Financial Highlights should be read with the accompanying “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II,
UnitedHealth Group is a diversified health and well-being company dedicated to helping people live healthier lives and making the health system work better for everyone. Through our diversified family of businesses, we leverage 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. We offer a broad spectrum of products and services through two distinct
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.”
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 reimbursement 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.
We are increasingly rewarding care providers for delivering improvements in quality and cost-efficiency. As of December 31, 2015, we served more than 14 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 of December 31, 2015, our contracts with value-based spending total nearly $46 billion annually, up from $13 billion in 2011.
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.
Following is a summary of management’s view of the trends and uncertainties related to some of the key provisions of Health Reform Legislation and other regulatory items. For additional information regarding Health Reform Legislation and regulatory trends and uncertainties, see Part I, Item 1 “Business - Government Regulation” and Item 1A, “Risk Factors.”
Medicare Advantage Rates and Minimum Loss Ratios. Medicare Advantage rates have been cut over the last several years, with additional funding reductions to be phased-in through 2017. The final 2016 Medicare Advantage rates were more stable than in recent years, with an expected average increase in industry funding of approximately 1.25%. However, these rates still trail the typical industry forward medical cost trend of 3% which creates continued pressure in the Medicare Advantage program. The impact of these cuts to our Medicare Advantage revenues is partially mitigated by reductions in provider reimbursements for those care providers with rates indexed to Medicare Advantage revenues or Medicare fee-for-service reimbursement rates. These factors affected our plan benefit designs, market participation, growth prospects and earnings expectations for our Medicare Advantage plans for 2016.
The ongoing reductions to Medicare Advantage funding place 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 reductions. These adjustments will 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, implement or increase the member premiums that supplement the monthly payments we receive from the government and decide 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. In addition, star ratings affect the amount of savings a plan can use to offer supplemental benefits, which ultimately may affect the plan’s membership and revenue. Beginning in 2015, quality bonus payments were paid only to plans rated 4 stars and higher. We expect that approximately 56% of our Medicare Advantage members will be in plans rated four stars or higher for payment year 2016 compared with approximately 39% of members in plans rated four stars or higher for payment year 2015. We further expect that at least 63% of our Medicare Advantage members will be in plans rated four stars or higher for payment year 2017. We continue to dedicate substantial resources to advance our quality scores and star ratings to strengthen our local market programs and further improve our performance.
During the fourth quarter of 2015, the Company changed its presentation of certain pharmacy fulfillment costs related to its OptumRx business. See Note 2 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements” for more information on this reclassification.
Medical care ratio is calculated as medical costs divided by premium revenue.
The following represents a summary of select 2015 year-over-year operating comparisons to 2014 and other 2015 significant items.
Consolidated revenues increased by 20%, Optum revenues grew 42% and UnitedHealthcare revenues increased 10%.
Earnings from operations increased by 7%, including an increase of 30% at Optum partially offset by a decrease of 3% at UnitedHealthcare.
Cash flow from operations were $9.7 billion an increase of 21%.
Our results of operations during the year ended December 31, 2015 were affected by our acquisition of Catamaran on July 23, 2015.
The increase in revenues was primarily driven by the effect of the Catamaran acquisition and organic growth in the number of individuals served across our benefits businesses and across all of Optum’s businesses.
The decrease in our operating cost ratio was due to the inclusion of Catamaran and growth in government benefits programs, both of which have lower operating cost ratios and Company wide productivity gains.
The increase in commercial risk-based enrollment was the result of strong participation in UnitedHealthcare’s individual public exchange products and favorable annual renewal activity and new business wins in the employer group segment. Medicare Advantage participation increased year-over-year primarily due to growth in people served through employer-sponsored group Medicare Advantage plans. Medicaid growth was driven by the combination of health reform related Medicaid expansion, states launching new programs to complement established programs and growth in established programs, partially offset by a decrease of 175,000 people in one market where an additional offering was introduced by the state in the first quarter of 2015. Medicare Supplement growth reflected strong customer retention and new sales. The number of people served internationally decreased year-over-year primarily due to pricing and underwriting disciplines in Brazil in response to regulatory actions and declining employment levels in Brazil.
UnitedHealthcare’s operating earnings for the year ended December 31, 2015 decreased as the combined individual exchange-compliant losses and premium deficiency reserves totaling $815 million more than offset strong growth across the business, improved medical cost management and increased productivity.
Revenue, earnings from operations and operating margins at OptumInsight for the year ended December 31, 2015 increased primarily due to expansion and growth in care provider revenue management services and payer services.
Revenue and earnings from operations for the year ended December 31, 2015 increased due to the mid-year acquisition of Catamaran as well as strong organic growth. Operating margins for the year ended December 31, 2015 decreased slightly due to the inclusion of lower margin Catamaran business. For more information about Catamaran, see Note 3 in Notes to the Consolidated Financial Statements in Part II, Item 8 “Financial Statements.”
The increase in our income tax rate resulted primarily from the nondeductible Health Insurance Industry Tax.
The increases in Optum’s earnings from operations and operating margins for the year ended December 31, 2014 were driven by revenue growth and increased productivity, partially offset by investments at OptumHealth and OptumInsight.
In 2015, our U.S. regulated subsidiaries paid their parent companies dividends of $4.4 billion. For the year ended December 31, 2014, our U.S. regulated subsidiaries paid their parent companies dividends of $4.6 billion. See Note 11 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements” for further detail concerning our regulated subsidiary dividends.
Our nonregulated businesses also generate 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 stockholders through shareholder dividends and/or repurchases of our common stock, depending on market conditions.
Summary of our Major Sources and Uses of Cash and Cash Equivalents
Cash flows provided by operating activities in 2015 increased primarily due to growth in risk-based products, which increased medical costs payable and an increase in CMS risk share payables, which increased other policy liabilities. These increases were partially offset by an increase in pharmacy rebates, which increased other receivables, the increase in the payment of the 2015 Health Insurance Industry Tax and the payment of Reinsurance Program fees in 2015.
Cash flows provided by operating activities in 2014 increased primarily due to an increased level of accounts payable and other liabilities, including the collection of Reinsurance Program fees in advance of remittance in 2015, partially offset by an increase in government receivables.
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 unsecured debt through third-party broker-dealers, and are available for general corporate purposes. For more information on our commercial paper and bank credit facilities, see Note 9 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements.”
Our revolving bank credit facilities contain various covenants, including covenants requiring us to maintain a defined debt to debt-plus-stockholders’ equity ratio of not more than 55%. As of December 31, 2015, our debt to debt-plus-stockholders’ equity ratio, as defined and calculated under the credit facilities was approximately 47%.
Long-Term Debt. Periodically, we access capital markets and issue long-term debt for general corporate purposes, for example, to meet our working capital requirements, to refinance debt, to finance acquisitions or for share repurchases. In July 2015, we issued debt to fund the acquisition of Catamaran. For more information on this debt issuance, see Note 9 of Notes to the Consolidated Financial Statements included in Part II, Item 8 “Financial Statements.”
Share Repurchase Program. We expect continued moderated share repurchase activity through 2016 following the acquisition of Catamaran. For more information on our share repurchase program, see Note 11 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements.”
The following table summarizes future obligations due by period as of December 31, 2015, under our various contractual obligations and commitments:
Includes remaining capital commitments for venture capital funds and other funding commitments.
Completion Factors. Completion factors are the most significant factors we use in developing our medical costs payable estimates for older periods, generally periods prior to the most recent three months. Completion factors include judgments in relation to claim submissions such as the time from date of service to claim receipt, claim inventory levels and claim processing backlogs 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 reserves may be significantly impacted.
Medical Cost PMPM Trend Factors. Medical cost PMPM trend factors are significant factors we use in developing our medical costs payable estimates for the most recent three 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 by reviewing a broad set of health care utilization indicators, including but not limited to, pharmacy utilization trends, inpatient hospital census data and incidence data from the National Centers for Disease Control. We also consider macroeconomic
The following table illustrates the sensitivity of these factors and the estimated potential impact on our medical costs payable estimates for the most recent three months as of December 31, 2015:
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.
Our Medicare Advantage and Medicare Part D premium revenues are subject to periodic adjustment under the CMS risk adjustment payment methodology. The CMS risk adjustment model provides higher per member payments for enrollees diagnosed with certain conditions and lower payments for enrollees who are healthier. We and health care providers collect, capture and submit available diagnosis data to CMS within prescribed deadlines. CMS uses submitted diagnosis codes, demographic information and special statuses to determine the risk score for most Medicare Advantage beneficiaries. CMS also retroactively adjusts risk scores during the year based on additional data. We estimate risk adjustment revenues based upon the data submitted and expected to be submitted to CMS. As a result of the variability of factors that determine such estimations, the actual amount of CMS’ retroactive payments could be materially more or less than our estimates. This may result in favorable or unfavorable adjustments to our Medicare premium revenue and, accordingly, our profitability. Risk adjustment data for certain of our plans is subject to review by the federal and state governments, including audit by regulators. See Note 13 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements” for additional information regarding these audits. Our estimates of premiums to be recognized are reduced by any expected premium minimum MLR rebates payable by us to CMS.
Goodwill. Goodwill represents the amount of the purchase price in excess of the fair values assigned to the underlying identifiable net assets of acquired businesses. Goodwill is not amortized, but is subject to an annual impairment test. We completed our annual impairment tests for goodwill as of October 1, 2015. All of our reporting units had fair values substantially in excess of their carrying values. During 2015, we changed our annual quantitative goodwill impairment testing date from January 1 to October 1 of each year. The change in the goodwill impairment test date better aligns the impairment testing procedures with the timing of our long-term planning process, which is a significant input to the testing. This change in testing date did not delay, accelerate, or avoid a goodwill impairment charge. Impairment tests are performed more frequently if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
Intangible Assets. Our recorded separately-identifiable intangible assets were acquired in business combinations and were initially recorded at their fair values. Finite-lived intangible assets are amortized over their expected useful lives, while indefinite-lived intangible assets are evaluated for impairment on at least an annual basis.
Our finite-lived intangible assets are subject to impairment tests when events or circumstances indicate that an asset’s (or asset group’s) carrying value may exceed its estimated fair value. Consideration is given on a quarterly basis to a number of potential impairment indicators, including: changes in the use of the assets, changes in legal or other business factors that could affect value, experienced or expected operating cash-flow deterioration or losses, adverse changes in customer populations, adverse competitive or technological advances that could impact value and other factors.
Other-Than-Temporary Impairment Assessment. Individual securities with fair values lower than costs are reviewed for impairment considering the following factors: our intent to sell the security or the likelihood that we will be required to sell the security before recovery of the entire amortized cost, the length of time and extent of impairment and the financial condition and near-term prospects of the issuer as well as specific events or circumstances that may influence the operations of the issuer. Other factors included in the assessment include the type and nature of the securities and their liquidity. Given the nature of our portfolio, primarily investment grade securities, historical impairments were largely market related (e.g., interest rate fluctuations) as opposed to credit related. In December 2015, the Federal Reserve (Fed) announced that it would increase short-
term interest rates to a range between 25 and 50 basis points. Fed officials emphasized that they intend to raise rates gradually, if necessary. We estimate a 25 basis point rise in short-term interest rates impacts the fair-value of our investments by $200 million. Our large cash holdings reduce the risk that we will be required to sell a security. However, our intent to sell a security may change from period to period if facts and circumstances change.
The judgments and estimates related to other-than-temporary impairment may ultimately prove to be inaccurate due to many factors, including: circumstances may change over time, industry sector and market factors may differ from expectations and estimates or we may ultimately sell a security we previously intended to hold. Our assessment of the financial condition and near-term prospects of the issuer may ultimately prove to be inaccurate as time passes and new information becomes available, including changes to current facts and circumstances, or as unknown or estimated unlikely trends develop.
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 to U.S. government and agency securities, state and municipal securities and corporate debt obligations that are investment grade. 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 of December 31, 2015, we had a reinsurance receivable resulting from the sale of our Golden Rule Financial Corporation life and annuity business in 2005. See Note 2 of Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements.” for more information. As of December 31, 2015, there were no other significant concentrations of credit risk.
We have audited the accompanying consolidated balance sheets of UnitedHealth Group Incorporated and subsidiaries (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of UnitedHealth Group Incorporated and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
These 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, estimates of other policy liabilities and other current receivables 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.
During the fourth quarter of 2015, the Company changed its accounting policy for the presentation of certain pharmacy fulfillment costs related to its OptumRx business. These costs are now included in medical costs and cost of products sold, whereas they were previously included in operating costs. Prior periods have been reclassified to conform to the current period presentation. The reclassification increased medical expenses by $376 million and $369 million, decreased operating costs by $418 million and $421 million and increased cost of products sold by $42 million and $52 million for the years ended December 31, 2014 and 2013, respectively. The reclassification had no impact on total operating costs, earnings from operations, net earnings, earnings per share or total equity.
The Company’s Medicare Advantage and Medicare Part D premium revenues are subject to periodic adjustment under the Centers for Medicare & Medicaid Services’ (CMS) risk adjustment payment methodology. CMS deploys a risk adjustment model that apportions premiums paid to all health plans according to health severity and certain demographic factors. The CMS risk adjustment model provides higher per member payments for enrollees diagnosed with certain conditions and lower payments for enrollees who are healthier. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using diagnosis data from hospital inpatient, hospital outpatient and physician treatment settings. The Company and health care providers collect, capture and submit the necessary and available diagnosis data to CMS within prescribed deadlines. The Company estimates risk adjustment revenues based upon the diagnosis data submitted and expected to be submitted to CMS. Risk adjustment data for certain of the Company’s plans are subject to review by the government, including audit by regulators. See Note 13 for additional information regarding these audits.
The Company excludes unrealized gains and losses on investments in available-for-sale securities from net earnings and reports them as comprehensive income and, net of income tax effects, as a separate component of equity. To calculate realized gains and losses on the sale of investments, the Company specifically identifies the cost of each investment sold.
The Company provides health insurance products and services to members of AARP under a Supplemental Health Insurance Program (the AARP Program) and to AARP members and non-members under separate Medicare Advantage and Medicare Part D arrangements. The products and services under the AARP Program include supplemental Medicare benefits (AARP Medicare Supplement Insurance), hospital indemnity insurance, including insurance for individuals between 50 to 64 years of age and other related products.
The Company’s pharmacy care services businesses contract with pharmaceutical manufacturers, some of which provide rebates based on use of the manufacturers’ products by its affiliated and non-affiliated clients. The Company accrues rebates as they are earned by its clients on a monthly basis based on the terms of the applicable contracts, historical data and current estimates. The pharmacy care services businesses bill these rebates to the manufacturers on a monthly or quarterly basis depending on the contractual terms and records rebates attributable to affiliated clients as a reduction to medical costs. The Company generally receives rebates from two to five months after billing. As of December 31, 2015 and 2014, total pharmaceutical manufacturer rebates receivable included in other receivables in the Consolidated Balance Sheets amounted to $2.6 billion and $1.5 billion, respectively.
CMS Premium. CMS pays a fixed monthly premium per member to the Company for the entire plan year.
Member Premium. Additionally, certain members pay a fixed monthly premium to the Company for the entire plan year.
Low-Income Member Cost Sharing Subsidy. For qualifying low-income members, CMS pays on the member’s behalf some or all of a member’s cost sharing amounts, such as deductibles and coinsurance. The cost sharing subsidy is funded by CMS through monthly payments to the Company. The Company administers and pays the subsidized portion of the claims on behalf of CMS, and a settlement payment is made between CMS and the Company based on actual claims and premium experience, after the end of the plan year.
Drug Discount. Health Reform Legislation mandated a consumer discount on brand name prescription drugs for Medicare Part D plan participants in the coverage gap. This discount is funded by CMS and pharmaceutical manufacturers while the Company administers the application of these funds. Accordingly, amounts received are not reflected as premium revenues, but rather are accounted for as deposits. The Company records a liability when amounts are received from CMS and a receivable when the Company bills the pharmaceutical manufacturers. Related cash flows are presented as customer funds administered within financing activities in the Consolidated Statements of Cash Flows.
The Catastrophic Reinsurance Subsidy and the Low-Income Member Cost Sharing Subsidy (Subsidies) represent cost reimbursements under the Medicare Part D program. Amounts received for these Subsidies are not reflected as premium revenues, but rather are accounted for as receivables and/or deposits. Related cash flows are presented as customer funds administered within financing activities in the Consolidated Statements of Cash Flows.
The final 2015 risk-share amount is expected to be settled during the second half of 2016, and is subject to the reconciliation process with CMS.
To determine whether goodwill is impaired, annually or more frequently if needed, the Company performs a multi-step impairment test. First, the Company estimates the fair values of its reporting units using discounted cash flows. To determine fair values, the Company must make 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 and discount rates. Comparative market multiples are used to corroborate the results of the discounted cash flow test. 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.
There was no impairment of goodwill during the year ended December 31, 2015.
The Company’s intangible assets are subject to impairment tests when events or circumstances indicate that an intangible asset (or asset group) may be impaired. The Company’s indefinite lived intangible assets are also tested for impairment annually. There was no impairment of intangible assets during the year ended December 31, 2015.
The Company had checks outstanding of $1.6 billion and $1.4 billion as of December 31, 2015 and 2014, respectively, which were classified as accounts payable and accrued liabilities and the change in this balance has been reflected within other financing activities in the Consolidated Statements of Cash Flows.
Changes in the RSF are reported in medical costs in the Consolidated Statement of Operations. As of December 31, 2015 and 2014, the balance in the RSF was $1.6 billion and $1.5 billion, respectively.
The Company evaluates the financial condition of the reinsurer and only records the reinsurance receivable to the extent of probable recovery. As of December 31, 2015, the reinsurer was rated by A.M. Best as “A+.”
The Company estimates its liability for the Health Insurance Industry Tax based on a ratio of the Company’s applicable net premiums written compared to the U.S. health insurance industry total applicable net premiums, both for the previous calendar year. The Company records in full the estimated liability for the Health Insurance Industry Tax at the beginning of the calendar year with a corresponding deferred cost that is amortized to operating costs on the Consolidated Statements of Operations using a straight-line method of allocation over the calendar year. The liability is recorded in accounts payable and accrued liabilities and the corresponding deferred cost is recorded in prepaid expenses and other current assets on the Consolidated Balance Sheets. In September 2015, the Company paid its full year 2015 Health Insurance Industry Tax of $1.8 billion. There was no liability or asset related to the Health Insurance Industry Tax recorded as of both December 31, 2015 and 2014 as the Health Insurance Industry Tax was paid in September of both years and the asset was fully expensed by each year end.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes (Topic 740)” (ASU 2015-17). ASU 2015-17 requires entities to present deferred tax assets and deferred tax liabilities as noncurrent on a classified balance sheet. ASU -2015-17 is effective for annual and interim reporting periods after December 15, 2016 and companies are permitted to apply ASU 2015-17 either prospectively or retrospectively. Early adoption of ASU 2015-17 is permitted. The Company plans to early adopt ASU 2015-17 on a prospective basis in the first quarter of 2016.
The Company paid for the acquisition primarily with the proceeds of new indebtedness. Debt issuances included $10.5 billion of senior unsecured notes, approximately $2.4 billion of commercial paper and a $1.5 billion term loan. The total consideration exceeded the estimated fair value of the net tangible assets acquired by $15.6 billion, of which $5.4 billion has been allocated to finite-lived intangible assets and $10.2 billion to goodwill. The goodwill is not deductible for income tax purposes.
Since the Catamaran acquisition closed during the third quarter of 2015, the preliminary purchase price allocation is subject to adjustment as valuation analyses, primarily related to intangible assets and contingent and tax liabilities, are finalized.
The acquisition date fair values and weighted-average useful lives assigned to Catamaran’s finite-lived intangible assets were:
The results of operations and financial condition of Catamaran have been included in the Company’s consolidated results and the results of the OptumRx segment as of July 23, 2015. Through December 31, 2015, the Catamaran business has generated $12.4 billion in revenue and had an immaterial impact on net earnings.
Unaudited pro forma revenue for the years ended December 31, 2015 and 2014 as if the acquisition of Catamaran had occurred on January 1, 2014 were $172 billion and $152 billion, respectively. The pro forma effects of this acquisition on net earnings were immaterial for both years.
Nearly all of the Company’s investments in mortgage-backed securities were rated AAA as of December 31, 2015.
Level 1 - Quoted prices (unadjusted) for identical assets/liabilities in active markets.
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 2015 or 2014.
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 Consolidated Balance Sheets:
Also included in the Company’s assets measured at fair value on a recurring basis using Level 3 inputs were $98 million of available-for-sale debt securities as of December 31, 2015, which were not significant.
Depreciation expense for property and equipment for 2015, 2014 and 2013 was $613 million, $532 million and $445 million, respectively. Amortization expense for capitalized software for 2015, 2014 and 2013 was $430 million, $422 million and $411 million, respectively.
The increase in the Company’s goodwill is primarily due to the acquisition of Catamaran. For more detail on the Catamaran acquisition, see Note 3 of the Notes to the Consolidated Financial Statements.
Amortization expense relating to intangible assets for December 31, 2015, 2014 and 2013 was $650 million, $524 million and $519 million, respectively.
The Company terminated the interest rate swap contracts on these hedged instruments during the year ended December 31, 2015. See below for more information on this termination.
Debt issued to fund the Catamaran acquisition. For more detail on Catamaran, see Note 3 of Notes to the Consolidated Financial Statements.
The Company’s bank credit facilities contain various covenants, including requiring the Company to maintain a debt to debt-plus-stockholders’ equity ratio of not more than 55%. The Company was in compliance with its debt covenants as of December 31, 2015.
The Company uses interest rate swap contracts to convert a portion of its interest rate exposure from fixed rates to floating rates to more closely align interest expense with interest income received on its variable rate financial assets. The floating rates are benchmarked to LIBOR. The swaps are designated as fair value hedges on the Company’s fixed-rate debt. Since the critical terms of the swaps match those of the debt being hedged, they are considered to be highly effective hedges and all changes in the fair values of the swaps are recorded as adjustments to the carrying value of the related debt with no net impact recorded on the Consolidated Statements of Operations. Both the hedge fair value changes and the offsetting debt adjustments are recorded in interest expense on the Consolidated Statements of Operations. The following table summarizes the location and fair value of the interest rate swap fair value hedges on the Company’s Consolidated Balance Sheet:
The reconciliation of the tax provision at the U.S. federal statutory rate to the provision for income taxes and the effective tax rate for the years ended December 31 is as follows:
The higher tax rates for 2015 and 2014 were primarily due to the increase in the nondeductible Health Insurance Industry Tax.
As of December 31, 2015, the Company had $459 million of undistributed earnings from non-U.S. subsidiaries that are intended to be reinvested in non-U.S. operations. Because these earnings are considered permanently reinvested, no U.S. tax provision has been accrued related to the repatriation of these earnings. It is not practicable to estimate the amount of U.S. tax that might be payable on the eventual remittance of such earnings.
The Company’s regulated subsidiaries are subject to regulations and standards in their respective jurisdictions. These standards, among other things, require these subsidiaries to maintain specified levels of statutory capital, as defined by each jurisdiction, and restrict the timing and amount of dividends and other distributions that may be paid to their parent companies. In the United States, most of these regulations and standards are generally consistent with model regulations established by the National Association of Insurance Commissioners. These standards generally permit dividends to be paid from statutory unassigned surplus of the regulated subsidiary and are limited based on the regulated subsidiary’s level of statutory net income and statutory capital and surplus. These dividends are referred to as “ordinary dividends” and generally can be paid without prior regulatory approval. If the dividend, together with other dividends paid within the preceding twelve months, exceeds a specified statutory limit or is paid from sources other than earned surplus, it is generally considered an “extraordinary dividend” and must receive prior regulatory approval.
which it is subject. At December 31, 2015, the Company believes that Optum Bank met the FDIC requirements to be considered “Well Capitalized.”
Under its Board of Directors’ authorization, the Company maintains a share repurchase program. The objectives of the share repurchase program are to optimize the Company’s capital structure and cost of capital, thereby improving returns to stockholders, as well as to offset the dilutive impact of share-based awards. Repurchases may be made from time to time in open market purchases or other types of transactions (including prepaid or structured share repurchase programs), subject to certain Board restrictions. In June 2014, the Board renewed the Company’s share repurchase program with an authorization to
repurchase up to 100 million shares of its common stock. During 2015, the Company repurchased 10.7 million shares at an average price of $112.45 per share and an aggregate cost of $1.2 billion. As of December 31, 2015, the Company had Board authorization to purchase up to 61 million shares of its common stock.
In June 2015, the Company’s stockholders approved an amendment to the 2011 Stock Incentive Plan (Plan). The approved amendment increased the number of shares authorized for issuance under the Plan by 70 million and removed certain limits in the Plan. The Company’s outstanding share-based awards consist mainly of non-qualified stock options, SARs and restricted shares. As of December 31, 2015, the Company had 85 million shares available for future grants of share-based awards under the Plan. As of December 31, 2015, there were also 12 million shares of common stock available for issuance under the ESPP.
Stock option and SAR activity for the year ended December 31, 2015 is summarized in the table below:
The Company leases facilities and equipment under long-term operating leases that are non-cancelable and expire on various dates. Rent expense under all operating leases for 2015, 2014 and 2013 was $555 million, $449 million and $438 million, respectively.
As of December 31, 2015, future minimum annual lease payments, net of sublease income, under all non-cancelable operating leases were as follows:
The Company provides guarantees related to its service level under certain contracts. If minimum standards are not met, the Company may be financially at risk up to a stated percentage of the contracted fee or a stated dollar amount. None of the amounts accrued, paid or charged to income for service level guarantees were material as of December 31, 2015, 2014 and 2013.
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.
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
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 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 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 things, compliance with coding and other requirements under the Medicare risk-adjustment model. The Company has produced documents, information and witnesses to the Department of Justice in cooperation with a current review of the Company’s risk-adjustment processes, including the Company’s patient chart review and related programs. CMS has selected certain of our 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 our health plans.
OptumHealth serves the physical, emotional and financial needs of individuals, enabling population health management and local care delivery through programs offered by employers, payers, government entities and directly with the care delivery system. OptumHealth offers access to networks of care provider specialists, health management services, care delivery, consumer engagement and relationship management and sales distribution platform services and financial services.
OptumInsight is a health care information, technology, operational services and consulting company providing software and information products, advisory consulting services and business process outsourcing services and support to participants in the health care industry. Hospitals, physicians, commercial health plans, government agencies, life sciences companies and other organizations that comprise the health care system use OptumInsight to reduce costs, meet compliance mandates, improve clinical performance and adapt to the changing health system landscape.
OptumRx offers pharmacy care services and programs, including retail pharmacy network management services, home delivery and specialty pharmacy services, manufacturer rebate contracting and administration, benefit plan design and consultation, claims processing and a variety of clinical programs such as formulary management and compliance, drug utilization review and disease and drug therapy management services.