Good morning. I will be your conference facilitator today. Welcome to the UnitedHealth Group fourth quarter and full year 2014 earnings conference call. A 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 and are under U.S. federal security 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 January 21st, 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.
Good morning. Thank you for joining us today. We enter 2015 with momentum from a strong 2014 finish and with more growth opportunities and fewer impediments than we've encountered over the last few years. We expect the strength of our performance capacities to become more visible in 2015 and even more so in 2016 and beyond, as we begin to perform more consistently to the full potential of this enterprise. In 2014, both top and bottom line results exceeded the upper range of our original forecasts for the year. 2014 revenues grew 6.5% to exceed $130 billion, and earnings grew to $5.70 per share, despite material and well-documented burdens from the ACA.
UnitedHealth Group's performance in 2014 was highlighted by diversified growth, strong operating and medical cost management, and continuing advances in service, innovation, and enabling technology, positioning UnitedHealth Group to better serve more people and better respond to the demands of our evolving healthcare system in the coming years. Cash flows from operations in 2014 exceeded $8 billion or 1.4 times net earnings, with fourth quarter cash flows more than $2.4 billion, a strong 1.6 times net earnings reflecting the core strength and quality of our business and earnings. In 2014, we raised our dividend by 34% to an annual rate of $1.50 per share. We repurchased $4 billion in UnitedHealth Group shares, and return on equity once again exceeded 17%. As we take a more detailed look at 2014 results, UnitedHealthcare's revenues grew 5.3% to $120 billion.
This past year, we experienced outstanding growth in Medicaid and better-than-expected performance across our Medicare portfolio, balanced off by challenges in the commercial and international markets as we entered the year. Beginning with Medicaid, organic growth of more than 2 million people over the last five years, including an exceptional 1 million new members in 2014, reflects a decade of strategic and operational decisions that have prepared us well to serve this ever-expanding population in the states that entrust us to administer these programs. The Medicaid market was the first created by and aligned to society's desire to expand care for the uninsured. We have tuned our medical management and consumer engagement techniques to address the needs and experiences of these consumers, leveraging the in-market personal care approach we use today with dedicated on-the-ground resources embedded within the communities we serve.
Our footprint in the Medicaid market continues to grow, now reaching states where nearly 60% of the Medicaid community reside. We combine a strong benefit value with deep trusting relationships serving the states and the people who rely on these programs and benefits. Today, our community and state business is well-balanced, serving people in more than 100 separate state programs, from children with young families to dually eligible citizens with the most complex medical conditions. We continue to steadily grow, serving Medicaid with about 60% of our 2014 growth from market expansion and approximately 40% from traditional sources, with year-over-year market share gains in existing programs and participation in new program launches. We expect to continue this pattern of broad-based growth in 2015, with revenues expected to grow 15%-17% this year.
In the senior and retiree market, strong execution drove meaningful growth for UnitedHealthcare Medicare and Retirement, which added 295,000 seniors in Medicare Supplement products and 215,000 people in standalone Part D. In Medicare Advantage, seniors continued to value and choose the modern benefits and support services they receive from managed care. As you know, sustained government funding shortfalls for Medicare Advantage have hurt seniors, cutting back their benefits and causing disruptions as products and markets were withdrawn across the industry in 2014, including more than 150,000 seniors impacted by our 2014 market and product exits. Despite this pressure, we grew to serve a net 15,000 more seniors in 2014, a small but hard-won achievement. We will be back to much stronger growth in 2015 as Medicare Advantage is expected to grow by 200,000-300,000 individuals.
With Medicare Supplement continuing its longstanding growth pattern, adding another 250,000-300,000 people. We will continue to serve seniors with our leading market position in Part D, we see an overall Medicare revenue growth rate of 6%-8% in 2015. Expected, commercial and international markets were more challenging for us over the past year, but we believe this is beginning to turn as well. In Brazil, we grew revenues by just under 9% in 2014, with revenue lift provided by pricing changes and efforts to expand our geographic presence. Price increases clearly pressured membership levels but are consistent with realigning our products for a sustainable marketplace going forward, and we expect stronger market conditions in 2015. At the same time, Amil's care delivery system of more than 30 strategically positioned acute care hospital facilities and over 50 clinical practices continues to grow and perform strongly.
We are advancing more modern analytics, services, and technologies across Amil's unique integrated benefits and care delivery platform to better analyze and manage costs, strengthen fundamental pricing, and improve operational cost structures. Amil has exceptional brand equity. People recognize the quality of Amil's hospitals and care facilities and the consistent value its medical and dental benefits offer. Overall, we expect revenues at UnitedHealthcare's global businesses to grow 5%-8% in 2015. UnitedHealthcare commercial revenues retreated 4% in 2014. In 2015, they will increase, and the year is off to a strong start. Consistent with the strategy we shared with you over a year ago, we participated modestly in the individual exchange market in 2014, with the expectation of more significant participation as the market matured. This year, we are offering products in 23 state exchanges that are home to 54% of the U.S. exchange market population.
This includes eight of the 10 largest exchange market states and 15 states where we also offer complementary Medicaid plans. We have enrolled more than 400,000 individuals through individual public exchanges with four weeks of marketing still to go. We are ahead of schedule, reflecting the brand value and trust in the UnitedHealthcare name. Growth in UnitedHealthcare's small group and middle market group health benefit businesses is also better than we had anticipated in a competitive but generally rational market landscape. The self-funded employer business is positioned for stronger growth and sales performance in 2015 as well, as we continue to consistently deliver the combination of excellent service and innovation, low medical cost trends, and flexible, customized approaches valued by the sophisticated large multi-market customer. Looking at the broader picture, UnitedHealthcare has consistently grown by offering differentiated value, service, and execution to its markets.
We've grown organically by more than eight million people in the past five years. We should grow to serve over a million more people in 2015, continuing UnitedHealthcare's track record as the fastest-growing health benefits company in the nation. We are confident UnitedHealthcare is positioned for continued growth, including revenue growth of 6%-7% in 2015. UnitedHealthcare delivered strong operating and medical cost performance during the last year. UnitedHealth Group's consolidated medical care ratio continues to be the best overall metric describing medical cost performance across UnitedHealthcare's diverse benefits businesses. That consolidated care ratio of 80.9% improved 60 basis points in 2014, and we expect it to remain stable in a range of 80.8% ±50 basis points in 2015.
Medical cost trends in the commercial business were in the 5.5% zone for the year, with great consistency and execution on medical cost performance across the UnitedHealthcare businesses. Hospital usage per capita was low overall again in 2014 and was lower across each of the UnitedHealthcare benefit businesses. Moving to healthcare services. Optum had a remarkable year in 2014 and is positioned to continue to perform strongly in 2015. Revenues grew by 25%, operating margins expanded to 6.9%, and earnings grew by 32%, once again above the upper end of our expectations for the year. Optum surpassed all of its initial 15 by '15 targets, return on invested capital, margins, and earnings all well ahead of schedule. In 2015, earnings are on pace to triple since we embarked on the One Optum growth initiative a few short years ago. The fourth quarter was exceptionally strong with earnings growth of 53%.
It was also something of a milestone, surpassing $1 billion in operating earnings in a single quarter for the first time. Throughout 2014, Optum increased the quality and depth of its strategic relationships and collaboration with clients and partners. It combined good solutions with good execution for the complex problems faced by large, sophisticated customers. This included Optum's assistance to the continued advancement of healthcare.gov and several state exchanges during the year. The One Optum commitments to greater alignment, consistent performance, and cross-business simplification continue to develop well and resonate with the people and customers Optum serves. A quick profile by each Optum business looks like this. Optum Health businesses are gaining momentum in the wake of investments made over the last several years. We expect strong growth and earnings performance in the year ahead.
Optum Health revenues increased by 11.9%, and operating earnings grew by 15% in 2014, all while growing the numbers of practices operated and patients and payers served in the care delivery business. Today, Optum serves over 2 million consumers through owned and affiliated physician practices. On the consumer side, Optum is aggressively deploying better approaches and new technologies for consumer engagement, health and wellness, and personalized consumer service and support. At Optum Insight, 2014 revenues grew 10.9%, operating earnings grew by 21%, and the external contract backlog rose nearly 20%. Optum Insight's $8.6 billion backlog provides a clear indication of the future revenue performance and services. A prime example here is the unique OptumOne analytics platform, which brings together clinical, claims, demographic, and care management data to provide both backward and forward-looking views of patient populations.
With a rich and distinctive clinical encounter data set of over 55 million lives and expanding rapidly, we expect to increasingly drive positive impact for care providers and the consumers they serve. OptumRx grew revenues by nearly $8 billion, or 33.2%, and operating earnings grew by 67% in 2014 as benefits were realized from the transition of the UnitedHealthcare commercial pharmacy business. OptumRx won external business awards to serve well more than 1 million people in 2014 and is tracking to a similar level of growth in 2015. The secular trend toward more complex and expensive specialty medications plays directly to Optum's strengths in synchronizing and integrating medical and pharmacy benefits, providing uniquely personalized service. Optum is advancing this approach with UnitedHealthcare commercial customers in 2015 and expects to see further market interest in its capabilities in 2016.
Looking forward to 2015, our expectations remain consistent with those we shared with you at our investor conference in early December. We are off to a strong start with Optum pursuing large strategic relationships and UnitedHealthcare's domestic medical membership, some 250,000 people ahead of our investor conference outlook as we close 2014. With continued strength into early 2015, as we discussed earlier in our remarks. For UnitedHealth Group, we are projecting high single-digit percentage revenue growth in 2015, with earnings growth potentially reaching the double digits at the upper end of our earnings range. Following established patterns, we expect first quarter earnings to decrease sequentially from this quarter, but perhaps not to the levels reflected in current analyst estimates. From there, we expect the second quarter to rise sequentially, and quarters three and four to have smoother progressions than in 2014.
We expect performance to further improve in 2015 in a number of key areas. Let's spend a minute on those areas of focus. We expect to grow at a very solid pace, capitalizing on market opportunities in commercial benefits, Medicare and Medicaid, as well as the continuing momentum of Optum. Amil's performance will strengthen in 2015, led by balanced pricing to address medical cost trends and the use of new approaches, analytics, and technologies to improve the total performance of both benefits and the care delivery businesses. We are committed in 2015 to growing, strengthening, and deepening customer and consumer relationships at the enterprise level across the UnitedHealthcare and Optum.
In this way, the breadth of services and capabilities can be dedicated to meet the needs of the largest and most sophisticated customers in healthcare, from the federal government to the U.S. military, to individual states, national employers, leading hospital systems, life science companies, and to increase our focus on national health systems in other countries. This year, we expect to significantly increase the number and quality of these important relationships that we're privileged to serve. Excellence and consistency in operational execution will remain an important focal point every day, all year long, enterprise-wide. Already in late December and January, we quietly onboarded over 5 million people to our newly developed Rally consumer engagement digital health platform and almost 6 million to Advocate4Me, our consumer support and service technology.
Nearly 400,000 physicians are now served through our cloud-based Link service platform with the goal to reach 600,000 by year-end. We expect to further advance these and other next-generation consumer-centric healthcare tools in coming months. Together with updates to our rapidly growing portfolio of mobile applications and cloud-based services, these technologies will serve to enhance and modernize our overall consumer and care provider experience in 2015. A key focal point within this area is our commitment to achieving 4-Star or better performance for at least 80% of our Medicare Advantage customers by 2018. 2015 is the year this work gets finished for 2018. We expect to perform well on medical costs for our customers. We deliver to our customers and members a valuable package of cost-effective network options and simple, useful information about quality and treatment choices supported by consumer outreach and effective medical management.
In 2015, we foresee our volume of care delivered through value-based contracts exceeding $43 billion as we help deliver improved costs and quality transparency. In 2015, we will hold strong financial disciplines. We expect to return capital to shareholders through a rising dividend and consistent share repurchase while we maintain a disciplined M&A outlook to further strengthen our capabilities and scale to benefit customers and consumers. Our brand equity and recognition will mature in 2015 with Optum and UnitedHealthcare each refreshing their efforts to reach consumers and thought leaders across the health system. We spoke at the December investor conference about a fresh vocabulary for our enterprise.
Words like consumer and care provider value, precision and consistency in our work, simplicity, driving the last mile in the integration of data, services, and transaction processes, rapid adoption for innovation benefits serving consumers and care providers, flexibility, adaptability, and a more urgent pace of change. These themes will become much more than words in 2015. Every year brings challenges, and 2015 will be no exception. How we meet those challenges will define the character of our enterprise and its leadership team. We expect to continue to build by focusing on serving our customers and serving you as our shareholders all year long, driving continued momentum in 2016, 2017, and beyond. We thank you for your interest this morning, and we will now return to your questions. Just one per analyst, please. Thank you.
Floor is now open for questions. At this time, if you have a question or comment, please press star and one on your touch-tone phone. You may remove yourself from the queue by pressing the pound key. Please do not utilize a speakerphone or headset when asking a question. We ask you to limit to one question per person so we can get to as many participants as possible. We can take our first question from Justin Lake with J.P. Morgan. Please go ahead.
Thanks. Good morning. My questions around the commercial risk market. Certainly looked like membership stabilized in the fourth quarter here. Steve, you talked about being ahead of plan early in the year. Can you expand on what is driving that change in membership trajectory and give us an update on the pricing environment in general? Thanks.
Sure. I think this morning I'm going to ask Dave to take point on the UnitedHealthcare element of questions. Dave, you want to take that?
Sure
engage the team?
Thanks, Justin. I'll just maybe just make a couple remarks and then I'll quickly turn it to Jeff. Thanks for noticing the progress we made in the commercial risk market in the fourth quarter. That carried over into Q1 as well, and as you look at it is both on and off exchange, and I think you'll hear from Jeff that we have very disciplined pricing as part of that as well. Jeff?
Thanks, Dave.
Morning, Justin. It's Jeff Alter. Yeah, we had a really nice quarter in 2014 and a really nice start to 2015, primarily driven by new products we put into the marketplace in reaction to the beginning of 2014 and some of our challenges around price points. We worked really hard to create products that were tied to network design and benefit plans that brought a different value proposition to many of our markets. We first began to see a turn in our membership profile around much better improved persistency of existing accounts. We saw some of our value around affordability helping out our experience-rated accounts. As we move into 2015, I think our exchange expansion also helped create some additional product portfolio advancements off exchange that have been selling really well. Your question around pricing, as Dave mentioned, our pricing remains consistent and stable.
I think that is also helping us as others are pricing maybe a little bit to fix the shortfall in their past pricing efforts. I think the market remains as stable as we talked about, competitive, and no real change to that portfolio of pricing across the various markets that we serve. Great. Thanks for all the color.
Next question, please.
We can take our next question from Matthew Borsch with Goldman Sachs.
Yeah, maybe if I could ask you to build on that and stay in the commercial market territory. Maybe you can just tell us what you're seeing in terms of the evolution of the small group market, how much erosion, if any, you're seeing with coverage, whether that's going to the exchanges or not. Then perhaps more broadly in commercial, what you're seeing with in-group retention with the economy strengthening.
Jeff?
Jeff again. Thanks for the question, Matt. In 2014, we were minor players in the Exchange, we don't have a lot of information. I will tell you that I think it's well within that range that we've talked about over the last couple of years, a few % of that small group market eroding into the Exchanges, at least at this point.
I think the growth in the Exchanges, both in 2014 and in 2015, are really driven by the uninsured and that expansion through the subsidy. We have not seen a significant erosion of our small group business. Just a reminder, over the years, that business has gotten to the point where roughly maybe 50% or 55% of those employers cover. That's down from maybe 60% to 65% in the 1990s. There's been a continued erosion of that market over the years. I think I had a second question around our pricing environment?
Well, it was really around whether you're seeing some on in-group attrition, whether you're seeing trends stabilize, and to what extent, perhaps as a result of the strengthening economy.
Yeah. Our in-group attrition has flattened. That is probably due to the economy. Earlier in the year, we did have some in-group attrition that was related to the ACA that has leveled off.
All right. Thank you.
We're really seeing growth on the exchange, off the exchange, and in the self-funded marketplace too.
Correct.
We're really seeing pretty broad-based response to the offerings you're putting out at this point in time.
Great.
Next question, please.
We'll take our next question from David Windley with Jefferies. Please go ahead.
Thanks. I was going to shift to Optum. Optum, and in particular, Insight had a really good fourth quarter margin. Wondered if you could elaborate on that for us and the sustainability of that. T hinking about the Optum margin progression over the next two years toward the 8% goal.
Larry?
Dave, it's Larry Renfro. I'm going to ask Bill Miller to participate in this question as well. I think you probably recall that we have gone through our business plan this year from the start talking about how the fourth quarter would end with a couple of things going on. We had a great fourth quarter with the $1 billion in earnings that Dave talked about. We were positioned for that quarter to have seasonality. That's our 40-60 split on our business for the year. The planned investments we expected to kick in and to start to pay off, and Optum Insight would be a part of that. That's Optum360. Then we had a third area of simplification and integration on our products. My comment on that is that everything worked as planned.
We exceeded slightly the expectations we gave you at our December conference. We're off to a very strong fourth quarter and a great start. I would also say that the question on the 8 by '16, we believe we're on target, and we feel good about that. The momentum going into 2015 is very strong, obviously, for us, but it's also very strong for our number one customer being UHC. We're still firm, and I believe that we're good with the 8 by '16. Bill, any comments on Insight?
Obviously, it was a very strong quarter, and I think it sets us up very well for 2015 and beyond. That backlog grows. I think there's clearly a recognition that a few of the key things that we're bringing to the marketplace and have invested in are maturing. There's acceptance, for example, of the Optum360 side of our business, which we talked a lot about, which is our revenue management platform. We're well on our way to the customer acquisition that we target. More importantly, what's exciting is the results that we're generating for our clients are starting to come through in terms of their financial and operational performance. We've made investments in data, and strengthened our hand, particularly from a clinical data standpoint that has clearly differentiated us.
We had a record quarter and expect another record year with sales, new client acquisitions, and revenue from our data differentiation, both in the provider marketplace and in the life sciences arena as well. Clearly, we've added critical clients on the government side, working with several states on exchanges. Finally, I would say we're really happy with our entry into the physician management business, where we're going into practices and health systems, helping them turn around and help drive better performance quality in their physician practices. We entered that market last year. We're very confident that that is going to be a strong contributor for the future of Optum Insight. All of those things combined together, I think, show a lot of diversity in what we do, a lot of areas to grow and feel pretty confident, not only about 2015, but beyond.
Thank you.
Next, please.
We'll take our next question from Peter Costa with Wells Fargo. Please go ahead.
Hi. Thanks, guys. You put forth on your Investor Day a view of cost trend rising 50 basis points faster than it did last year. Some of your competitors have put forth views of trend that's a little bit ahead of that. Why should we not be concerned that perhaps some of the improving view and membership on the commercial business isn't because you've perhaps underpriced that business? Specific to that, in terms of cost trend, can you talk about how your view on specialty pharma, in particular hepatitis C drugs, is evolving this year relative
Okay, Peter, it's Dave Wichmann. You got a lot in there. I'm going to have Dan respond to. I will just maybe comment globally on our ability to manage medical costs and trend. I think it's no surprise that we've been able to create distinction there vis-a-vis our competition for some time. We do a very good job of controlling utilization and an excellent job as well in terms of taking a forward view of our cost structures and putting it into our pricing, which is a discipline we've applied for years now, and I think it's consistently produced good results. Dan, I'll ask you to comment further.
Sure. Good morning, Peter. Dan Schumacher. Let me handle first the medical cost side, just talk quickly about pricing and then a little bit on Hep C. I think those are the three elements you're interested in.
Yes.
From a medical cost standpoint, just looking at 2014 broadly, we're very pleased with our medical cost performance. In the fourth quarter in particular, we again came in a little bit better than what we had expected, and that's true in our commercial business as well as in our government businesses. We look at the utilization under that more specifically, that continues to be very well controlled. Steve did mention that again this year, we were able to drive an absolute reduction in our hospital usage per capita. We did that in each business, and that was the sixth consecutive year we've been able to drive an absolute reduction in hospital inpatient usage per capita.
When we put that all together from a commercial standpoint, our cost trend for 2014 came in actually a little bit better than the 5.5% that we had guided to at the beginning of December, as well as at the low end of the range we guided to a year ago. We think about our trend into the future, we have assumed that we're going to see a moderate increase in utilization in each of our benefits businesses. That outlook is what informed our pricing as well as our benefit planning. I'll tell you, with December behind us and the majority of January behind us as well, we are not seeing any indication or evidence of an increase in utilization. We feel very comfortable with our forward outlook. The commercial cost trend for 2015 is 6% plus or minus 50 basis points.
Sitting here today, we have 75% of our revenue for 2015 locked in, and the vast majority of that revenue comes from retained accounts. Those are customers that we have experience with, that we understand their performance. We feel very comfortable with not only our cost trend outlook, but also in relation to where we are positioned from a revenue standpoint in our commercial business. Lastly, you asked about Hep C. Obviously, that's a category of significant focus for a lot of people as of late. In 2014, obviously, we revised our expectations for cost coming out of the first quarter, and I'll tell you that we tracked very much in line with that over the balance of 2014. We look to 2015, we do expect an increase in those costs in each of our businesses. We've reflected that and captured it in our outlook.
We feel comfortable with where we're positioned.
Can you give us some specifics on how much cost increase you expect in 2015 and precisely what you're doing regarding negotiating between the various drugs in Hep C?
What I'd tell you, Peter, is that we are constantly working to manage costs and drive greater value. In this space, we are pleased to see competition. As we look at new product launches, particularly in very high cost categories, we have a very rigorous process. It's a process that evaluates the clinical equivalency of the drugs. We look at the effectiveness of each drug. We design clinical programs to ensure appropriate use. Then we obviously are looking at the PDL and formulary implications, and then we're negotiating relationships that really drive the best value for our members and our customers. We don't talk specifically in this forum about manufacturer relationships, but rest assured, we are all over this.
Thank you much.
Peter, maybe just to close that out, just to be clear, taking Jeff's comments earlier and Dan's comments now, I think it's really a product positioning exercise and possibly some firming of the market that's caused us to advance our business. I think you can conclude that we're not underpricing the business. The other thing you can look at is our relative MCR performance for the fourth quarter versus the full year. If you look at that, you'll see that we're performing better in Q4 than we did for the full year. We performed very well for the full year, but you can see some acceleration in performance as well. Hopefully that closes out that issue. We're not underpricing.
Thank you much.
Next, please.
We can take our next question from Andrew Schenker with Morgan Stanley. Please go ahead.
Hey, good morning. If I'm doing my math here correctly, it looks like you guys are forecasting about 19%-20% growth in value-based care or care delivered under value-based contracts. Maybe if you could talk about a little bit how that's split between commercial Medicare and Medicaid, also how those value-based contracts are impacting both your enrollment. Are you seeing outsized enrollment in those products? Also around your expectations around cost trends. Thank you.
Okay, I'll have Dan comment on this. Obviously, it's a key area of focus for us to align incentives with a delivery system really anchored on advancing quality of healthcare first, but also improving the affordability of it. Dan?
Sure. Good morning, Andy. Your math is right. Yes, we are expecting about a 20% increase in the concentration of value-based reimbursement. We ended the year at about $36 billion of spend in value-based arrangements, and we're looking to drive that north of $43 billion in 2015. In terms of the underlying businesses, we're seeing double-digit growth in all three of our businesses. I wouldn't highlight any one individually. We're looking to make progress across the spectrum and across the benefits landscape. We are seeing contributions to enrollment as a result of those relationships where we partner more distinctly with certain delivery system partners. On the cost side, we're also seeing the outcomes there. We talked at the Investor Day, I know we had a breakout seminar that talked about driving 1%-6% aggregate savings from our value-based reimbursement approaches.
Within that, obviously, the numbers can be more significant based on how they're designed and as well as how tightly they are aligned around quality and performance and outcomes. We're very pleased with our progress there. We're focused on it in 2015, and we'll be in 2016 and beyond.
I think it's important to note the orientation to quality, and the fact that the structure actually drives volume towards the better providers that enter into these performance contracts, and that we're progressing these contracts into more sophisticated forms where they're actually taking on even greater performance responsibility over time. Next question, please.
We'll take our next question from Tom Carroll with Stifel. Please go ahead.
Hey, good morning. It sounds like a very confident 2015 outlook. I wonder if you could share with us a bit more commentary on your operating cost ratio. Fourth quarter's result was relatively high, driven by the obvious, but do you think you see that improving in 2015, much like the rest of your business? Where should it go over the next three years? Thanks.
We do. Dave, do you want to address that?
Tom, Dave Wichmann.
Hi.
A couple things. First, our operating cost ratio for the quarter was a little bit elevated at 125 basis points quarter-over-quarter. As you know, this is mainly influenced by the insurers fee, which amps up that ratio by about 120 of the basis points. What has been pretty persistent in our business is the mix has shifted more towards services. When you see that mix shift, it tends to put a lot of pressure on this ratio. That increases it even further, our productivity efforts bring it back down. We've seen productivity well managed across our business, not only offsetting those impacts, but also inflation broadly. As we look to 2015, the same dynamics play out. We have a little bit of an uptick in the insurers fee, which further presses this ratio.
We also see continued growth in Optum and in our fee-based business overall, which tends to press this forward as well. We continue to offset that with productivity improvements year-over-year. We do expect the ratio to be somewhere around 17% ±30 basis points for next year. We believe our run and position supports that.
Thank you.
Next, please. Next question. Moderator, do you have another? We've answered all the questions this morning? We may be having some technical difficulties.
Hello? Hello?
One moment please, we're having technical difficulties.
Hello? Hello?
UnitedHealth Group is still here. I don't know about the rest of the world at this moment.
Our next question comes from Christine Arnold with Cowen. Please go ahead, your line is open.
Hey there. Optum360 and particularly for Optum Insight seems to be tracking ahead of even what you were expecting last month. Is there any change to your Optum expectations relative to what we saw at your Investor Day? Also, what are you expecting in terms of margins on your individual membership on the public exchanges? Thanks.
Well, that's an interesting combination question, Christine. I'll have Larry take the Optum side, and then we'll respond to the margins on the public exchanges.
Christine, I believe that we are right on target with where we plan to be right now with Optum360 from what I'll call the planned investment side as well as the implementation operation. I think you know we have Dignity Health and NorthShore as two of our prime customers here. Nothing has really changed from the Investor Day. We were positioning everything to happen in the fourth quarter just as it came through. I don't know, Bill, if you have any comments.
No, I don't think much has changed. I think our business will, depending on what happens with the ICD-10 changes this year. They didn't happen last year, we overcame that. If they don't happen this year, we're prepared one way or another. I think we're optimistic and see certainly a pipeline that would lead us to believe that not only are we on target, but we've got a chance to work ahead. I'd say nothing's changed since the investors conference. I would say, just in terms of customer acquisition, we've always said across our business that we were looking for these eight to 10 rich and deep relationships. I think if you look across all of the customers that we've acquired, not only in 360 but beyond, we're halfway to that goal.
We feel very good about achieving that. Certainly, we don't see anything in 2015 slowing us down to achieve that.
Christine, it's Larry again. Let me talk about the 10 relationships that Bill mentioned. We've named two. As we go forward, some of our customers, they do not like to be identified because of competition. Some of the visible ways of looking at that half that we have right now would be to look at Optum360. It would be to look at our business in the government solutions area. You could look at OptumOne, our data and analytics area, and you could look at OptumLabs. There's some other metrics that I think are going to be important to look at from this customer acquisition standpoint, and I'm going to ask John Rex to maybe hit some of those metrics as well.
Good morning, Christine. John Rex here. A few other things that we'd look at in terms of helping illustrate how we're progressing towards that goal of the larger relationships. If we look at since the last couple of years, average deal size within Optum Health is up 80%. The revenue from our top 25 customers within Optum is up 2.4 times. The number of customers with over $100 million in annual revenue has doubled. We point to our external backlog being up nearly 20% and a pipeline that about doubled over the last year. Those are other metrics we look to to help illustrate the impact that we're having in gaining these types of relationships.
We'll have Jeff respond to the public exchange question.
Morning, Christine. It's Jeff Alter again. On the exchange, we built for our initial years the margin of 1%-2% without any reliance on the risk corridors. We believe longer term, it's a 3%-5% business, and like everything else, we'll endeavor to be in the top end of that range as we go forward.
Okay, thanks.
Next, please. Next question.
Yes. We'll take our next question from Ralph Giacobbe with Credit Suisse. Please go ahead.
Thanks. Good morning. Just staying on the public exchanges, can you maybe give us a little bit of an update on how enrollment is tracking? I think you talked about it being in excess of 400,000, just wondering if you expect to sort of exceed the 400,000-500,000 range. Lastly, maybe if there's any disproportionate enrollment in any state that you're in. Recently in California, sounds like you tried to get in statewide for 2016 but were denied. Is the plan just to kind of revisit that in 2017, or are there alternatives you're seeking to still get into that market before then? Thanks.
Morning, Ralph. It's Jeff Alter again. Let's start with, yeah, we've had about over the 400,000 level in sign-ups. We still feel comfortable within the range that we gave at the investor conference between 400,000 and 500,000. At this point, I'd think more around the 500,000, and depending on how the next week or so plays out, we could beat that, right now we feel comfortable within that range. The good news for us is we're growing where we said we would grow. We're just growing a little bit more in some of those markets than we thought. At investor conference, we talked about some of the bigger markets where we thought we could grow and do well, and that's where we are growing and doing well. Along with our plan, that's where the growth is coming in. Now, obviously in California, we are disappointed.
We wanted to bring more choice and options to the residents of California. We believe competition is good for them. Unfortunately, we were not able to get agreement from that board to be in all markets. We did get granted a few markets where there aren't as many carriers as they would like. We're reviewing that now. We might be in California in 2016, but in a small handful of markets, and we will go back in in 2017. We believe choice and competition are good for all markets, including California.
You anticipate that you'll expand your portfolio markets in the next year?
Yes. Outside of California, we are working now to expand our footprint into the other markets that we didn't serve in 2015.
We'll do that in a measured way. It's not all those main markets.
Yeah. We're reviewing those markets now. We'll make some final decisions and let you know.
The other thing that's nice is not only did you sell in the markets that you wanted, but you also sold the products that you thought would sell. Right?
Correct.
Next question, please.
We'll take our next question from A.J. Rice with UBS. Please go ahead.
Hi, everyone. Maybe just to ask you about the Medicare Advantage. Obviously, you're looking for an acceleration in growth. I think 200,000-300,000 enrollment was the target at the Investor Day. It looks like in January with some of the open enrollment season, you were up at 165,000 adds. Can you just comment on what you're seeing so far in the open enrollment season, whether that's putting you ahead of your expectations in line, and any sort of qualitative comment about the market environment? Then any early thoughts on the 2016 MA rate notice?
Hey, A.J. It's Dave. I think the team's done a nice job of really reestablishing growth in the Medicare Advantage individual line. We've continued our very nice growth on the Group MA front as well. I'll ask Steve Nelson to comment more broadly on your questions.
Sure. Good morning, A.J. Steve Nelson. Yes, we're very pleased with not only how we ended the year, but how we performed in AEP. As Dave indicated, we drove really strong growth in our Group Medicare Advantage business, I would say market leading growth, actually. Really pleased with that. We expect full year growth in our individual membership as well. We're particularly excited about that because of the work we've done with reshaping our network and introducing premiums broadly into our portfolio. We're able to grow in the markets that were key to us, such as Florida and New York and Texas and Southern California. Really off to a nice start, I would say also we've saw some really good results and nice start to Medicare Sup as well.
Across those two products, really, again, off to a good start, good place to be. In fact, maybe a little bit ahead of where we were thinking, we feel really good about the ranges that we offered in last December, feel good about those ranges. In terms of the 2016 rates, there's a lot of variables that go into the final rate, as you know, we don't really speculate on that. I will offer that our position has been that it's just a very successful and valuable program to seniors, it's had great results in medical costs and improving outcomes. Member satisfaction is up, the program is growing. We remain strong advocates for our seniors and their healthcare, we hope and expect that the rates, when they're finally published, will be fair and appropriate.
Overall, we're really pleased with the positioning of our Medicare business and how we're heading into 2015.
All right, great. Thanks a lot.
Sure. We may have time for about two more questions, we'll take a look at that. Maybe two more questions. The next, please?
Yes, we can take our next question from Kevin Fischbeck with Bank of America. Please go ahead.
Great, thanks. Maybe just to continue on the MA side of things, can you talk a little bit about the Stars and how your analysis of what Stars has meant for enrollment in 2015? Are you seeing better enrollment in the places where you have four Stars? Are you seeing real issues when your competitors have really moved up on the Stars on the individual side in 2015? Then also, obviously, you've grown Group very significantly for 2015. Do Stars matter as much when we think about the Group business, or is that something that over time you think that it will impact how Group perceives the product as well?
Maybe I'll start on this. I'd like to make it clear that we believe Stars matters and that we're focused on improving our performance in Stars, and I think we have been very consistent on that theme. It's not clear that has had really an impact with respect to how the product is marketed or acquired in market. We do believe that it is important over time, obviously important from a financial point of view, important in terms of our relationship with CMS, who basically established those performance guidelines. I want to make it clear that we are committed to Stars performance, but it's not clear, and I'll ask maybe Steve Nelson to comment that that has had really a particular impact in terms of market response to product offerings, right?
Sure. No. Hi, it's Steve Nelson. You're right, Steve. The Stars obviously is a factor, but it's one of many. The benefit planning process is one that has a lot of factors in it, and we take all those things into account as we look at the results that we've achieved in AEP. It's very much in line with our expectations, and Stars doesn't particularly spike out as the core driver to any of those results. Again, it's across many factors and a lot of including your brand strength of distribution, the engagement that you have with providers, and again, how you design the product. There's a lot of factors in there. On the group side
Stars is important. It allows you to price competitively, and our group membership is in four-star plans, that adds to our ability to grow that membership and has contributed to that.
I guess the question is, if 2018 feels like a long way away in many respects, do you think that you'll be able to grow nicely even until you get to that target? You don't need to be at four stars to continue to grow the MA business in the meantime?
No, we don't. One thing that really hasn't been mentioned this morning is that we're clearly in the zone of our growth expectations for MA, and we've actually advanced premiums in a significant way and to basically be able to grow through that. Right, Steve?
Right. Absolutely.
Percentage is pretty impressive. I think bodes well because I think the large portion of the establishing premium products in markets, a lot of that work got done this year.
Okay, great. Thanks.
Yep. One last question, please.
Okay, we can take our last question from Joshua Raskin with Barclays. Please go ahead.
Thanks. Good morning. I want to get back to the commercial business, I guess the question is just sort of about the landscape of commercial employer contracts. Basically, what are they looking for in terms of products? Then, how do you guys quantify the Optum impact, whether there's a cross-sell of Optum products or you mentioned Rally and Advocate4Me and a couple of these others. Do you measure this in new wins or higher retention levels? And just broadly, what's changing in that landscape where United's now seeing sort of that inflection point on commercial growth?
We'll have Jeff respond to that. I do think that the content of the Optum product in the UnitedHealthcare offering, clearly in the way in which it's applied, clearly makes a distinctive difference, it has a lot to do with the way in which it's applied in the offering. Jeff?
Yes. Morning, Joshua. Jeff Alter. I think, again, for most every one of our clients and employers in general, this is a very important benefit for them, for their employees. They look for the value that can be provided, but it's also one of their more expensive items. They look for a partner who can work with them over the long term, to keep affordability in mind, but also deliver great product, service, and innovation. That's when you think about the combination of UnitedHealthcare and Optum together, working in partnership with the client and their consultant and/or broker to create that plan that works for that employer across sort of a very long time span. We believe we are uniquely positioned to deliver anything at any point for that client as their business changes and their dynamics change.
We're able to bring in consumer products that Optum builds. Obviously, our close tie to OptumRx. Now that specialty medicine is becoming a cost factor, having the close relationship that we have with OptumRx to embed that inside the medical benefit is vitally important for the value proposition that the employer is looking for. Then, across the spectrum into Optum Health, our disease management and wellness programs, our consumer engagement, employers have spent considerable amounts of money to have disease management and wellness programs and are looking for more engagement and the work that Rally and Optum Health does to go beyond just creating an offering, but actually get that engagement and get that uptake, to keep people healthier and engaged in their wellness is vitally important.
I think, what we've seen as the marketplace has stabilized over the last year or so is that view from employers looking for a longer-term partner who can work with them to create an even more valuable benefit plan and offering for their employees, but also be mindful of the cost factors that are involved in it.
Yeah. Nobody can really match the breadth of the offerings and the innovation dynamic and the reliability of continuous innovation, continuous focus on technology, so that you're building value year after year, which plays a lot to the retention rates you have too. Good question and great response. Thank you very much for joining us this morning. Kind of to sum up 2014, UnitedHealth Group has clearly had a very strong year in 2014 and the momentum of the business grew throughout the course of the year, so that we ended the year perhaps in our strongest point and have brought that strength into the beginning of 2015. Through consistent execution and consistent focus on performance, serving customers, the people that we serve, continuing to drive innovation, matched with the strong financial disciplines, we expect our growth to accelerate in 2015 and beyond.
Thank you very much for joining us this morning, and we'll see you next quarter. Thank you.
This concludes today's program. Thanks for your participation. You may now disconnect.