What Is The Biggest Expense Item For UnitedHealth Group?

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

UnitedHealth’s Net Income Margin Has Increased Over The Recent Years. We Discuss Individual Cost Drivers In The Sections Below

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
  • 1) Operating Expenses: $241 billion
  • 2) Non-Operating Expense: $2 billion
  • 3) 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:
  • (A) $51.8 billion increase in Medical Costs,
  • (B) $12.8 billion increase in Other Operating Costs,
  • (C) $23.2 billion increase in COGS, and
  • (D) $950 million increase in D&A

(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.

(B) 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.

(C) COGS Grew From $3.8 Billion In 2014 To $27.0 Billion In 2018

• UnitedHealth’s cost of goods sold (COGS) 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) 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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