Healthcare Financial Management: Unitedhealth Group Case

Summary

UnitedHealth Group faces multiple major forces relevant to the modern healthcare industry. One of the more notable major forces for the company is an ever-present necessity to comply with emergent regulations and keep up with technological advancements. In accordance with those requirements, UnitedHealth Group (n.d.) aims its policies to remain relevant in terms of equipment. However, constant equipment upgrades demand a careful approach from a financial perspective. A proposal for obtaining modern medical equipment requires a thorough evaluation, thinking on possible impacts on the organization, and a proper justification. Otherwise, the company might spend funds without getting the desired return on investments.

Financial and Budgetary Considerations

Preparation for making a strategic proposal should start with examining the financial and budgetary considerations of the project. At this stage, it is necessary to define corporate financial statements, which would serve as a ground for a proposal, and predict its possible impact on the organization’s performance and financial health. In addition, it is vital to comprehend an approximate budget for the proposal’s implementation. Overall, this stage shapes the basic framework of the proposal and determines whether it has a reliable foundation.

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Financial Statements

In the case of UnitedHealth Group, two key financial statements will be used to obtain the necessary information. Firstly, Form 10-K will provide the annual data on purchases and key financial indicators in the 2018-2020 span. The knowledge about past results will serve as a reliable starting point for making a strategic proposal for the future. For instance, Form 10-K allows to highlights a pattern of UnitedHealth Group spending slightly above $2 billion on purchasing property, equipment and capitalized software yearly (UnitedHealth Group, 2021a). As such, the proposal on modern equipment purchases receives a solid reference point.

Secondly, Form 10-Q presents the changes in the relevant financial indicators, which is helpful for understanding the current dynamics. For example, by June 30, 2021, UnitedHealth Group purchased property, equipment, and capitalized software for $1,130 billion, which is $210 million more compared to June 30, 2020 (UnitedHealth Group, 2021b). Therefore, estimating the plausible expenditures on this type of asset for the entire 2021 fiscal year is possible.

Proposal Impact

The proposal to purchase more modern healthcare equipment will likely cause several impacts on the UnitedHealth Group’s financial statement. Most importantly, financial indicators related to costs, such as purchases and operating costs, will increase. In addition, net earnings will decrease initially due to the necessary investments into new equipment. On the other hand, purchased equipment will count towards the organization’s assets. In addition, the proposal might increase net earnings in the following fiscal years since the quality of healthcare services and customer retention rates will likely improve. Overall, the proposal should positively impact the company’s financial statements.

Fixed Budget Versus Flexed Budget

Judging from the available data on UnitedHealth Group’s expenditures, one can confidently state that this organization allocates a fixed budget on equipment, property, and software purchases. For instance, the company spent $2,063 billion in 2018, $2,071 in 2019, and $2,051 in 2020 (UnitedHealth Group, 2021a). One can notice that costs reliably fluctuate around the $2 billion mark. Such a form of budget allocation would make the proposal implementation more difficult since it would lead to a significant increase in expenditures. On the contrary, flexed budget would leave more space for maneuver, making the proposal easier for implementation.

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Proposal Justification

A business proposal must have a reliable foundation in the shape of the relevant financial statements. However, this information is not sufficient since a proposal requires justification, and a presentation of positive results that it will produce. Senior-level management needs to be convinced that a proposal will eventually result in profits, especially if it requires significant initial investments. Therefore, one should select and calculate financial ratios, which would provide an insight into the practical introduction of the proposal. The calculated ratios would also show what benchmarks should be met at the various stages of the proposal’s implementation.

Ratio Selection

A proposal to purchase modern equipment can be supported by several financial ratios. First, one can calculate the Return on Investment (ROI) ratio. This ratio represents a percent of return on the initial investment over time (Kim, 2018). In other words, it shows how quickly purchased equipment will make its worth and start generating profit. Secondly, the Internal Rate of Return (IRR) ratio will assist in measuring the profitability of potential investment (Kim, 2018). Overall, calculating these ratios will allow determining an approximate time in which investment in new medical equipment will become profitable and evaluate its eventual returns.

Ratio Results

Unfortunately, UnitedHealth Group does not separate costs of equipment purchases from the funds spent on buildings and capitalized software. UnitedHealth Group’s financial managers probably have exact numbers at their disposal; however, in this case, one has to make assumptions without separate data on equipment purchases. By June 30, 2021, the company spent $1,130 billion on equipment, property, and software (UnitedHealth Group, 2021b). One can assume that total expenditures on these assets might reach about $2,3 billion by the end of the 2021 fiscal year.

For example, the proposal on equipment upgrades presumes a 10% increase in equipment purchase costs. Assuming that equipment purchases would make one-third of total expenditures, or approximately $760 million, one might count this investment’s theoretical ROI and IRR. According to the UnitedHealth Group (2021a), the useful lifetime for equipment ranges from 3 to 10 years. If one takes an equipment lifetime of seven years and assumes that it generates $17 million annual net profit, starting from the second year of operation, that would make an ROI of approximately 34,21%. The exact ROI calculation formula would look like the following:

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Formula

This ROI level would be satisfactory for such a large organization as UnitedHealth Group. According to Masters et al. (2017), nationwide healthcare organizations showed a median ROI of 27,2%. However, the IRR level in the scenario with a $17 million increase of annual net earnings would only be 9%, which is less than the 11,5% benchmark of historical average stock market return (Kim, 2018). Therefore, it is imperative to obtain the data and calculate financial ratios on particular equipment types. UnitedHealth Group does not provide financial indicators for equipment purchases exclusively, so it is only possible to make a general proposal and identify satisfactory ROI and IRR levels.

Short- and Long-Term Impact

The short-term impact of the proposal on purchasing modern equipment would manifest in possible financial burden from the leases or direct spending. According to Eldenburg (2017), this impact can be mitigated with operating loans and rentals. This measure would help in the circumstances of the budget fixed around the $2 billion mark. The long-term impacts of the proposal are improved quality of services, increased customer retention rates, and, consequently, increased net earnings. However, the positive impacts depend significantly on a particular equipment type and management’s willingness to make the budget more flexed.

Closing Statement

In conclusion, it is necessary to examine the value added to the organization by the strategic proposal and provide its overall justification. Modern healthcare sets high standards of efficiency, and UnitedHealth Group strives to meet them in order to provide patients with optimized and technologically advanced care. As such, the proposal’s potential effectiveness depends on financial feasibility and the positive contribution to the brand image.

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Added Value

From the added value perspective, the proposal to purchase modern equipment correlates with UnitedHealth Group’s declared mission. The company seeks to modernize healthcare, and upgrading its equipment seems an important step in that direction and a competitive advantage. If UnitedHealth Group follows the proposal, it will further reinforce its image of a progressive organization, making the best healthcare technologies available to the people. In this regard, UnitedHealth Group’s brand would benefit from the proposal’s implementation.

Justification of Proposal

Analysis of financial statements and ratios creates several conditions for the proposal’s feasibility. The biggest obstacle lies in the lack of financial data exclusively tied to expenditures on equipment. As a result, implementation of the proposal in practice would require extra information about equipment. Despite this issue, ratio calculation and financial statement analysis provided several valuable insights. Firstly, ratios such as ROI must be counted separately for each type of equipment. Secondly, equipment should not be purchased or upgraded without a justified practical need. Finally, purchased equipment must either have long useful life or potential for a quick return on investments.

References

Eldenburg, L. G., Krishnan, H. A., & Krishnan, R. (2017). Management accounting and control in the hospital industry: A review. Journal of Governmental & Nonprofit Accounting, 6(1), 52-91. Web.

Kim, D.S. (2018). How to decide on purchasing new medical equipment. OBG Management, 30(5), 34–39.

Masters, R., Anwar, E., Collins, B., Cookson, R., & Capewell, S. (2017). Return on investment of public health interventions: a systematic review. Journal of Epidemiology and Community Health, 71(8), 827-834. Web.

UnitedHealth Group. (2021a). Form 10-K. Web.

UnitedHealth Group. (2021b). Form 10-Q. Web.

UnitedHealth Group. (n.d.) Solutions to make health care work better. Web.

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