Good morning. I will be your conference facilitator today. Welcome to the UnitedHealth Group Third Quarter 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 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 ks dated October 16, 2014, which may be accessed from the Investors page of the company's website. I would now like to turn the conference over to the President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.
Good morning and thank you for joining us today. This morning, we will review our 2014 Q3 and 9 month financial results, results which have been consistently in line with or ahead of the outlook we shared with you nearly a year ago. We're seeing steady progress across our businesses and over the next 2 years expect our overall business performance to further strengthen and accelerate in both top and bottom line growth. Our top line performance this quarter suggests an improving environment for our offerings combined with steady consistent execution. Revenue grew 7% year over year, led by growth in senior and public sector benefits and across Optum's portfolio of health services.
Consistent execution is evident in our performance in managing medical and operating costs, successful state Medicaid expansion, moderately improving Medicare Star ratings and the value clients are realizing in Optum's provider, payer and government markets. And all of this is in the face of unprecedented healthcare reform across the United States. Our 3rd quarter revenues were $32,800,000,000 and earnings per share grew 7% to $1.63 per share. UnitedHealthcare results clearly strengthened with Optum again contributing 30% of our enterprise wide operating earnings. Operating cash flows of $3,200,000,000 were exceptional at twice our net income level, despite remitting $1,300,000,000 in federal ACA taxes during this quarter.
This morning, we are reaffirming our 2014 revenue outlook of $130,000,000,000 and raising our net earnings projection to a range of $5.60 to $5.65 per share. As always, our goal is to perform to the upper end of our range. We remain focused on executing a deliberate quality and cost agenda, because improving health care quality and affordability is core to delivering value at both UnitedHealthcare and Optum. On any given day, we average 27,000 members in the hospital and another 14,000 at skilled nursing facilities. We have nearly 2,000 clinicians across the nation working with attending physicians to help keep our members on course for optimal medical outcomes, successful discharges and to avoid unnecessary readmissions.
Optum expects to perform 1,000,000 Medicare house calls and home visits this year to engage our members, understand their health status and needs, close gaps in care and advance clinical care paths and services. Over the past 5 years, our commitment to affordable quality care has become ever more integrated, targeted and refined. Modern plan designs harness greater patient responsibility with online tools and consumer engagement services that help people make better choices and decisions to get the right care at the right facility for the right cost. We serve nearly 6,000,000 people in consumer directed health plans, up from 2,900,000 people just 5 years ago. And these consumers have set aside $2,700,000,000 in health care funding through health banking and investment accounts with Optum.
These consumers and those in similar consumer centric programs are motivated to engage and make the best choices about their health and health care. Consumer engagement includes making quality and pricing transparency tools available right at people's fingertips, right on their smartphones. These tools tap into our premium designation quality networks, a commercial benefits program we began in 2004 that now helps link people to nearly 120,000 network doctors recognized for consistent superior quality and efficiency. These doctors practice in clinical areas that generate more than 80% of our consumers' medical cost experience and the results are consistently outstanding. Our premium cardiac physicians have 28% fewer repeat procedures and a 29% lower complication rate for implantable cardiac device surgeries.
Our premium orthopedic surgeons have 41% fewer repeat procedures and a 17% lower complication rate for knee surgeries. There are more examples like these demonstrating that getting an engaged consumer to the right doctor makes a meaningful difference. Our commitment to affordability extends to the care delivery side. Value based contracting has become foundational to UnitedHealthcare today. Contracts that align care provider incentives around health care quality outcomes, appropriate use of services and total cost of care.
Our contracts with value based medical spend now total nearly $35,000,000,000 per year, up from less than $13,000,000,000 just 3 years ago and on a path to $65,000,000,000 by 2018, if not sooner. The Modern Health System is being shaped around aligned incentives, supported by transparent information and consistently high quality clinical services. These changes are helping our nation in turn to achieve optimal evidence based utilization and cost. We are among the leaders shaping this next generation health care system with Optum working hand in glove with care providers in local markets, helping them improve consistency, quality and cost structures, so they can preserve and grow their patient faces as their market shifts to performance based revenues. Progress is apparent in UnitedHealthcare's year by year decrease in hospitalizations per member in every major product category, including in 2014.
Over the past 6 years, UnitedHealthcare has realized a cumulative 26% reduction in inpatient use per Medicare member and a 16% reduction in inpatient use per commercial member, while continuing to improve overall quality of care. To begin a brief, but more detailed discussion of 3rd quarter results, let's we'll start today with UnitedHealthcare. 3rd quarter revenues grew 6% year over year, exceeding $30,000,000,000 UnitedHealthcare earned more than $2,000,000,000 in the quarter, driven by overall revenue growth and an efficient operating margin of 6.8 percent, even considering the growing mix toward lower margin public and senior sector customers. 3rd quarter was again led by community and state, where we grew to serve 250,000 more people. We are now on course to grow by just under 1,000,000 new Medicaid members this year.
This record level of organic growth is well balanced with about 60% from health reform market expansions and 40% from established states under new programs that complement established approaches as well as natural growth within the traditional programs. And Medicare continues to be a growth contributor as we approach organic growth of 500,000 people across all products in 2014, a strong and consistent outcome in a year where we took necessary steps that caused some membership losses to position our Medicare Advantage products for future growth and to benefit seniors in the years ahead. Today, we have a more focused and aligned network supporting Medicare Advantage, a Part D program qualified to serve low income seniors in 97% of the markets nationally for 2015 and a rising star quality that will continue to advance. For the 2015 payment year, we expect more than 37% of our MA members to be in plans rated 4 stars or higher. We expect a similar percentage in 2016 and sharply improved performance in 2017 2018 based on efforts launched earlier this year and establishing themselves across our markets.
The open enrollment season began yesterday. We believe our products are well positioned locally. Our sales and marketing resources are properly staged and supported and we expect solid growth in our Medicare Advantage, our Part D and Medicare Supplement offerings in 2015. In the commercial markets, we remain focused on pricing discipline relative to cost trends, balancing margin and market positioning, all with an eye towards consistency and sustainability for both customers and consumers. The multi quarter decline in risk based enrollment has slowed and the modest decrease in self funded products were due to employment attrition.
In the individual market, we remain on course to participate in nearly 2 dozen state exchanges in 2015, consistent with our original public exchange strategy. In Brazil, pricing increases reflect new baseline costs in delivering expanded mandated health care benefit, leading to a conscious reduction in membership this year. Despite this decline, Amil's revenues were strong in the 3rd quarter with international revenues The consolidated care ratio was 79.7%, a decrease of 90 basis points over last year's 3rd quarter. Earnings were strengthened by continued favorable reserve development across the business as our affordability initiatives continue to perform well. Moving to our Healthcare Services platform.
Optum's 3rd quarter included a healthy balance of growth, earnings performance and focused strategic market activity. Through the 1st 9 months, Optim revenues have grown 26% and earnings from operations by 24%. We believe the 4th quarter will be strong for this platform and Optum remains on pace to contribute roughly 1 third of UnitedHealth Group's 2014 cash flows from operations, all while investing significantly in future growth. In the Q3, Optum's revenues grew 21% year over year to $12,000,000,000 Earnings from operations grew 27% year over year to $865,000,000 Operating margins rose a full percentage point from the 2nd quarter and 30 basis points year over year to 7.2%. OptumRx led this quarter's results.
Revenues grew 27%, earnings from operations grew 65 percent to $326,000,000 and operating margins were above 4%, improving 0.5 points since the June quarter and 1 percentage point year over year. The market is responding to the value of synchronized pharmacy and medical benefits where OptumRx uses data, technology and an integrated service model to address the total medical experience and related costs rather than solely the pharmacy silo. We have seen a number of new opportunities with employers for 2015 and we believe we have been awarded more than our fair share of that new business. This growth is additive to the growth that flows naturally from the businesses of UnitedHealthcare each year. Optum Insights growth was led by Optum 360 revenue management and government exchange services.
We continue to deliver services in the development and operation of federal and state healthcare exchanges and look forward to continuing to leverage Optum's expertise to serve our government partners in this important work. With the passing of this quarter, we have fully cycled through last October's regulatory pullback in hospital clinical compliance services. To put the magnitude of this pullback in perspective, Optum Insights underlying operating earnings growth would have been more than 15 percentage points higher than the 6 percentage point growth we reported this quarter, which only highlights the strength and momentum of the diversified product offerings we offer in this segment, including a commercial version of our hospital clinical compliance capabilities that is gaining traction with hospitals in the market and is becoming a future growth driver. In our position as a valued service provider to hospitals further advance with the recent acquisition of the Med Synergies organization. Med Synergies has deep expertise in revenue management for hospital employed physicians and medical groups.
Connecting Med Synergies with our Optum 360 inpatient focus creates an end to end revenue management offering for large sophisticated integrated care delivery systems. Coupling these with Optum's clinical software, analytics and workflow tools gives us a comprehensive and market leading solution to serve delivery systems, covering both administrative and clinical domains across the full continuum of care setting. Within our Optum's Analytics businesses, we expect to end the year with more than 50,000,000 lives of longitudinal clinical data, up 50% in a year and easily one of the largest such resources in the country, if not the largest. And it supplements our 155,000,000 person administrative claims data repository. Increasingly, we are harnessing the sophisticated data resource for advanced analytics across multiple platforms to meet growing market needs around managing the health of population.
OptumHealth reported an 11% operating margin in the 3rd quarter with earnings from operations up 16% year over year. These results were led by our collaborative care businesses. Today Optum touches 2,000,000 consumers through our collaborative care physicians and clinical professionals who are prominent leaders in their local markets recognized for clinical quality. As our medical groups transition to Optum Technology, we further improved their execution on behalf of the patients and payers they serve, help grow their business and generate superior financial returns. More broadly within OptumHealth, we look to meaningfully improve clinical outcomes and patient well-being across multiple settings, outpatient, within institutions and in the home.
We expect Optum overall revenues to be at the upper end or perhaps above our target of $45,000,000,000 to $46,000,000,000 with earnings from operations near the upper end of our previous outlook of $3,100,000,000 to 3,200,000,000 dollars Optum's future growth should continue to be strong supported by our $7,700,000,000 contract revenue backlog and exceptional levels of customer pipeline activity. To summarize, 2014 performance remains consistently strong through the 1st 9 months, particularly considering the ACA headwinds this year. Revenues have grown year over year by 6%. We have increased our full year net earnings outlook to a range of $5.60 to $5.65
per share.
And this earnings outlook accommodates expected 4th quarter seasonality, strong optimum performance to close the year and 4th quarter investments in growth, including strong Medicare Advantage marketing and the launch of our individual products on health exchanges in 19 new states. We expect 2014 cash flows from operations will be around $8,000,000,000 possibly more. Our growing earnings capacity this year positions us well for 2015. At this distance, I would offer that the consensus earnings estimates for next year do a pretty good job of calibrating our 2015 outlook, reflecting the combination of opportunities we expect to pursue and the challenges we expect to manage. We remain fully committed to consistent fundamental execution with objective of realizing as much of our true potential as possible in every endeavor.
We will provide details of our 2015 outlook at our Investor Conference on December 2 in the context of our long term strategy and our opportunity to serve people and to build value. So now I'll turn this call back to our moderator for your questions. And I would ask this morning that we limit our questions to one apiece. So thank you very much. Operator?
The floor is now open for questions. Our first question is coming from Justin Lake, JPMorgan.
Thanks. Good morning. My question is on the commercial business. First, can talk about your early view on exchange positioning in terms of products and price relative to peers and how we should think about profit targets here given the losses in 2014 that we see across the industry? And then just a quick comment on New York Small Group and how we should think about it for 2015 given the pushback on pricing seen from regulators?
Thanks.
Okay. Justin, we'll respond to your 2 part question. I'll offer some perspective that we are trying to participate thoughtfully in exchanges and don't have have not built excessive expectations on that. I think Jeff will talk to exchanges and then maybe to New York.
Sure. Good morning, Justin. It's Jeff Alter. So on your first question or your first part of your single question on public exchanges, I would say it's keeping with our strategy that we waited to see what was going on in 2014 and then using that knowledge, we built a different platform for exchanges. So when you think about where our products are positioned, many of those products come with a network construct that's probably nontraditional to what you might expect from UnitedHealthcare.
We feel good about where we're positioned. We are targeting profitability in 2015, probably a little bit lower than that 3% to 5% long term range that we've talked about, but still profitable. And from what we know today, we feel pretty good about where we're positioned in many of the exchanges, particularly the larger states where we expect to grow the most. New York, I would say nothing's changed too much in New York from the competitive environment that we were in the middle of this year. The rate actions or the rate approval actions by the regulator pretty much give us for the most part the same competitive marketplace in New York for 2015 that we have today.
We're fortunate to have a broad portfolio of fully insured business across the country and we're managing through some of those regulator responses right now.
Thanks.
Next question please.
Our next question comes from Matthew Borsch of Goldman Sachs.
Yes. Thank you.
Maybe I could ask about Medicare Advantage, if you could just I realize you'll go into detail at the December 2 Investor Day, but maybe you can just talk to the scope of the benefit changes that you made and if you can characterize how they look to you at your initial look versus what the competition has put out? And maybe directionally, if you think that you'll be able to grow membership and earnings next year?
Yes. I think we feel pretty good about it. Steve, do you want to comment? Sure. Hi, Matt.
It's Steve Nelson. Yes, we really like our position going into 2015. Benefit shaped up about as we expected. We have we think we're positioned very well to grow in 2015 meaningfully at sustainable margins. I'll just offer we did add premiums, which was an important step to the long term viability of this product and but we are very thoughtful about that.
We added premiums in markets where premiums already existed. And we added about to about 1 third of our members. In a third of those cases, we added 0 premium alternatives in places where we didn't do that. We enhanced our benefits in meaningful ways that we knew based on our research would be important to seniors. So we feel very positive one day into open enrollment and we expect to grow meaningfully at sustainable margins.
And the earnings growth?
Yes. We expect to grow earnings across the board for 2015. Actually, we think all of our businesses are really better positioned than they were as we entered into '14. And really the underpinnings of our 'fifteen outlook, obviously, they're different contributions, but we're expecting growth really across all our
next question comes from Peter Costa of Wells Fargo.
Can you talk about your expectations for cost trend going into the end of the year and into next year? And how you expect to be pricing for that cost trend for next year in the commercial side of the business? Sure. I think Dan Schumacher will respond to this.
Good morning, Peter. Thank you for the question. On the medical cost side, I'd tell you in the quarter we were very pleased with our performance in the quarter both in aggregate as well as across each of our businesses. And frankly, it was a little bit better than we expected. And you can see that in the care ratios.
You can see it in a little stronger prior period development relative to the last couple of quarters. Each year, we send a we set a trend expectation, respectful, mindful of underlying medical costs and then we endeavor to outperform it. And we have strong medical cost management disciplines that we apply and you're seeing us outperform that this year. As you look at our full year commercial cost trend for 2014, We expect to perform at the low end of our range of 6% plus or minus 50 basis points, possibly a little bit better. As you look into next year on the cost side, we expect similar themes and we'll go through the specifics of that with you at investor at the Investor Conference.
But certainly a major component of that will be unit costs as it is every year. It represents anywhere from 2 thirds to 3 quarters of the underlying cost trend and that's something that is founded on negotiations that are happening each day every day. So we've got a very good line of sight on that. With respect to pricing, I'd ask Jeff Alter to comment on that.
Good morning, Peter. We've had a very successful long term pricing discipline, so nothing's changed in our philosophy. We continue, as Dan mentioned, to be very mindful of cost trend. It's the number one driver of our premium. And we've got a lot of programs in place to outperform those medical forecasts.
So that's a big underlier. And there's a lot of other things that make up the price provider network, product attributes, business mix. But we're not changing our discipline. It's been very successful for us and we expect it to continue to be very successful for us into the future.
Just to clarify, are you guys saying that you expect cost trend to be the same next year as it was this year? Or are you just saying that similar to this year? Similar themes. Yes. Peter similar in approach.
We tend to view our costs as we enter the year. We tend to endeavor to outperform them. We continue to see medical cost trends and inflation going forward and we position ourselves to price accordingly. All of that is completely consistent with the way we have approached the business for the last several years. No different and we don't plan on changing that in 2015.
Peter, it's John Penschorn. We'll be fully detailed on this on December 2. We're really not trying to walk through 2015 today. So I think we'll be able to fully answer that question here in just a few weeks.
Next question please.
Our next question comes from Christine Arnold of Cowen.
Good morning. Thanks for the question. You've had great growth in Medicaid and data suggests that the expansion population is pretty young and healthy. Could you speak to where your Medicaid book of business is coming in this year and your expectations for next year with respect to that book?
Yeah. Austin, do you want to comment? Thanks for
the question. Well, first of
all, we're very pleased with the growth. We are honored to have the opportunity to work with this new population, help them guide through the health care system. We expected higher utilization in the expansion population in almost every case we got paid for that higher expectation of cost and that's what we've seen. So we expect long term for the population to perform in that 3% to 5% margin and are very confident about the continued growth.
And what do the rates look like for that population next year and the profitability for that book directionally?
Sure. Again, we expect the rates will be appropriate for the population and support long term sustainability. We work hand in hand with our states across all the markets to ensure that on an ongoing basis that that's the case. And everything seems to be showing up as we expected.
And we have long said that the margin ranges for those businesses in our 3% to 5% zone and that's kind of how they're playing out. Thank you. Next question.
Our next question is from David Windley of Jefferies.
Hi. Thanks for taking the question. So slightly nearer term question. If I look at the ranges and point estimates that you've given on factors like your medical 2014 operating costs at kind of 16.7% and even to a lesser import your tax rate, it would seem that 1 or more of those would need to trend below what you've most recently said to get to your guidance range. And I'm wondering which of those I should focus on as performing better.
If you can elaborate please.
Well, my reaction to that question is, I would stand back and look at the totality of the business. If you take a look at the spectrum of UnitedHealth Group and that's who we are speaking to, you have the continued performance of the Optum business. We have a very strong Medicaid business in terms of its growth. We have an international business that we think will make a meaningful contribution going into next year. We have been historically very strong in our operating cost disciplines and have structured those programs for across the expanse of our businesses.
I think we have nice momentum coming in our Medicare business and our commercial business. So I wouldn't lay it out to one factor or try to basically triangulate on a ratio that really when you have a business as diversified and as expansive as this one. So that's why I think that that's perhaps the perspective you should look at into 2015. Okay. Thank you.
Thank you.
Our next question comes from Sarah James of Wedbush Securities.
Thank you. Optum has always been a source of growth, but this quarter it really seemed to stand out particularly in growth in the external revenue for OptumInsight as well as improvements in the OptumRx margins. I know you touched on it briefly in the prepared, but I was hoping you could dig in a little bit further and talk about some of the programs you have in place driving that and how we should think about the potential of continued improvements there?
We'd be pleased to. Larry, can you start that off?
Sure. Hi, Sarah. It's Larry Renfro. Let me break it into 3 areas and I think it will we'll get as John has said many times, we'll get more into detail about this at the Investor Conference, but this might help you get ready for the Investor Conference. Obviously, last year at the previous investor conference and into this year, we've been talking about investing in the future, especially in OptumHealth and OptumInsight.
We had that all planned and we've absorbed obviously the impact and all of our financials are in line as we continue to finish off the investments or the development in these new programs. I think in the Q3, you saw that Awesome Health went to a 14% top line growth and 16% bottom line growth year over year. You also saw that the Optum Insight went 4% up on the top line and 6% up on the bottom line. So what you're starting to see is what we said would happen during the year that our investments are starting to tail off. And as a result, really our outcomes are starting to kick in.
So we believe that that will create a strong 4th as Steve referenced in his remarks. The second part of this answer is that, we're obviously going after 10 large accounts we have identified that we would do by 2016. We have probably as many sales metrics as we do financial metrics in Optum. So we are in line with all those sales metrics as we go forward. I'd say the 2 that you might want to look at that would really tell you something would be our backlog.
That backlog is at $7,700,000,000 up 21% year over year. And our sales pipeline, that's up 166% year over year. So that's the second part of the answer. The 3rd part on the growth would be the 5 areas of focus that we're really concentrating on now and this will be in the future as well. That's medical groups, Optum 360, the PBM, international and the government business.
So I think that if you kind of go back to the question you asked, I think we're pretty well positioned for growth and we're pretty much hitting on all these programs.
Got it. And just a follow-up, the margin improvement in OptumRx, should we think about this as being the new bar for that segment? Or is there further upside from this one?
So OptumRx had a great quarter. And I think if you go back to this what we were talking about a few months ago in terms of investing in the future, that's what we did a couple of years ago when we built the platform and started the process of moving the business in house. That's been a great move on our part. What I would say is what the margin really does is validate the guidance that we've been giving that 3% to 4%. And I think we'll expand upon that more at Investor Day.
Dirk, do you want to add anything? Yes. Hi, Sara. It's Dirk.
What I would say is if you look at the Q3, the major driver of the better margin was things that we did in executing and drug purchasing and acquisition strategies really at the gross margin line is where we had a favorable uptick in the quarter.
And those should be sustainable.
And as Larry said, we'll stick
to 3% to 4% from a long term op margin perspective.
Thank you. Next question?
Our next question comes from Ralph Giacobbe of Credit Suisse.
Thanks. Good morning. In the release in your prepared, you suggested and talked about sort of restraint utilization and obviously the MLR performance would suggest that as well. Just hoping you can maybe provide a little bit more on specific inpatient and maybe outpatient metrics. If you're seeing any change on sort of QE levels, any measurements there would be helpful.
And then just last quarter you said MLR would track at the higher end of guidance. Is that still the case? Thanks.
Yes. We don't actually ever get into those kinds that level of granular statistics, but I think we can give you some commentary to give you some sense.
Sure. Good morning, Ralph. This is Dan Schumacher. On utilization specifically, as we've mentioned, we continue to see very stable trends across our businesses, which is to say that we see the same comparable increases in 2014 as compared to 2013. As you look at the componentry underneath it, obviously pharmacy is higher in the hep C category and that's being offset more than offset by better performance in inpatient in particular followed by physician and outpatient.
Our medical cost management plays a very significant role in this. As I said earlier, we do set expectations and then endeavor to outperform them and we're doing that this year. I think some of the other things that are probably contributing to the performance and utilization is certainly some greater consumer responsibility and higher concentrations of value based reimbursement. And again, those are things that are a significant focus of our enterprise. So overall, very stable utilization patterns.
I think perhaps people ask how do we know and looking at external data and so forth. And I'll tell you, as Steve said in the prepared remarks, you look at we have 41,000 people in any given day in a facility. And we have 2,000 people, they wake up every morning and they look at who's going to be admitted, who has been admitted, how long they've been there, what they're being treated for and most importantly working with them, their family and their caregivers on appropriate discharge plans so that they can be successful when they leave. And all of that is enabled by near real time technology and we're going to have an opportunity to show that to you at the investor conference. So that's what we're seeing on the utilization front.
Okay. Thanks. And then just MLR guidance?
MLR guidance, again, I think we'd reiterate comments from last quarter, which is to say we'd expect to be near the higher end of the range on both the consolidated and the commercial ratios, albeit a little bit better than what we were thinking leaving the 2nd quarter.
Thank you. Next question.
Our next question comes from A. J. Rice of UBS.
Thanks. Hi, everybody. Maybe just ask you about the international business. It looks like there's an acceleration in top line performance at EMEAL this quarter. I know there were some issues around government changes down there and utilization and so forth.
Are you pretty much back to where you wanted to be in a normalized operating trend? And then more broadly, I guess, you guys have been mentioned in several international sales situations. Can you comment on your appetite for international deals at this point and whether your thinking is involved in what you might or might not do?
Yes. We are basically coming around the bend on a full year in terms of the changes in Brazil and I think that they are we see some pretty positive sense in terms of that marketplace. And I'll have Dave comment on that and the others. Thanks, A. J.
Thanks for the question. I think what you're noticing in EMEAL is what we noticed as well as it's beginning to show tangible results from the various initiatives that we put in place largely in response to this ANS regulatory change, which happened just over a year ago. As you know, there was a lag on the market's ability to respond to that change. So one of the things we had to do was ensure that all of our plans were in good standing, get our renewals up. And so even in the face of declining membership, which is largely around dealing with high costs of block business, if you will, we are showing strong revenue growth, which is largely a reflection of the activities we have underway with respect to getting renewals in place in response to that regulatory change.
We're also pursuing managing our costs and they're coming out and we're making I think all the right changes to the business and notably our hospitals continue to perform very well as well. So it will take some time AJ to work our way through this. It will be maybe all the way to the end of 2015 till we get to what I would characterize as a more normalized level of profitability in the business, but we clearly see line of sight towards that. As it relates to the international markets and our appetite there, yes, we are active predominantly in Brazil, predominantly in the healthcare delivery space, predominantly in the long lines that I described before, which is to move beyond the centers of Sao Paulo and Rio de Janeiro into the contiguous cities, if you will, and then also to pursue growth in the Northeast part of that country. Our efforts there have gone very well.
And then of course we have other interests internationally, but I'd say most of those are aimed towards the South America and Latin American markets. And then as we think about more broadly across the globe as well as in those two markets, we see great opportunity for Optum, which we are just beginning to pursue. Okay, great. Thanks a lot. Next question, please.
Next question comes from Josh Raskin of Barclays.
Hi, thanks. Good morning. Wanted to take a step back just on the benefits business and the M and A landscape. And it's been 2 years now since there's been any major M and A on the benefit side and it's been even longer for United. So I'm just curious, is there a reason for this pause?
Is there something in the market that changed with reform? Is it just an unsure landscape as to who the winners and the losers are in some of the benefits business? Just maybe your perspectives on M and A, maybe even broadly beyond UNH just in the benefits segment specifically? Yes.
I'll just comment that perhaps the highest levels certainly with the health care reform efforts that have been going forward. I could easily see this marketplace being fairly occupied and making sure that this is for everybody in this space that they are prepared to and responding to the changing regulatory landscape and to make sure that they're pursuing the opportunities and managing the challenges that those regulatory changes brought forward. And I think that continues to go forward. I think it's been a very successful 1st year across the industry in terms of how that has been responded to.
And when are you less occupied with those responses?
Well, I think my view is that this year was by far the most amount of changes, but they're going to have to be digested in the marketplace over the next 2 to 3 years. But I would not necessarily suggest then that there'll be a time when there'll be market activities around M and A begin to pick up and so forth. I'm not sure I would necessarily when we take a look at the expense of our business, we are well diversified across our benefits business, continue to be interested in growing that and making sure it continues to innovate and drive value from an organic point of view and to be in a position that where we see opportunities to expand that business that makes sense, that lie into our strategic path, that bring capabilities, that bring market positions or scale that we will we would have an interest and I would imagine and others will as well. We have opportunities to also allocate capital to services and to international markets and we would have to assess those as well. So I don't think it's as my sense is it requires a little bit more thoughtful reflection than just when will a reform run its course or not.
And I think that I'm impressed that across the space these businesses have been mature in terms of how they responded. And I think everybody is focused at the opportunities at hand.
Thanks. Sure.
Next question please.
Our next question comes from Scott Fidel of Deutsche Bank.
Thanks. Just had 2 quick ones. Just first, how much of the $200,000,000 in the targeted Optum investment spend has now been completed through the 3Q? And how much remains for the Q4? And then just secondly, just I know it's very small for you guys in the overall context of things, but just interested on Texas Medicaid.
That's been one of the states that has still been reticent to cover the industry fee. And we've heard some mixed feedback from different plans on whether they expect to get paid on that or not. So definitely very interested in whether you've heard something from Texas on whether you're going to get recouped for the industry fee this year? Thanks.
So that will go from one side to the other. So John, do you want to respond to the first?
Yes. Scott, John Rex here. So yes, correct. We talked in the first half about some investments that we've been making particularly within the Optum Insight and Optum Health businesses and we'd size that up in the first half at $140,000,000 talked about $200,000,000 or more for the full year in terms of anticipating and investing in those businesses. So in the 3Q, we would have invested an additional $60,000,000 So we have hit our $200,000,000 I do anticipate that we will continue to spend in the 4th quarter, albeit at an administered rate.
However, that is within the scope of our guidance where we've talked about our comfort with the high end of our 3,200,000,000 dollars earnings
range. Okay. Austin?
Sure. Thanks for the question. I guess first of all, I'd comment that we've had great progress as you know in getting arrangements and agreements in place with our states on the recovery of this fee. There is one instance as you mentioned that we don't have written agreement yet. We do expect to be paid.
We expect all of these to come in before the end of the year. We haven't recorded revenue in that one instance, but we feel very good overall.
Okay. Thanks. Next question please.
We'll take our next question from Kevin Fischbeck of Bank of America.
Great. Thanks. Couple of quick questions on the individual or the exchange business. I want to clarify something first. You said that you expected to be slightly below kind of the longer term margin in that business of 3% to 5%.
But I think in the past you talked about pricing that business profitability kind of excluding the 3Rs not relying on them to make a profit. And I would think that if you were pricing that way then with the 3Rs you would be at least at that average number. So just wanted to clarify that before a follow-up on the exchanges.
Hi, Kevin. It's Jeff Altery. Yes. So we're not exclusive of all of ERS. So we would not rely on corridors.
We will obviously rely on the reinsurance and the risk adjustment. Risk adjustment is a big part of it. So while we will get into that 3 probably closer to the 5 as the market matures, we also recognize that it's still a market in development and our competitors that are already in the marketplace, We need to be able to come in at a price point that attracts a little bit of growth, but still profitability and then build into that marketplace. So this is a long term build for us. But so just clarifying, we will not rely on corridors, but the other cars are important parts of that business and risk adjustment will always be an important part of that.
Okay. So is this a clarification then? Or is this something that now that you've seen the pricing and everything else that it's a little bit different? I just wasn't sure.
Kevin, this is Gail Boudreaux. I just want to add on to Jeff's comments about what he said. I mean, it's not so much a clarification. It's always been our long term strategy. We see this market as a really good growth long term growth opportunity.
As we said in the last several calls, we don't expect to rely on subsidies as part of that and we are pricing to profitability. But in any new market, as you enter a market, we don't necessarily think that we'll see our 3% to 5% earnings range in the 1st year. And again, remember, 75% of this market is yet to develop and we are seeing it firm and stabilize a little bit, but it's still only the 2nd year in the market. But overall, we went into this market with an expectation of earning a profit in it.
Okay. Because that was going to be my real question was just how you think the market is going to evolve in 2015? I mean do you think the CBO target of $13,000,000 makes sense? And then how do you think about your positioning as I guess a strong second mover versus the incumbents? I mean in retrospect if you had known that membership would be 7,300,000 dollars would you have been more aggressive in year 1?
Or I guess just any thoughts there?
No, no. We like where we are. We would have played this just exactly as we have. We think the 2nd vintage will be better. The 3rd vintage will be better after that.
This market will form. It will be different market by market. It will take time for it to evolve. It will eventually evolve into about the profit margin range that we have been discussing. We're not going to comment on CBO.
We have no idea from that point of view whose projections are correct. So tomorrow all we can say is everybody's projections have been wrong. And so we will just play this and participate as we see this market evolve, which has been completely consistent with our perspective on this. And we do anticipate to that we will participate in this way that is sustainable from a growth and profitability point of view. But we don't have that kind of mature margin assumption in your first couple of years of participation.
And we really don't have a lot of this into our 15 year outlook, but this is really just our introduction. We expect to participate. We expect to grow, but we're not expecting tremendous profit out of that 1st year participation. So I think that's ought to be the way you think about it. Okay.
Thanks. Sure. Next question please.
Our next question comes from Andy Schenker of Morgan Stanley.
Thanks. Good morning. So one of your peers just pulled out the Delaware Medicaid program over rate this grant. I believe you're the only other MCO in the program. So first of all, do you expect to enroll the 1 130 members next year?
And then more broadly, how are your rate discussions going for Medicaid next year? Any areas of pushback on rates? Thanks.
Austin? This is Austin. Thanks for
the question. We do have an agreement in place with Delaware. We look forward to continuing to serve the people of Delaware and stay focused on being ready to do that. I won't speculate on at this early date on where that membership will play out. But overall, we continue to feel confident in our relationships deliver that long term sustainability in that 3% to 5% margin.
And the states see value in that.
These are
complex programs. They're invested in them. And Medicaid programs are continuing to establish themselves very well.
Yes. I think the great growth that we've seen this year and our ability to work year over year with states is a reflection of the trust they've put in us to serve their populations.
And I think Medicaid has been one of the strong successes of the ACA effort. So next question please.
Our next question comes from Ana Gupte of Leerink Partners.
Thanks. Good morning for taking the question. The question is on the employer
market and mix shift potentially in 2015
given the data points of dumping into exchanges. But on the flip side, the private exchange market and adoption has been slower from the recent Aon data points and there's an employer mandate oneonetwenty fifteen. So are you looking at 2015 as a big year of mix shift? And is there a potential for disproportionate share gains for you because the brand stickiness is not that great? And what are you assuming in your soft 2015 EPS guide of kind of in line with consensus?
That's quite a question. Gail, do you want to start?
Sure. That is quite a question. There's a number of things embedded. Let me first talk about the mix shift question you had and take it in a couple of parts. The first, let me deal with your question on small employer dumping.
We don't we have not seen a lot of that. We don't really expect an acceleration in that given how reform has laid out in some of the offerings that are still in the marketplace. So I don't expect any significant increase in dumping, although we do expect some decline in the market, which has been happening over time, but not a significant dumping. In terms of the overall market, you mentioned employers getting rid of or taking down their part time employees. Let me start with our expectations around the large marketplace.
Overall, the national account marketplace has been we feel positive about that marketplace. We're pleased with our competitive position in it. And we do expect better results in 2014 than in 2013. We've had a stronger close ratio. But with that, getting to your second question, we do have a very focused strategy when there is an opportunity in exchanges to help convert some of our self funded business to fully insured exchanges and we are seeing some of that, which comes out of our commercial enrollment.
And the other sector of the market that's happening is the retiree population is moving from the self funded book of business, particularly in our national accounts to our Medicare Advantage, our Medicare Supplement and our Part D products. And again, we've been very successful in that in 2014 and we expect to be successful in 2015. That's been a very specific strategy. So those are the kind of changes going on in the market and we feel good about our positioning in that.
Yes. I'd say just the expense, the diversification of our benefits offerings suggests that even if there are shifts in the marketplace, we're really well positioned to accommodate those shifts and I think pretty agile in that context. So perhaps just one more question.
Our next question comes from Karl McDonald with Citigroup.
Great. Thank you. On the cost trends, so sub 5% last year, a little bit under 5.5% this year. Can you walk through what's accounting for that call it 50 basis point increase this year versus 2013?
Sure, Karl. This is Dan Schumacher. One of the primary elements of the increase year over year is reform related. We talked about that at the Investor Conference last December that as people moved into richer plans, complied with community rating and so forth that was one of the elements that principal elements that drove the increase.
Okay. Thank you. Thank you. So I think we will close. And as we close today, I'd like to remind you that 2014 performance across both Optum and UnitedHealthcare remains strong through the 1st 9 months of the year and we expect to continue that consistent performance through the rest of 2014 and to remain in line with or ahead of our outlook that we shared with you today.
And in 2015 and beyond, we expect our overall business performance will further strengthen and accelerate both top line and bottom line. We look forward to sharing more detail with you around 2015 performance at the Investor Conference on December 2 in New York. So thank you for your attention today. Thank you.
This does conclude today's UnitedHealth Group Third Quarter 2014 earnings conference call. You may disconnect your lines and everyone have a good day.