Friday, January 10, 2020

What Is The Biggest Expense Item For UnitedHealth Group?


Trefis Team Contributor Great Speculations Contributor Group Jan 10, 2020, 09:30am
UnitedHealth Group’s (NYSE: UNH) biggest expense item is Medical Costs, which includes obligations for medical care services that have been rendered on behalf of insured consumers. The company spent $94 billion in Medical Costs in 2014, and the figure increased to $145 billion in 2018, driven by growth in the number of customers served. In fact, the company added 4 million new customers over the same period. As a percentage of revenue, Medical Costs have declined from 72% to 64% between 2014 and 2018. This can be attributed to the company’s operational efficiency measures, which resulted in expenses growing at a slower pace when compared to the company’s revenues. Below, we take a look at the key drivers of UnitedHealth’s expenses and net margins. Look at our interactive dashboard analysis ~ UNH Expenses: How Does UnitedHealth Group Spend Money? ~ for more details.
Breakdown of UnitedHealth’s Total Expenses In 2018:
·         Total = $214 Billion
·         Operating Expenses = $209 Billion
·         Provision for income taxes = $4 Billion
·         Non-operating expenses = $1 Billion
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UnitedHealth’s Total Expenses Were $214 Billion In 2018, And They Could Grow To $247 Billion In 2020
·         UnitedHealth’s total expenses have grown from $125 billion in 2014 to about $214 billion in 2018.
·         For 2020, we expect total expenses to be around $247 billion, which comprises of
·         Operating Expenses: $241 billion
·         Non-Operating Expense: $2 billion
·         Income Taxes: $4 billion
·         Below, we take a look at how the company’s key expense components have trended and the key reasons for the change.
2. Operating Expenses Are On the Rise
·         Operating Expenses have increased from $120 billion in 2014 to $209 billion in 2018 driven by:
·         $51.8 billion increase in Medical Costs,
·         $12.8 billion increase in Other Operating Costs,
·         $23.2 billion increase in COGS, and
·         $950 million increase in D&A
Medical Costs Grew From $93.6 Billion In 2014 To $145.4 Billion In 2018
·         Medical Costs include obligations for medical care services that have been rendered on behalf of insured consumers.
·         The growth in Medical Costs over the recent years can be attributed to an increase in customers served, and pricing trends.
·         As a % of revenues, Medical Costs declined from 71.8% to 64.3% over the same period.
·         The figure is expected to be under 65% in the near term.
Other Operating Costs Grew From $21.3 Billion In 2014 To $34.1 Billion In 2018
·         The growth in other operating costs was primarily due to an increase in the number of customers served.
·         The company added roughly 4 million new customers between 2014 and 2018.
·         As a % of revenues, other operating costs have declined from 16.3% to 15.1% over the same period.
·         The figure is expected to be around 14.5% in 2020.
COGS Grew From $3.8 Billion In 2014 To $27.0 Billion In 2018
·         UnitedHealth’s cost of goods sold includes the cost of pharmaceuticals dispensed to its unaffiliated customers.
·         A sharp jump in COGS during 2015 can be attributed to change in accounting policy.
·         As a % of revenues, COGS grew from 2.9% in 2014 to 11.9% in 2018.
·         The figure is expected to remain around the current levels, as seen over the past couple of years.
D&A Grew From $1.5 Billion In 2014 To $2.4 Billion In 2018
·         As a % of revenues, D&A remained around the 1.1% mark over the last few years.
·         The figure is expected to remain around the current levels, in line with the trend seen in the recent past.
3. UnitedHealth’s Non-Operating Expenses Includes Interest Expenses
·         Interest Expenses grew from $0.6 billion in 2014 to $1.4 billion in 2018.
·         As a % of average debt, interest expenses have seen slight growth but largely remained in the range of 4% to 5%.
·         The company’s long term debt increased from $16.0 billion in 2014 to $34.6 billion in 2018.
·         The increase in debt in 2015 can be attributed to the company’s acquisition of Catamaran Corporation.
4. UnitedHealth’s Income Tax Expense Has Declined In Recent Years
·         This was driven by the Tax Cut and Jobs Act.
·         Effective Tax Rate declined from 42% in 2014 to 22% in 2018.
·         The plunge in 2017 can be attributed to TCJA, with corporate tax rates lowered to 21%.
·         The figure is expected to hover around the 22% mark in the near term.

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