UnitedHealth Group Third Quarter 2015 Teleconference October 15, 2015 Good morning, I will be your conference facilitator today. Welcome to the UnitedHealth Group Third Quarter 2015 Earnings Conference Call. A question and answer session will follow UnitedHealth Group s prepared remarks. As a reminder, this call is being recorded. Here is some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. Information presented on this call is contained in the Earnings Release we issued this morning and in our Form 8-K dated October 15, 2015, which may be accessed from the Investors page of the Company s website. I would now like to turn the conference over to the chief executive officer of UnitedHealth Group, Stephen Hemsley. Stephen Hemsley: Good morning and thank you for joining us to review UnitedHealth Group s third quarter results. Our business continues to grow, as we develop and respond to large and emerging market opportunities across both the health care benefits and services sectors. Health care markets worldwide continue to evolve, with nations and market participants of all types seeking to build better health care systems that are more informed and modern, lower cost, simpler and more responsive to consumers. Organizations throughout health care are searching for ways to improve performance by leveraging data and information to more effectively deliver quality care that is measurable, with greater precision and consistency, in response to ever-increasing pressures around cost, 1
access and transparency. We have consciously positioned UnitedHealthcare, Optum and UnitedHealth Group to deliver practical innovation and significant value in this environment. UnitedHealth Group s third quarter revenues grew 26.6 percent year-over-year to $41.5 billion, including strong 10 percent organic revenue growth across our businesses. Consolidated net earnings of $1.65 per share were in line with our expectations, as was the net earnings margin, which decreased by just over 1 percent year-over-year, reflecting the greater mix of pharmacy care services as well as early stage, lower margin individual exchange business, lower levels of reserve development and accelerated investments in improving Medicare Stars quality, principally closing gaps in care for the seniors we serve. Year-to-date we have grown net earnings per share by 14 percent on revenue growth of 17 percent. Our return on equity of 19 percent reflects a balanced use of capital and organic initiatives to build our business. Quarter end days-claims-payable increased two days sequentially and one day year-over-year, and cash flows from operations continue to be strong, at more than 170 percent of net income this quarter. Year to date, cash flows of $6.2 billion have grown by 11 percent, and represent a strong 135 percent of net income for the nine-month period. I will ask Larry Renfro to provide a review of Optum, and then Dave Wichmann will cover UnitedHealthcare and some UnitedHealth Group enterprise comments. Larry Renfro: Thanks, Steve. Optum continues to innovate to address rising market needs, particularly those of larger, more sophisticated organizations which have complex health 2
care service, delivery and management challenges. Our businesses are producing strong, sustainable growth across the board. Optum s revenues of $19.3 billion grew 61 percent year-over-year this quarter. Our results include Catamaran within OptumRx s results for the first time and reflect exceptional overall organic revenue growth of 15 percent. OptumHealth and OptumInsight together grew revenues by more than $1 billion or 25 percent year-overyear, to more than $5 billion this quarter. Third quarter operating margin of 5.9 percent reflects the increased mix of pharmacy care services revenues, as well as integration and intangible amortization costs related to Catamaran. Both OptumHealth and OptumInsight delivered double digit percentage operating margins in the quarter. We continue to focus on the opportunities to dramatically elevate value for customers in five large growth markets: clinical care, pharmacy care services, information and technology solutions, government services and international. Our One Optum approach means we build strong, strategic and senior enterprise-level relationships that transcend individual product categories and point solutions. We start by listening closely to our clients so we understand the issues from their perspective. We then bring deep experience, creativity, strategic partnerships and our own differentiated capabilities in health care, combined with responsive and practical operational solutions. This can lead to working sessions, which often lead to pipeline, backlog, and revenues and earnings. Optum360 is a good case in point. It has grown to 7,500 employees serving 1,600 hospitals, and is helping manage more than $50 billion of their billings. Just last week, customers surveyed by the Black Book a leading research organization ranked Optum360 offerings as the best in the three key product categories for the sector. And 3
we are still in the early stages as hospitals and health systems shift to professionally managed revenue approaches. Domestically and in other nations, we are in discussions with high profile health care organizations regarding our wide range of technology and information-enabled services. We are exploring significant opportunities to serve the health care needs of U.S. federal government programs, and talking with prominent health care organizations about innovative technology infrastructure and application services and a comprehensive suite of technology-enabled payer services. Any one or more of these has potential to develop into a multi-year, multi-billion dollar strategic relationship. Across Optum, this type of proactive approach is driving positive results. Third quarter backlog for OptumInsight exceeds $10 billion in value, and grew 34 percent year-over-year on an external basis. Our pipeline is continuing to grow at an exceptional rate, as well. The median deal size for OptumHealth has doubled over the past three years. We are delivering more care to more people through more payers at OptumCare. We now deliver care to more than 7 million people annually through our OptumCare businesses. Market interest in OptumRx continues to grow in response to the value we can drive through more integrated downstream drug benefit and care management efforts, especially around the growing specialty pharmaceutical segment. The U.S. Department of Health and Human Services has authorized agencies under its purview to conduct innovative health care research with Optum Labs, using Optum Labs big data resources. These indicators should help give you a sense of both our continuing progress and the meaningful opportunities we are developing. We will continue to execute on the details for our clients, with a focus on quality and service, and further build our growing reputation for being the trusted partner that gets the job done. We are optimistic about the prospects for Optum in 2016, 2017 and beyond. 4
Now let me turn it over to Dave. Dave Wichmann: Thank you, Larry. UnitedHealthcare continues to differentiate its products on the foundations of distinctive quality, service, innovation and value. As a result, UnitedHealthcare has grown domestically to serve nearly 300,000 more people in the third quarter, 1.5 million more people this year and nearly 1.7 million more people over the past 12 months. We enter 2016 with even more distinctive products, capabilities and relationships, and we expect to continue to deliver impressive levels of growth next year as well. UnitedHealthcare s third quarter revenues of $32.8 billion grew year-over-year by $2.8 billion or 9.2 percent all organic. The UnitedHealthcare operating margin of 5.7 percent decreased, as expected, declining just over 1 percent year-over-year, due to lower levels of reserve development, solid growth in early stage, lower margin public insurance exchange products and increased investments in Medicare Stars quality. We continue to expect a full year consolidated care ratio of 80.8 percent, plus or minus 50 basis points, likely above the midpoint of that range, based on our year-to-date experience. The annual care ratio is being modestly affected by the performance of our new public exchange benefit programs, which now serve nearly 550,000 people. Like others, we observed market-wide data this past spring that suggested the risk pool served by public exchanges would require more medical services than original expectations. Rather than wait for our own experience with our new members to fully develop, we increased rates and repositioned certain products market by market for 2016, and we expect improved performance next year. We will expand to 11 new markets in 2016 5
and we continue to expect exchanges to develop and mature over time into a strong, viable growth market for us. We have accelerated the up-take of our medical care quality programs to achieve Star ratings beyond the strongly improved levels CMS recently published for payment year 2017. Our Medicare Stars improvement does come with a related increase in medical costs. We are confident we have implemented the necessary steps to achieve our goal of 80 percent or more of our members in four star or greater programs by payment year 2018. Star quality improvements will strengthen our reimbursement rates in 2016, 2017 and 2018, enrich our Medicare Advantage programs benefit offerings, and further our growth and financial position. Our 2015 commercial medical cost trend outlook continues to be biased toward the lower portion of our 5 ½ percent to 6 ½ percent full year forecast. In total, UnitedHealthcare has maintained a nearly 6 percent operating margin year-todate in 2015, identical to the year-to-date margin at this point in 2014. Driven by yearto-date organic revenue growth of more than $9 billion, UnitedHealthcare has advanced earnings from operations by $540 million, which is a growth rate of more than 10 percent. All three of our benefits businesses are producing strong results. Let s turn to review a couple of examples that illustrate how we work locally and use technology to serve the two most important participants in health care the doctor and the patient. We are increasingly aligned with physicians and hospitals, and we continue on our course to deliver $65 billion or more in care annually by 2018 through valuebased care contracts. Today these programs touch as many as 13 million of our consumers, delivered in part through more than 650 accountable care arrangements. This includes growth of more than 160 new accountable care arrangements so far this year alone. In many instances, these care providers 6
and UnitedHealthcare bring in Optum to help them manage population risk and improve operational performance on a more systematic, organization-wide basis. Larry has given you a feel for how this trend positively affects demand for Optum s services. Let me give you a few more examples. Together with Optum, we are also supporting physicians operational needs with Link, which we have discussed before. Link is a cloud-based digital platform that provides secure workspace and connectivity between physician offices and health plans, enabling them to efficiently communicate and transact business. By year-end 2015, Link will be serving more than 600,000 physicians nationwide. We offer them connectivity to 75 distinct dedicated applications relevant to their operations. We continue to grow both the installed customer base and the portfolio of applications and capabilities. Our goal is to fully serve physicians practices with core transactions and information exchange, as well as scheduling, referral processes, transparency and other services. On the patient side with Optum, we increasingly focus on the local community and deliver care and services in peoples homes. You have heard about our HouseCalls program in Medicare, and we have begun using it in targeted commercial and Medicaid patient situations, as well. The more than 1 million HouseCalls our physicians and nurse practitioners will execute this year increases our medical spend up front. They encourage people to get annual care visits with their physicians, appropriate vaccinations, and so on. The benefits are substantial we have more satisfied consumers, with better health care quality, and we protect them from potentially higher medical costs down the road. Consumer satisfaction and retention are significantly strengthened by the HouseCalls experience. At the community level, we have hundreds of community health workers on the ground, helping address the root causes of health care issues for Medicaid members with complex medical conditions. We meet with them in their homes 7
and help them access the health and social services they need to better manage their health. This includes addressing housing, employment, access to healthy food and nutrition, as well as transportation and other public support services. Again, UnitedHealthcare is improving quality and consumer satisfaction, while helping to reduce exposure to potentially higher costs from untreated or undertreated conditions. Our people are also on site in hospitals, helping with discharge and follow-up care planning; they are in physicians offices, helping address gaps in care and documenting Medicare quality compliance; and they are on the phone and on the web, treating every interaction as an opportunity to add value for the consumer by helping them understand the actions they need to take to improve their health. You can see the benefits of programs and approaches like these in our results. Growth in local commercial markets, where our efforts to be more local are having positive effects. Distinguished and on-going growth in service to large self-funded employers, who are among the most informed and discriminating in assessing service, quality, innovation and total value. Consistent Medicaid awards from states, which focus on elements of quality, service and total value in their evaluation process. In just the past two weeks we have been honored to be selected by the state of Michigan and the state of Texas for program expansions and we recently finalized our commitments to serve the state of Iowa, as a culmination of their award process. And our Medicare Stars quality is sharply higher for 2016 and 2017, thanks to our employees and the strong performance of the care providers who have worked collaboratively with us to better serve seniors. We believe UnitedHealthcare will continue to grow at a strong pace, profitably improving its market share as a direct result of the quality, consumer satisfaction and total value we deliver. 8
Before Steve sums up, let me touch on the outlook for UnitedHealth Group as a whole: Considering together both the positives and pressures of the first nine months of this year, we continue to expect our full year 2015 results will fall within the range of $6.25 to $6.35 per share, and we would remind you that range absorbs 10 cents per share for Catamaran and compares favorably with our original outlook of $6.00 to $6.25 per share. We continue to expect a further lift in the rate of earnings per share growth in 2016. The range of Street estimates for the next year is quite wide, and we expect to be within that range. But not surprisingly, we would begin in a more conservative posture or range, as we have in prior years. We will defer specific questions on 2016 financial performance to December 1, when we host our annual Investor Conference in New York. Steve...? Steve Hemsley: Thank you, Dave. Larry and Dave have given you some sense for why we continue to be optimistic about our potential to deliver value throughout the broad health care system, and to grow. You heard some of our touchstones in their comments: Relationships built around trust, collaboration and mutual respect for the challenges in delivering health care, improving it and making it simpler for the people involved. Innovation developing products and processes that truly help people solve real problems, and then embedding and driving these ideas to scale quickly to improve the overall system. 9
Quality measured by how consumers, physicians and other customers define it and feel it. Responsive and Compassionate Service which goes hand in hand with quality and defines peoples health care experience. Our aspiration is to serve others on their terms, not ours. Satisfaction and Value which together capture how well you bring all these elements together to help people in differentiated ways. We believe executing well on these elements, at scale with nearly 200,000 dedicated people pulling in the same direction will make a difference for those we serve, and drive distinctive, sustaining growth across our enterprise. Thank you for your interest. 10