offset by the moratorium on the Health Insurance Industry Tax in 2019. Earnings from operations were also favorably impacted by operating cost management. Optum Total revenues and earnings from operations increased as each segment reported increased revenues and earnings from operations as a result of the factors discussed below. Earnings from operations also increased due to productivity and overall cost management initiatives. The results by segment were as follows:OptumHealth Revenue increased atOptumHealth primarily due to organic growth and acquisitions in care delivery, increased care services and organic growth in behavioral health services. Earnings from operations increased primarily due to care delivery.OptumHealth served approximately 96 million and 93 million people as ofDecember 31, 2019 and 2018, respectively.OptumInsight Revenue and earnings from operations atOptumInsight increased primarily due to organic and acquisition growth in managed services.OptumRx Revenue atOptumRx increased primarily due to organic growth and acquisitions in specialty pharmacy, partially offset by an expected large client transition. Earnings from operations increased primarily due to the factors that increased revenue as well as improved supply chain management.OptumRx fulfilled 1,340 million and 1,343 million adjusted scripts in 2019 and 2018, respectively, with 2019 impacted by the large client transition. 29
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LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES Liquidity Introduction We manage our liquidity and financial position in the context of our overall business strategy. We continually forecast and manage our cash, investments, working capital balances and capital structure to meet the short-term and long-term obligations of our businesses while seeking to maintain liquidity and financial flexibility. Cash flows generated from operating activities are principally from earnings before noncash expenses. Our regulated subsidiaries generate significant cash flows from operations and are subject to, among other things, minimal levels of statutory capital, as defined by their respective jurisdiction, and restrictions on the timing and amount of dividends paid to their parent companies. OurU.S. regulated subsidiaries paid their parent companies dividends of$5.6 billion and$3.7 billion in 2019 and 2018, respectively. See Note 10 of Notes to the Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" for further detail concerning our regulated subsidiary dividends. Our nonregulated businesses also generate significant cash flows from operations that are available for general corporate use. Cash flows generated by these entities, combined with dividends from our regulated entities and financing through the issuance of long-term debt as well as issuance of commercial paper or the ability to draw under our committed credit facilities, further strengthen our operating and financial flexibility. We use these cash flows to expand our businesses through acquisitions, reinvest in our businesses through capital expenditures, repay debt and return capital to our shareholders through dividends and repurchases of our common stock. Summary of our Major Sources and Uses of Cash and Cash Equivalents For the Years Ended December 31, Change (in millions) 2019 2018 2017 2019 vs. 2018 Sources of cash: Cash provided by operating activities$ 18,463 $ 15,713 $ 13,596 $ 2,750 Issuances of long-term debt and commercial paper, net of repayments 3,994 4,134 - (140 ) Proceeds from common share issuances 1,037 838 688 199 Customer funds administered 13 - 3,172 13 Other 219 - - 219 Total sources of cash 23,726 20,685 17,456 Uses of cash: Cash paid for acquisitions, net of cash assumed (8,343 ) (5,997 ) (2,131 ) (2,346 ) Cash dividends paid (3,932 ) (3,320 ) (2,773 ) (612 ) Common share repurchases (5,500 ) (4,500 ) (1,500 ) (1,000 ) Repayments of long-term debt and commercial paper, net of issuances - - (2,615 ) - Purchases of property, equipment and capitalized software (2,071 ) (2,063 ) (2,023 ) (8 ) Purchases of investments, net of sales and maturities (2,504 ) (4,099 ) (4,319 ) 1,595 Other (1,237 ) (1,743 ) (539 ) 506 Total uses of cash (23,587 ) (21,722 ) (15,900 ) Effect of exchange rate changes on cash and cash equivalents (20 ) (78 ) (5 ) 58 Net increase (decrease) in cash and cash equivalents$ 119 $ (1,115 ) $ 1,551 $ 1,234 30
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2019 Cash Flows Compared to 2018 Cash Flows Increased cash flows provided by operating activities were primarily driven by higher net earnings as well as changes in working capital accounts. Other significant changes in sources or uses of cash year-over-year included an increase in cash paid for acquisitions, increased share repurchases and decreased net purchases of investments. Financial Condition As ofDecember 31, 2019 , our cash, cash equivalent, available-for-sale debt securities and equity securities balances of$49.1 billion included$11.0 billion of cash and cash equivalents (of which$584 million was available for general corporate use),$36.1 billion of debt securities and$2.0 billion of investments in equity securities. Given the significant portion of our portfolio held in cash equivalents, we do not anticipate fluctuations in the aggregate fair value of our financial assets to have a material impact on our liquidity or capital position. Other sources of liquidity, primarily from operating cash flows and our commercial paper program, which is supported by our bank credit facilities, reduce the need to sell investments during adverse market conditions. See Note 4 of Notes to the Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data"
for
further detail concerning our fair value measurements. Our available-for-sale debt portfolio had a weighted-average duration of 3.4 years and a weighted-average credit rating of "Double A" as ofDecember 31, 2019 . When multiple credit ratings are available for an individual security, the average of the available ratings is used to determine the weighted-average credit rating. Capital Resources and Uses of Liquidity In addition to cash flows from operations and cash and cash equivalent balances available for general corporate use, our capital resources and uses of liquidity are as follows: Commercial Paper and Bank Credit Facilities. Our revolving bank credit facilities provide liquidity support for our commercial paper borrowing program, which facilitates the private placement of senior unsecured debt through independent broker-dealers, and are available for general corporate purposes. For more information on our commercial paper and bank credit facilities, see Note 8 of Notes to the Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data." Our revolving bank credit facilities contain various covenants, including covenants requiring us to maintain a defined debt to debt-plus-shareholders' equity ratio of not more than 60%, subject to increase in certain circumstances set forth in the applicable credit agreement. As ofDecember 31, 2019 , our debt to debt-plus-shareholders' equity ratio, as defined and calculated under the credit facilities, was 39%. Long-Term Debt. Periodically, we access capital markets to issue long-term debt for general corporate purposes, such as, to meet our working capital requirements, to refinance debt, to finance acquisitions or for share repurchases. For more information on our debt, see Note 8 of Notes to the Consolidated Financial Statements included in Part II, Item 8 "Financial Statements and Supplementary Data." Credit Ratings. Our credit ratings as ofDecember 31, 2019 were as follows: Moody's S&P Global Fitch A.M. Best Ratings Outlook Ratings Outlook Ratings Outlook Ratings Outlook Senior unsecured debt A3 Stable A+ Stable A- Stable A- Positive Commercial paper P-2 n/a A-1 n/a F1 n/a AMB-1 n/a The availability of financing in the form of debt or equity is influenced by many factors, including our profitability, operating cash flows, debt levels, credit ratings, debt covenants and other contractual restrictions, regulatory requirements and economic and market conditions. A significant downgrade in our credit ratings or adverse conditions in the capital markets may increase the cost of borrowing for us or limit our access to capital. Share Repurchase Program. As ofDecember 31, 2019 , we had Board authorization to purchase up to 72 million shares of our common stock. For more information on our share repurchase program, see Note 10 of Notes to the Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data." Dividends. InJune 2019 , the Company's Board of Directors increased the Company's quarterly cash dividend to shareholders to an annual rate of$4.32 compared to$3.60 per share. For more information on our dividend, see Note 10 of Notes to the Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data." 31
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CONTRACTUAL OBLIGATIONS AND COMMITMENTS The following table summarizes future obligations due by period as ofDecember 31, 2019 , under our various contractual obligations and commitments: (in millions) 2020 2021 to 2022 2023 to 2024 Thereafter Total Debt (a)$ 5,532 $ 9,118 $ 6,122 $ 44,302 $ 65,074 Operating leases 804 1,327 901 1,671 4,703 Purchase and other obligations (b) 1,617 2,483 768 248 5,116 Other liabilities (c) 914 344 285 7,767 9,310 Redeemable noncontrolling interests (d) 852 542 - 332 1,726 Total contractual obligations$ 9,719 $ 13,814 $ 8,076 $ 54,320 $ 85,929 (a) Includes interest coupon payments and maturities at par or put values. The
table also assumes amounts are outstanding through their contractual term.
See Note 8 of Notes to the Consolidated Financial Statements included in
Part II, Item 8, "Financial Statements and Supplementary Data" for more
detail.
(b) Includes fixed or minimum commitments under existing purchase obligations
for goods and services, including agreements that are cancelable with the
payment of an early termination penalty and remaining capital commitments
for venture capital funds and other funding commitments. Excludes agreements
that are cancelable without penalty and excludes liabilities to the extent
recorded in our Consolidated Balance Sheets as of
(c) Includes obligations associated with contingent consideration and payments
related to business acquisitions, certain employee benefit programs, amounts
accrued for guaranty fund assessments, unrecognized tax benefits, and
various long-term liabilities. Due to uncertainty regarding payment timing,
obligations for employee benefit programs, charitable contributions, future
settlements, unrecognized tax benefits and other liabilities have been
classified as "Thereafter."
(d) Includes commitments for redeemable shares of our subsidiaries. When the
timing of the redemption is indeterminable, the commitment has been
classified as "Thereafter."
We do not have other significant contractual obligations or commitments that
require cash resources. However, we continually evaluate opportunities to expand
our operations, which include internal development of new products, programs and
technology applications and may include acquisitions.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2019 , we were not involved in any off-balance sheet
arrangements, which have or are reasonably likely to have a material effect on
our financial condition, results of operations or liquidity.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2 of Notes to the Consolidated Financial Statements in Part II, Item
8 "Financial Statements and Supplementary Data" for a discussion of new
accounting pronouncements that affect us.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those estimates that require management to
make challenging, subjective or complex judgments, often because they must
estimate the effects of matters that are inherently uncertain and may change in
subsequent periods. Critical accounting estimates involve judgments and
uncertainties that are sufficiently sensitive and may result in materially
different results under different assumptions and conditions.
Medical Costs Payable
Medical costs and medical costs payable include estimates of our obligations for
medical care services that have been rendered on behalf of insured consumers,
but for which claims have either not yet been received or processed. Depending
on the health care professional and type of service, the typical billing lag for
services can be up to 90 days from the date of service. Approximately 90% of
claims related to medical care services are known and settled within 90 days
from the date of service and substantially all within twelve months. As of
December 31, 2019 , our days outstanding in medical payables was 51 days,
calculated as total medical payables divided by total medical costs times the
number of days in the period.
In each reporting period, our operating results include the effects of more
completely developed medical costs payable estimates associated with previously
reported periods. If the revised estimate of prior period medical costs is less
than the previous estimate, we will decrease reported medical costs in the
current period (favorable development). If the revised estimate of prior period
medical costs is more than the previous estimate, we will increase reported
medical costs in the current
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period (unfavorable development). Medical costs in 2019, 2018 and 2017 included favorable medical cost development related to prior years of$580 million ,$320 million and$690 million , respectively. In developing our medical costs payable estimates, we apply different estimation methods depending on the month for which incurred claims are being estimated. For example, for the most recent two months, we estimate claim costs incurred by applying observed medical cost trend factors to the average per member per month (PMPM) medical costs incurred in prior months for which more complete claim data is available, supplemented by a review of near-term completion factors. Completion Factors. A completion factor is an actuarial estimate, based upon historical experience and analysis of current trends, of the percentage of incurred claims during a given period that have been adjudicated by us at the date of estimation. Completion factors are the most significant factors we use in developing our medical costs payable estimates for periods prior to the most recent two months. Completion factors include judgments in relation to claim submissions such as the time from date of service to claim receipt, claim levels and processing cycles, as well as other factors. If actual claims submission rates from providers (which can be influenced by a number of factors, including provider mix and electronic versus manual submissions) or our claim processing patterns are different than estimated, our reserve estimates may be significantly impacted. The following table illustrates the sensitivity of these factors and the estimated potential impact on our medical costs payable estimates for those periods as ofDecember 31, 2019 : Completion Factors Increase (Decrease)
(Decrease) Increase in Factors In Medical Costs Payable
(in millions)
(0.75)% $ 584
(0.50) 388
(0.25) 194
0.25 (193 )
0.50 (384 )
0.75 (575 )
Medical Cost Per Member Per Month Trend Factors. Medical cost PMPM trend factors
are significant factors we use in developing our medical costs payable estimates
for the most recent two months. Medical cost trend factors are developed through
a comprehensive analysis of claims incurred in prior months, provider
contracting and expected unit costs, benefit design and a review of a broad set
of health care utilization indicators, including but not limited to, pharmacy
utilization trends, inpatient hospital authorization data and influenza
incidence data from the National Centers for Disease Control . We also consider
macroeconomic variables such as GDP growth, employment and disposable income. A
large number of factors can cause the medical cost trend to vary from our
estimates, including: our ability and practices to manage medical and
pharmaceutical costs, changes in level and mix of services utilized, mix of
benefits offered, including the impact of co-pays and deductibles, changes in
medical practices, catastrophes and epidemics.
The following table illustrates the sensitivity of these factors and the
estimated potential impact on our medical costs payable estimates for the most
recent two months as of December 31, 2019 :
Medical Cost PMPM Quarterly Trend Increase (Decrease)
Increase (Decrease) in Factors In Medical Costs Payable
(in millions)
3% $ 754
2 502
1 251
(1) (251 )
(2) (502 )
(3) (754 )
The completion factors and medical costs PMPM trend factors analyses above
include outcomes that are considered reasonably likely based on our historical
experience estimating liabilities for incurred but not reported benefit claims.
Management believes the amount of medical costs payable is reasonable and
adequate to cover our liability for unpaid claims as of December 31, 2019 ;
however, actual claim payments may differ from established estimates as
discussed above. Assuming a hypothetical 1% difference between our December 31,
2019 estimates of medical costs payable and actual medical costs
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payable, excludingAARP Medicare Supplement Insurance and any potential offsetting impact from premium rebates, 2019 net earnings would have increased or decreased by approximately$160 million . For more detail related to our medical cost estimates, see Note 2 of Notes to the Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data."Goodwill We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. When testing goodwill for impairment, we may first assess qualitative factors to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. During a qualitative analysis, we consider the impact of changes, if any, to the following factors: macroeconomic, industry and market factors, cost factors, changes in overall financial performance, and any other relevant events and uncertainties impacting a reporting unit. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform additional quantitative analyses. We may also elect to skip the qualitative testing and proceed directly to the quantitative testing. For reporting units where a quantitative analysis is performed, we perform a multi-step test measuring the fair values of the reporting units and comparing them to their aggregate carrying values, including goodwill. If the fair value is less than the carrying value of the reporting unit, then the implied value of goodwill would be calculated and compared to the carrying amount of goodwill to determine whether goodwill is impaired. We estimate the fair values of our reporting units using discounted cash flows, which include assumptions about a wide variety of internal and external factors. Significant assumptions used in the impairment analysis include financial projections of free cash flow (including significant assumptions about operations, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods and discount rates. For each reporting unit, comparative market multiples are used to corroborate the results of our discounted cash flow test. Forecasts and long-term growth rates used for our reporting units are consistent with, and use inputs from, our internal long-term business plan and strategies. Key assumptions used in these forecasts include: • Revenue trends. Key revenue drivers for each reporting unit are determined
and assessed. Significant factors include: customer and/or membership
growth, medical trends and the impact and expectations of regulatory
environments. Additional macro-economic assumptions relating to
unemployment, GDP growth, interest rates and inflation are also evaluated
and incorporated, as appropriate.
• Medical cost trends. For further discussion of medical cost trends, see the
"Medical Cost Trend" section of Executive Overview- Business Trends and
the "Medical Costs Payable" critical accounting estimate above. Similar
factors, including historical and expected medical cost trend levels, are
considered in estimating our long-term medical trends at the reporting unit
level.
• Operating productivity. We forecast expected operating cost levels based on
historical levels and expectations of future operating cost levels.
• Capital levels. The operating and long-term capital requirements for each
business are considered.
Discount rates are determined for each reporting unit and include consideration of the implied risk inherent in their forecasts. Our most significant estimate in the discount rate determinations involves our adjustments to the peer company weighted average costs of capital that reflect reporting unit-specific factors. We have not made any adjustments to decrease a discount rate below the calculated peer company weighted average cost of capital for any reporting unit. Company-specific adjustments to discount rates are subjective and thus are difficult to measure with certainty. The passage of time and the availability of additional information regarding areas of uncertainty with respect to the reporting units' operations could cause these assumptions to change in the future. As ofOctober 1, 2019 , we completed our annual impairment tests for goodwill with all of our reporting units having fair values substantially in excess of their carrying values. LEGAL MATTERS A description of our legal proceedings is presented in Note 12 of Notes to the Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data." CONCENTRATIONS OF CREDIT RISK Investments in financial instruments such as marketable securities and accounts receivable may subject us to concentrations of credit risk. Our investments in marketable securities are managed under an investment policy authorized by our Board of Directors. This policy limits the amounts that may be invested in any one issuer and generally limits our investments toU.S. government and agency securities, state and municipal securities and corporate debt obligations that are investment grade. 34
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Concentrations of credit risk with respect to accounts receivable are limited due to the large number of employer groups and other customers that constitute our client base. As ofDecember 31, 2019 , there were no significant concentrations of credit risk.
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