Good morning. I will be your conference operator today. Welcome to the UnitedHealth Group Conference Call. A brief question and answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded.
Here are 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. Certain information presented on this call is contained in the press release we issued this morning and in our Form 8 ks dated November 19, 2015, which may be accessed from the Investors page of the company's website. Would now like to turn the conference over to the Chief Executive Officer of UnitedHealth Group, Mr. Stephen Hemsley. Please go ahead.
Good morning and thank you for joining us. After some brief prepared remarks, we will take a few questions this morning and expect to have you finished before the market opens. Earlier today, we revised our full year 2015 outlook to approximately $6 per share, reflecting a $425,000,000 reduction in operating earnings or approximately $0.26 per share, including 2 $75,000,000 related to the advance recognition of 2016 losses. The operating earnings reduction is centered in our deteriorating experience with individual exchange compliant products, with a minor portion set aside for expected startup and implementation losses in a single new Medicaid contract. As you are aware, we avoided the introductory year of the public exchange, entering the market in a measured fashion in its 2nd year.
We saw it as a market with potential growth, but with acknowledged reservations as to whether that market would have balanced participation, effective controls over participants moving in and out of coverage as healthcare needs emerged, and whether exchanges would be regulated in ways that prioritize sustainable underwriting to ultimately reflect the true cost of coverage for the population served. As 2015 has played out, the exchange represented the key source of increasing pressure on our overall care ratio. In our view, in recent weeks, market performance expectations for exchange products have further declined. We have identified higher levels of individuals coming in and out of the exchange system to use medical services, lower expectations for new growth and overall future participation, declining performance in and accelerating failures of the sponsored health cooperatives and our own emerging claims experience, which is worsening as the year end nears. The combination of these factors suggest the overall exchange market profile is more negative than we had planned, with new market enrollment growth developing more slowly.
These indicators point to an environment These indicators point to an environment
that is declining and likely
to continue in that direction into next year. And we see no data pointing toward improvement, which is why we have taken this proactive step. At this time last year, we expected the exchange to produce essentially neutral results for the year when we set 20 15 guidance at $6.25 per share. Today, total operating losses we are expecting to recognize in 2015, including all components, is just above $700,000,000 or $0.45 per share, including the $275,000,000 advance recognition of losses for the 20 16 policy year. Additionally, approximately $200,000,000 to $225,000,000 in losses for this product category are not eligible for advance recognition and we have incorporated them into the 2016 earnings outlook we previewed today.
At roughly $0.13 to $0.15 per share. We have taken several immediate actions to reduce our exposure in this segment, including suspending marketing and reducing or eliminating commissions in most markets. Product eliminations and pricing actions taken last May have positioned our products as higher priced offerings in most markets. Collectively, these actions should temper any growth in 2016. We are evaluating the viability of the insurance exchange product category for us and will determine during the first half of twenty sixteen the extent to which we can continue to serve the public exchange markets in 2017.
Participation in exchanges is not essential to our overall benefit offerings, but we remain hopeful these markets will eventually evolve into a viable coverage category for Americans. Our company remains a strong supporter of sustainable efforts to ensure access to affordable quality care for all Americans. We have been advancing publicly on this issue, advocating publicly on this issue for more than 20 years now and is one of the first to focus on managed Medicaid and Medicare. The remaining minor piece of the 4th quarter reserve, roughly $75,000,000 relates to implementation and startup losses in a new state managed Medicaid transition, which will be effective January 1. We believe this is a good investment and that the state will be a solid, durable and long term component of our strong Medicaid portfolio.
Although we are disappointed with these developments and our own performance in these exchange products, we are pleased with the continued advances in performance and the strong outlook across the rest of our diversified healthcare benefits and services businesses. Looking into 20 16, UnitedHealthcare has seen strong market response to its individual Medicare Advantage offerings, expecting stronger growth in this category than we had at the start of this year. Our Medicare and Medicaid businesses continue to grow with leading market positions, serving the special needs of our nation's most vulnerable citizens. All of our remaining commercial product lines and businesses are performing very well. And Optum's businesses continue to grow at an exceptionally strong double digit percentage pace.
Our initial outlook for 2016 has net earnings of $7.10 to $7.30 per share. We will provide you with additional details regarding our 2016 expectations at our upcoming investor conference on December 1. We'll now take a few questions just on these specific topics of the morning. Thank you.
The floor is now open for questions. And we'll take our first question from Josh Raskin with Barclays.
Hi, thanks. Good morning. So I guess my main question really just centers around what the actual assumptions are in 'sixteen and then what you do for 'seventeen. So I guess simply, how long are you willing to lose money in exchanges and what do you need to see happen to continue to operate in these exchanges for 2017? And I guess, sorry to cheat, but what would that when is the date you've got to decide?
Is that rolled by different states next summer or how should we think about that?
Well, I think that as we indicated, we would like to participate and was hopeful that this would be a market that would establish itself in a more sustainable way. It appears that it will be at minimum more it will not evolve as quickly as we had hoped. We will make determinations on a market by market basis as we go through the early part of 2016. We have roughly until the middle of the year, I think, to make real determinations with respect to that. I would emphasize that we have pulled back on 2016 already.
We have pulled back significantly in terms of marketing, access, commissions, basically a full range of tactics to minimize our growth into 2016 so that we can really assess whether we're going to have continued participation and where into 2017. So it will be basically the work of the first half of the year.
Are you willing to lose money again in 2017, Steve?
No, we cannot sustain these losses. We can't really subsidize a market place that doesn't appear at the moment to be sustaining itself.
Okay. So just to clarify, dollars 0.13 to $0.15 of loss in 2016 is still in the numbers and you'd assume at worst that 0 in 2017?
That's right.
Okay. Thanks.
Our next question comes from Andy Schenker with Morgan Stanley.
Thanks. Good morning. So just hoping to understand a little bit more about what happened since you provided guidance last month. I mean, was this directed in certain metal tiers, certain geographies? I mean, how broad based was this?
Was there anything unique? Was this high cost, for instance, surgeries, maybe related to deductibles? A little more color on what really got worse on the utilization? Thank you.
Well, I don't think it
is just one thing. And I think you can you could fault us for you can fault us for trying too hard to make this work or to try to hang in too long. But basically, when we really assessed kind of the spectrum of data points, the nature of those that were coming in and out of the exchange market within our book, the lack of new enrollment growth less than we had planned for 'sixteen and I think that basically is an industry wide proposition. The our own view that utilization was growing with this population within our domain. We concluded that this is an area that we had sat out the 1st year.
Perhaps we should have sat out the 2nd year, perhaps the 3rd. It might take longer for this to evolve. And so what we decided to do is give recognition to that. Our real orientation is to make sure that we have capped this exposure for 2016, that we really have addressed this and that we have de risked 2016 in terms of taking these steps.
Okay. Maybe just to follow-up a little bit. So for 2015 though appreciating that most of the charges related to 2016 both the stuff you could pull forward to 2015 and the continued dollars in 2016. But for 2015 alone, you had about $75,000,000 right of pressure related to the exchanges, which is clearly new since you reported earnings last quarter. So I mean by my math, that's almost 16% of your individual MLR, granted that's our own number.
So clearly, it still got worse within the quarter here. Is that just, as you said, Healthy people dropping off? Any more color on just what drove what accelerated most recently? Thank you.
Yes, I think there's a number of factors. Part of it is that we saw no indication of anything actually improving, that the continued use of services was not abating. It was increasing modestly. So that the trends were not going to improve. And we have seen in terms of the course of the year, a meaningful portion of membership move out and new membership move in during outside the enrollment period.
And those have been strong users of services and I think that that has been as well a principal driver of that pressure. So I think that's really kind of the core of it.
Thank you.
The next question is from A. J. Rice with UBS.
Thanks. Hello, everybody. Just probably to follow-up on that one and partly a little different angle on it. You're saying people coming in. Are you saying that people are figuring out some way to use the special enrollment to come in and that's meaningful enough to have an impact?
And then also in the prepared remarks, you mentioned the co op closures. How does that is that a positive? Is it a negative? How does that actually impact your performance?
Sure. I'll have Dan touch a little bit about some of the mobility within the exchange category. But basically, the co ops just an indication as to the kind of the sustainability of the marketplace is really what Warrut had was in that comment. Dan?
Sure. Good morning, A. J. It's Dan Schumacher. With regard to those that are joining us after the open enrollment period, so as we looked at the end of the Q3, we had a little over 20 percent of our enrollment base where folks that had joined us after open enrollment.
And through the end of the year, we expect that to be about 30% of our enrollment base. And what we see in terms of use underneath it is about a 20% or a little bit more delta between the cost profile, risk profile and the underlying consumption. So the folks that join after the open enrollment period are consuming at a much higher rate than those that join during the open enrollment period.
Okay. All right.
Thanks a lot.
Next question, please.
We'll go next to Cheryl Skolnick with Mizuho.
Thank you very much. And most of the meeting questions have been answered, so I won't trouble you to repeat yourself. But as you go forward in thinking about both the Medicaid business, which you mentioned here as having presumably enough of a thin margin to take some incremental to take some advanced loss there, as well as the exchange business. Should we be at all concerned that some of the pressures that we're seeing with the inability in essence to fund a sustainable coverage program with the exchanges is just being exacerbated in the Medicaid market as well now. Is there something afoot there that we should be concerned about at all?
Or is this simply the way new contracts in Medicaid are starting in this day and age? And as you move into the contract, do you hope to be able to get a little bit more of a cushion in your margin?
So I think that's a good question. The markets, I think, are very distinct. The Medicaid market is well established. It is a group based marketplace. It has embraced deeply kind of managed care capabilities.
The state that we are referring to is transitioning to a managed care approach and a very good and substantial marketplace. And this is the investment required to basically establish that in that marketplace. So we're actually a positive for us. As we went through this effort, wanted to make sure we were thorough with respect to making sure we addressed all matters related to 16. We knew that this implementation and startup would flow into that.
So that's really the purpose of addressing it. It is we are very positive on the managed Medicaid marketplace and on this new proposition. When you take a look at the relationships we establish in states, they are long and durable in nature and very much can justify these kinds of investments.
Is there some sort of return calculation that we can do X number of lives for Y amount of investments that can sort of guide us to understand this? Because the reason I ask here is because there have been instances with all due respect of Medicaid not paying their way and you having to exit some contracts that you've had for long term. So that's why I want to understand where that hurdle rate is on the Medicaid side that makes you willing to start a partnership, but maybe not willing to stay in a partnership a little later on?
Yes, actually, I think that's a fair point. We have actually had to do relatively few exits. We have had to threaten a few, but have not necessarily had to follow through in them. There are markets that have proven themselves to kind of not fund in a sustainable way. And in those markets, we really won't engage, but we don't believe that this will be the case.
This is really more the cost of entry into what we think will be a viable new market. Austin, you want to comment? Sure. As we've talked about before, we take a very proactive and engaged transparent approach with all of our state partners. We've got a very strong portfolio and a history of decade long relationships that produce appropriate margins.
That said, as you know, and Steve mentioned, in those rare cases where we're not able to create a relationship that's devoted to sustainable programs, we'll make those tough decisions and exits. We believe that this contract will be a long term performer for us and right now are very pleased to have been selected in several states and are heads down implementing those programs. As you know, our target margin here is 3% to 5% and we have been operating comfortably within that range.
Excellent. Thank you. This is a very smart thing for you to do and I certainly appreciate all the Hi,
thanks.
This is actually Steve Baxter on for Kevin.
Hi, thanks. This is actually Steve Baxter on for Kevin. Can you give us an update on the size of your off exchange individual business and what the performance of that business looks like at this time?
Sure, Dan. Sure. Good morning. Our total exchange compliant enrollment base is about 700,000 lives. And as we mentioned in the last quarter, we've got about 540,000 on the exchange.
Is there any meaningful difference in the performance of those lots?
I would tell you that there is both of them are challenged and they're both encompassed in the numbers and outlook that we've put forward. But there is some distinct difference with regard to the prior question around those folks that are coming into the plan outside of the open enrollment period, we don't see that same dynamic in the off exchange block.
Okay, thanks. And I guess is, do you still have a meaningful block of grandfathered individual lives in pre ACA compliant plants?
Yes, we do.
Can you update us on the size and performance of that block?
Sure. The grandfather block is around 500,000 lives and is performing reasonably well.
Okay. Thank you.
Thank you. Next question please.
Next we'll go to Christine Arnold with Cowen.
Hi. Are you incorporating any assessments with respect to the failed co ops, I. E, the co ops go under, the others have to pay to pay out the providers? And how confident are you in really what the run rate is since you still don't have November, December claims? And if things are deteriorating, how are you estimating kind of what the full year looks like?
What's the risk that this just isn't enough from a run rate perspective?
So as you can imagine that in taking this step, we have looked hard to make sure that we have been thorough with respect to this. And as indicated, there is only there are limitations as to how far you can go in terms of giving early recognition to losses in insurance products. So we have we believe we've been very thorough on that basis. And then as we indicated, we think that there is $200,000,000 to $225,000,000 of exposure going into 2016, which we have considered fully in our guidance this morning at $7.10 to $7.30 per share. Dan, any other comments on?
I think that we have been conservative and giving recognition to the cost trends and continued direction of those trends.
And what about the co op assessments? Are there any contemplated?
No, we have not incorporated assessments in terms of inheriting anything like that.
Dan? No, Christine, we have not assumed any of that. And typically, when you look at those that were in positions where they were having to pay into the risk adjustment pool, there has been holdbacks by CMS against reinsurance recoveries. So that's one measure of protection against that. But no, we've not assumed that.
So the insurance commissioners aren't saying someone has to pay the providers, it's going to be the other insurers, it's going to be the providers on the hook in the case that these guys aren't adequately reserved?
Actually, if you look at the largest co op failure, it's in a state that doesn't have a guarantee association. So to your point, yes, that's the way that would roll out.
Okay, thanks. Next question please.
Next, we'll go to Ana Gupte with Leerink Partners.
Yes, thanks. Good morning. Bill, these are the 5 of you even without the Blues and if you add on Centene and Molina Healthman, whatever, have about over 50% of the current market, I think. And then looking at all these co ops and others withdrawing from the market next year, it would be potentially slightly even more. What are CMS or what are HHS saying when you when they see something like this, I'm imagining you're having conversations with them as is the Blue Association, will they make you whole on the 3Rs or do something about the hardship exemptions and so on that's causing all this adverse selection or increased subsidies?
Well, you are certainly pointing to some of the issues in the marketplace, but we really cannot comment on conversations nor am I suggesting that there are conversations along those lines. So I really don't think that that is in the domain of things that we can really comment on this morning.
Okay. Then just on the 2016, you say that it's 425, dollars to $275 is related to $16,000,000 And I think some of them already covered some of this. But incrementally speaking with this $0.25 guide down, how much of it is because you saw last night enrollment data, which continues to look weak even though it's early days versus more claims for your 15 book of business and or attrition and nonpayment of premiums in the 4th quarter?
Well, I think it's a combination of all those factors, Anna. But we had seen indications and there had been signals of indications of lower levels of new enrollment much earlier than last night. Last night just reaffirmed that direction. So it's just another data point, but we had picked that up kind of within the last 30 days.
And so it looks like 2016, all the guide down and whatever you have right now, you've incorporated everything into that $0.25 right? You don't expect anything worse for 'sixteen?
We have endeavored to be very thorough. And as I indicated, we have addressed the $275,000,000 in pulling those forward into the current year. And we are including the $200,000,000 to $225,000,000 in our guidance in the next year. So we think that we have really our goal here was to cap this and de risk 2016.
Excellent. Thank you so much.
Next, we'll go to Matthew Borsch with Goldman Sachs.
Yes. Hi. I'm sorry if this is territory others have covered. I joined the call late. But how much of the what is the 7 is it the range of $710,000,000 to $730,000,000 for next year?
What does that exclude? What losses on anticipated losses on next year are you excluding from the guidance?
Well, if I understand the question, Matthew, we are pulling forward $275,000,000 of losses from 2016 into the Q4. And as I indicated, we are anticipating further losses in the exchange of $200,000,000 to $225,000,000 at this point in time. And so and that is fully included in our guidance. So 275 will be recognized in the Q4 and we believe that the 200 to 225 will run its course over next year and is in our guidance of $7.10 to $7.30 If you stand back and look at this on a run rate basis, if we had not participated in the exchanges at all, our per share earnings would have been above $6.40 per share this year if we had just stand stood out of the exchange and 2016 would be higher than the guidance that we have offered this morning. So
that's great, but obviously that's not
run rate business underneath and we are addressing the exchange issue.
Now is that GAAP treatment though that you're doing that, is that on an adjusted basis? I guess I'm just trying to understand. I can't think of the last time that you guys have taken losses from a future year and then put out your initial range and say, here's the initial range of excluding the bad stuff. That's not usually what you do.
Well, I think we're being very deliberate about telling you about all of the bad stuff. That portion that we pulled into the Q4, so we will give full recognition to that. And we are telling you how much is in next year with respect to what we can expect continued losses to be. I don't know what more we could actually tell you or to be more direct and explicit about the challenges that we're seeing in the exchange and the pieces that we're giving recognition to and the period.
No, I appreciate that. You're giving us the numbers. But you're and again, I'm not clear if this is on a GAAP basis, but you're pointing to that 7.10 to 7.30
really out Yes, this is Matthew, this is all on a GAAP basis. Everything we're talking about is on a GAAP basis.
Okay. Now let me ask you on the amount that you're taking in this year, the $275,000,000 If it turns out that that's overly conservative, does that become a benefit for 2016 earnings?
If that were to be overly conservative, that would come back in and we will be very specifically accountable to that. So we recognize the pieces and we recognize as we give these pieces out that we're accountable to you for that.
And I guess last question here is you're saying that your sense is you will not accept losses on this business in 2017. I mean that to me would have I realize you're not going getting into your conversations with CMS, but that signals right there that you're taking a hard line on the basis with which you will participate for what will be next year when we're in next year?
That is correct.
Okay. Thank you.
Next, we'll go to Peter Costa with Wells Fargo.
Yes. Thanks. Just a couple of specific questions. For 2016, what's the membership you're expecting that would be tied to the PDR, the $275,000,000 PDR? And then what's the membership tied to the $100,000,000 to $225,000,000 in losses for next year?
And then are you including any risk quarter receivables?
Yes. Dan, you want to touch on membership?
Sure. Good morning, Peter. It's Dan. On the enrollment base, we would expect it to be reasonably comparable in 2016 to our enrollment base in 2015. And with regard to and I guess one point to your question on the PDR specifically, obviously we cannot provide for enrollees that sign up post oneone in a twelvethirty one accrual.
So that's one point of clarification on it. And then with regard to the corridor, we are not assuming any corridor recovery.
So if there was a corridor payment for 2016, you would actually get some of this money back. Is that accurate?
If we were in a position to receive a corridor and it was adequately funded, it would be an improvement.
And what about the 2014 corridor and 2015 corridor payments? Are there any that are impacting the numbers for those 2?
We are not assuming any corridor recovery for 2015 performance or 2016 performance and 2014 for us given our very limited footprint was not relevant.
Perfect. Thank you very much.
We'll take 2 more questions, please.
We'll go next to Sean Whelan with Piper Jaffray.
Hi, thanks. So, can you just explain, but a little finer point, you said that those that joined that joined late are consuming at a much higher rate. Do you have any specifics on why that is the case?
Dan, do
you want to comment? Sure. Sean, I'd tell you that there in terms of the composition of their use, there isn't any thing I would highlight between those that join in open enrollment and those that join post open enrollment. I would just tell you that in aggregate, they consume at a rate that's about 20% higher. And as I mentioned in our off exchange enrollment base, where they have the same open enrollment period and similar qualification criteria post open enrollment, we do
not have that same dynamic, in part
due to some of the eligibility verification processes that we undertake.
Okay. Thank you.
One more question, please.
That question will come from Frank Morgan with RBC Capital.
Good morning. On that same thought, would you call this the fundamental issue as to why you're becoming very reluctant to continue your participation in Obamacare? And do you think there's anything else structurally that you would like to see changed as it relates to increasing your likelihood of participating? Thanks.
That come back down to the same set of elements that we discussed as kind of we opened our formal commentary that the marketplace kind of be an open, balanced and robust marketplace, so that there would be a balanced risk pool, that there would be adequate control over entry and access to the marketplace. That basically that be a sustainable marketplace for the population that it serves. And that continues to be our hope. But the experience we've had to date would not suggest that. So I think that really comes down to how that marketplace forms over time.
And then as we see those markets actually being sustainable in that regard to the earlier question, we would be open to participating in them. But our experience to date has given rise to these and we cannot sustain those kinds of costs and losses. And so we will evaluate the marketplace as it goes. So it comes down to those same elements that I've mentioned before.
But would this be the biggest issue? Would you say this issue about coming in after open enrollment?
I can't and don't want to offer a speculation on sizing. It clearly is an element in the mix and it clearly is a driver of higher medical services uses and costs and it does put pressure on the sustainability of this category. It is not the only thing though because you do need good growth in a robust pool. You do need some velocity through that marketplace. So I wouldn't offer it as the only thing, but it clearly is a factor.
Okay. Thank you.
Thank you. And thank you all for joining this morning. And we hoped and endeavored to try to be thorough and transparent in this discussion, address the issues that we're seeing and we look forward to talking about 2016 and the opportunities for our businesses, the vast majority of which we're actually talking about a relatively small element of our business. We will be talking about all the potential and the opportunities of a dramatic growing and vibrant set of businesses well deployed across the healthcare landscape at our investor conference on December 1. And we certainly will also address further questions you may have on this, but we've tried to really address them and our folks will be available through the course of the day to address your And we thank you for joining us this morning.
Okay.
Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation. You may now disconnect. Have a great day.