Good morning. I'll be your conference facilitator today. Welcome to the UnitedHealth Group first 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's 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 cautionary statements included in our current and periodic filings. Information presented on this call is contained in the earnings release that we issued this morning and in our Form 8-K, dated April 17th, 2014, which may be accessed from our investors page of the company's website.
At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. 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 the first quarter's results in the context of our full-year objectives for 2014. Objectives that include continuing to diversify our services and product offerings, continuing to develop and expand our capabilities and relationships, and further strengthened and consistent fundamental execution and service to customers and consumers. We're working towards all these while new national healthcare policies begin to come into place and new baselines for market behaviors and new market dynamics become realities. We plan to deliver revenues in a range of $128 billion to $129 billion for the year, produce earnings in the range of $5.40 to $5.60 per share, and generate cash flows from operations between $7.8 billion and $8.2 billion. UnitedHealth Group, UnitedHealthcare, and Optum performed largely as we expected in the first quarter.
We remain on our plans for 2014 and as usual, continue to work through more challenges than benefits for the moment. Longer term, we continue to more clearly see evidence of the growth opportunities for both UnitedHealthcare and Optum as we move beyond the more negative immediate term impacts of the ACA and its implementation. This was really the first quarter of full-scale operations under the ACA. Everything else in the past three years has been more of a preamble. The ACA's impacts on 2014 have been immediate and significant, as we described at our investors conference. Non-deductible insurance taxes, ACA prescribed Medicare Advantage funding pullbacks, commercial underwriting changes, and various other provisions cumulatively reduced our per-share net earnings by nearly $0.30 for this quarter, and sequestration cut an additional $0.05 in this quarter.
On a full-year basis, 2014 Medicare funding actions will cut roughly $0.45 per share beyond that. This makes a grand total of about $1.50 per share in externally driven year-over-year pressure, fully consistent with our view at our investors conference in December. The ACA impacts every major line item of our consolidated results and distorts comparisons for virtually all performance ratios. This will continue as the year progresses and new regulatory and tax baselines are established and settle in. We think some very important early observations can be made about the ACA's first-quarter introduction. First, consumers and benefit sponsors are showing by their actions the clear value they see in private sector managed care products and services.
The capabilities of the private sector healthcare community are significant and have proven to be highly adaptable to serving the needs and demands of consumers in all stages and situations of life, as well as government and private benefit sponsors and the broader health system. Ultimately, there should be advances in access to care, and the healthcare system as a whole would become more effective and efficient and consistent over time. Early evidence of these is visible and will produce long-term growth opportunities for both UnitedHealthcare and Optum. Let's review how this played out in the first quarter for UnitedHealth Group, starting with UnitedHealthcare, whose revenues grew $1 billion or 3.6% year-over-year to $29.3 billion, led by membership growth in Medicaid. Over the past 12 months alone, UnitedHealthcare has implemented six new or renewed Medicaid contracts and grown to serve 395,000 new members.
In this past quarter, we grew by 255,000 people, driven by the expanded eligibility offered in and about half the states where we serve Medicaid beneficiaries as well as new membership in traditional categories. We expect growth throughout the year and could well exceed the upper end of our outlook of 350,000-450,000 additional people served this year. The Congressional Budget Office forecasts 12 million people will obtain coverage through Medicaid by the end of 2016. We will endeavor to gain market share serving the needs of these beneficiaries and their state sponsors. Nationally managed Medicaid is also broadening to serve new patients with greater clinical needs, like dual eligibles. We believe our integrated and in-the-market clinical model gives us distinct advantages in serving these higher growth, more complex areas.
Our model integrates behavioral, pharmaceutical, medical, and social services with a focus on the 5% of the population that drives well over 50% of the total medical cost in the typical Medicaid program. In Medicare, we began the year with growth of 360,000 across all Medicare product categories as Part D sales were strong and Medicare Supplement also grew nicely. Participation in our Medicare Advantage program was essentially flat, down 5,000 people sequentially, and well within the range we expected, despite significant market exits and product network adjustments made in response to the 2014 Medicare Advantage rate cuts of more than 6%. We continue to manage our Medicare Advantage products and cost structure at the local market level. We'll stay focused on that task all this year and next, given the continued adverse funding climate for Medicare Advantage.
Commercial membership also began the year generally in line with our expectations, with a sharp decrease in people served through fee-based relationships, as well as some expected decline in risk-based business. As expected, our individual policy business declined this quarter, as we decreased by 90,000 consumers with the advent of the ACA. In the commercial market, we experienced a strong competitive period over early renewals for legacy benefits, where many small group customers renewed early to avoid community rating and ACA price increases. These decisions were rational, driving healthier groups to renew early, while other groups took advantage of community rating where that was their best course of action. Over the last quarter, we have seen intensified pricing in several markets, including small group in N.Y., a large market for us.
We believe several carriers there, including new entrants, are pricing well below cost into what we would view as unsustainable pricing levels. If this climate continues, we could see some further pressure on risk-based membership beyond the ranges we anticipated this year. At Amil, we are beginning to see clear signs of response and recovery from a surge in utilization caused by aggressive access standards imposed nationally by the regulatory authorities in mid-2013. We continue to project a 6% commercial medical cost trend, ±50 basis points for 2014. First quarter usage benefited slightly from intense winter conditions across the Midwestern and Northeastern areas of the country. Offsetting this item was the rapid launch of an effective and very expensive new hepatitis C therapy. The aggressive U.S. pricing practices on this has been well-publicized and continues to be quite controversial.
We are working diligently to ensure this medication is applied under clinically appropriate standards. Patients were treated across the Medicaid, commercial, and Medicare Part D categories at a cost of more than $100 million to us in the quarter. The federal government will bear significant expense in the Part D program because the high cost of this treatment causes the patient to quickly move through the donut hole into the 80% CMS reinsurance corridor. Meanwhile, state Medicaid directors are at varying stages of concluding whether to include the medication on their approved state pharmacy list, and if so, how to pay for it.
Stepping back from these first-quarter trends, our full-year commercial care ratio will see pressure caused by a combination of the revenue impact from stronger than expected early renewal activity in December at pre-ACA rates, the underpricing dynamic in N.Y., and higher than expected utilization and cost related to hepatitis. The size and diversity of UnitedHealth Group tends to mute the effect of the commercial variance on the consolidated care ratio, we expect this ratio could lean toward the higher end of the 80.5%, ±50 basis point range we provided last December. Before I turn to Optum, I want to recognize some of our colleagues with us today who have taken on new roles at UnitedHealth Group, all in keeping with our long-standing philosophy of moving talented executives across the enterprise to broaden their experience and management depth.
Jack Larsen has moved from the Medicare business to head up our rapidly growing Optum Collaborative Care, which includes our care delivery businesses, a perfect transition given his background in Medicare and extensive M&A background. Steve Nelson has shifted from his role leading our local market-oriented Medicaid businesses to heading our Medicare & Retirement operation, where we are putting intense focus on market-by-market strategies around clinical care, network alignment, and quality stars. Austin Pittman takes over at our Community & State Medicaid businesses, coming from his most recent assignment, leading our overall UnitedHealthcare Network and local commercial market leadership before that. Turning now to Optum, it is becoming more evident the capabilities we have collectively built in our services platform are increasingly recognized in the marketplace. Optum continues to grow and mature quarter by quarter.
We continue to evolve to meet the needs of the market to further integrate offerings, strengthen and grow relationships, and align our efforts to the most valuable and sustainable opportunities to make the healthcare system perform better. More participants recognize Optum is in position to help customers engage their toughest healthcare challenges. Our work assisting the HealthCare.gov website in the last quarter of 2013 has led to new relationships, new pipelines of potential work, and new contracts with a spectrum of customers for 2014. We expect further growth in governmental services this year, continuing this first quarter's trend. Our efforts to help our customers improve their end-to-end performance and their structural costs have moved ahead with the launch of our Optum360 Revenue Management business with Dignity Health. We are developing a pipeline of additional health systems and expect to add business to Optum360 as the year progresses.
Optum is seeing positive market response to its broad business process outsourcing capabilities as well. OptumHealth is aligned around five key growth areas: prevention, intervention, financial services, distribution, and care delivery. Broad capabilities meeting market needs, matched with an efficient, agile, customer-focused organizational structure. The relationships we are building leveraging these critical capabilities, and they will be instrumental in Optum's future revenue and earnings growth as the consumer becomes a more significant buyer and decision-maker in healthcare. OptumRx is working a strong prospect pipeline in pharmacy services. Our distinctive focus on managing total cost by synchronizing information and care processes across the medical, lab, and pharmaceutical continuum is driving significant interest. We are only able to generate this interest as a result of the meaningful investments we made in OptumRx over the past couple years.
Similarly, we are making targeted investments in OptumHealth and OptumInsight to seek opportunities in areas such as consumer engagement, consumer distribution services, next generation analytics that combine administrative and clinical data at the scale of 60 million people or more, and next generation medical care review and compliance analytics. We will also invest startup costs in the assimilation of each new Optum360 relationship. This quarter, earnings bear $60 million of these investments, which will continue over the course of the year, but somewhat more weighted in the first half. All of these efforts resonate with one theme, new and sustained areas for growth by helping the system to perform better for everyone. Turning to Optum's performance for the quarter, revenues grew 29% to $11.2 billion, and earnings from operations grew 20% year-over-year to $650 million.
Operating margins declined slightly due to the exceptional growth at the lower margin OptumRx business, as well as the planned investments we just discussed. OptumRx led this quarter's reported results with revenues up 43.5%, earnings from operations up 114.2%, and operating margins expanding a full percentage point to 3.2%. We filled 140 million adjusted scripts this quarter, up 38% year-over-year. OptumInsight had strong growth in government and sponsored services in the quarter. At the same time, a slowdown in hospital clinical compliance services pressured revenues and operating earnings year-over-year and sequentially, as the federal government deliberated over medical necessity processes for Medicare, its so-called two-midnight rule. At the same time, our newly introduced compliance offering, serving hospitals' needs for clean medical necessity documentation for privately insured patients, are seeing accelerated growth in sales and pipeline.
We expect OptumHealth and OptumInsight to increase in profitability as the year progresses, accelerating into the second half. All in Optum delivered a strong first quarter with improved earnings and capital returns as compared to last year and remains on pace to produce $3.1 billion-$3.2 billion in operating earnings this year, as well as roughly one-third of UnitedHealth Group's cash flows from operations, all while investing in the future growth in its business. As a whole, we have a solid start to the year against the increasing headwinds we described at our investors' conference. UnitedHealth Group's first quarter revenues grew nearly $1.4 billion, or 4.5% to $31.7 billion, and net earnings were at $1.10 per share, fully in line with our expectations.
Cash flows from operations were strong at $1.4 billion, up 34% year-over-year, and a good start toward our full year projection. The biggest challenges in 2014 are the combination of non-deductible healthcare taxes and ACA-mandated Medicare rate cuts on top of sequestration and the government's continued systematic underfunding of Medicare Advantage. Including the 2014 Medicare funding issue and other ACA provisions, these impacted our first quarter results by well more than $0.35 per share and will pressure our full year net earnings by about $1.50 per share. We expect second quarter earnings per share will grow from this past quarter's results, but as planned, will come in below last year's reported second quarter, which benefited from strong reserve development and did not bear some of the competitive commercial market pressures UnitedHealthcare faces today, and like this quarter, will have substantial ACA effects.
Items we are watching include hepatitis C treatment costs, the full recovery of state Medicaid fees, commercial risk-based membership, New York, and the overall performance of our Medicare business. We are always respectful of medical cost trends, even though they are basically in line in the quarter. As always, we will strive to deliver the best possible result in both the short and longer term. We expect our 2014 net earnings to land in the existing range of $5.40-$5.60 per share. We mean that as a range. The items we discussed this morning might serve to temper one's thinking within that range. Standing back from the numbers, UnitedHealth Group faces an expansive long-term growth opportunity. In the U.S. alone, there is the opportunity to approach and serve the more than 700 of the Fortune 1000 companies, not yet our customers.
Today, we serve more than 85 million people, leaving more than 230 million Americans we do not touch. There's a growing number of people in government-sponsored programs who are yet to benefit from managed care. There is significant upside potential in our PBM market share. There are multi-billion dollar, multi-year opportunities that link services, technology, and insight to fundamentally help the health system perform better for everyone. Beyond the U.S., we see the same growing opportunities as the challenges other national health systems face around access, control, affordability, and effective decision-making are in fact the same ones we have here in the U.S., even as these systems differ. The level of longer-term success we achieve will depend on two things. First, an adaptive and innovative approach to applying our three long-standing core competencies of clinical care, organization and delivery, health information analysis and insight, and advanced enabling technology.
Second, the effectiveness of our leaders and our organizational culture. We serve in the sensitive social services arena in the early stage of important market changes, and we believe success will come to those who can build trust, serve with compassion, and control costs while driving higher quality outcomes. We thank you for your time this morning and look forward to your questions. We'll give you a second to get organized, and we will pick up your questions. Thank you.
The 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. We ask that you limit to one question per person so that we can get as many participants as possible. Please do not utilize speakerphone or headset while asking a question. Our first question is from Matthew Borsch from Goldman Sachs. Your line is open.
Yes. Hi, good morning. Could you talk about the outlook for Medicare Advantage for 2015? I realize we have to get through this year first, but in light of the various changes that were made in finalization of the rate, I know one of your competitors has put out a point estimate for the all-in rate impact, and I was wondering if there was a range that you could offer on a similar basis.
Yeah, sure. I think in terms of a range, first of all, we would comment that the final rate notice did mitigate some of the originally proposed cuts for 2015. In fact, the net result is that rates were once again taken down somewhere in the order of maybe slightly over 3%. That really comes on the heels of an overall funding decline of over 6% in the prior year, and that's against a rising overall medical cost trend. We would bracket that around, let's say, the 3%-3.5% range. Honestly, that is somewhat disappointing. We were hoping for a more positive all-in response. We'll be focused on working through and trying to mitigate that as we approach 2015. I would bracket it in the, let's say, 3%-3.5% range.
If I could just ask for one clarification on that. Is that inclusive of the, because it's not a rate factor, the impact of the increase in the industry fee, at least under the ACA provisions today?
Yeah, that is an all-in kind of what we see a funding deficiency to Medicare for 2015.
Okay, thank you.
Our next question is from Justin Lake from J.P. Morgan. Your line is open.
Thanks. Good morning. Wanted to follow up on the comments around 2014 commercial MLR, specifically if it does come in toward the higher end of the range. Can you tell us whether you think that would likely drive EPS to the lower end in your full-year guidance? Then just quickly on the MLR side, you mentioned $100 million of Hep C costs in the quarter. Can you tell us what your original expectations were for Hep C in Q1 and how you're currently expecting this cost to trend for the rest of the year? Thanks.
It was a little garbled on that second one. Your second question is $100 million related to what?
I'm sorry, $100 million of Hep C cost, I think you mentioned.
I got it. Okay. All right
for the quarter, how your expectations were going into the year for that versus the $100 million, and then how you expect that to trend for the rest of the year.
I got it. Well, maybe the way to frame the care ratio, and I'll let Gail Boudreaux and Dan Schumacher address this in more specifics, but we saw pressure in the first quarter. It is the first quarter. Those pressures are coming from a variety of sources. We will endeavor to try to mitigate against that over the course of the year. We think it's appropriate to alert you to the fact that care ratio will feel pressure because of these factors. As you point out, we have a very diverse business, not only within the UnitedHealthcare platform but in the Optum platform, and we have a number of ways to fight back against those pressures, and we're endeavoring to do that.
It's early in the year, and so we are staying largely within the ranges and kind of giving you color around where we see the pressure points. In terms of hepatitis C, Gail, Dan?
Sure. Good morning, Justin. On hepatitis C, as Steve mentioned, we saw $100 million of costs in the first quarter, a little more than that. That was across all of our benefits businesses, so Medicare, Medicaid, and commercial. I think what we're seeing is not inconsistent with what folks are seeing across the industry, which is higher pent-up demand, as there was more patients that were warehoused leading up to the launch of hepatitis C treatments. We would expect that there would be some moderation in new patient volume as that initial pent-up demand starts to wear off. I would tell you that obviously these are 12 and 24-week treatment regimens, so those folks that were introduced in the first quarter will carry forward into the second.
In terms of its relation to our expectation, I won't size that specifically other than to say that it's a multiple of what we had expected.
Great. Thanks for the color.
Next question, please.
Our next question is from Peter Costa from Wells Fargo. Your line is open.
Yes. I'd like to understand a little bit more about what you expect to do about the rising cost of Hep C going forward. As you mentioned, moderating, when it becomes perhaps all oral towards the end of the year, you would expect it to re-accelerate again, and in particular for next year. How are you going to price that into your businesses for next year? Do you expect states to reimburse you this year or carve it out? Can you build on that a little bit? The other cost item that you talked about was in New York. Can you tell us how you're going to respond in New York to the pricing pressure there?
Sure. As you point out, how Hep C is addressed really does vary across the businesses based upon the segment of business that we're in. We'll try to respond to several of those, and maybe we'll start out with Gail.
Sure. Good morning. Let me first address the Hep C question, we'll talk about the issue in New York. I think as you mentioned first, the Hep C therapies, as you know, are very effective, and one of the things that we are doing is working to ensure that appropriate clinical protocols and standards are in place. As noted, the price is exceptionally high. As Steve said in his opening comments, that's controversial and it's putting a lot of pressure on states, CMS, in terms of Part D, as well as our employer sponsors, the cost has to be addressed. As we think about actions in the Medicaid space, particularly, first and foremost, we're working with each of our states to ensure that we're aligned with their expectations on their PDL and how they want to handle that, and also giving them ideas on risk mitigation.
From a cost perspective, where we're paying for it in Medicaid, it is a cost to the program that wasn't priced in. We are working with our states to figure out that funding gap. We do expect it is a cost of delivering service in that space and would expect that that will be reimbursed, but the timing is what is uncertain now because this accelerated very quickly. As Dan said in his opening remarks about this, because of warehousing and the rapid launch, this is something that everyone's dealing with across the space right now. In terms of the issue on New York, let me open up a few comments, and I'll ask Jeff Alter, our CEO of our commercial business, to comment.
I think Steve highlighted, in New York, we have a somewhat unique situation in the small group market in particular, where there are new entrants as well as existing competitors pricing below what we believe is a sustainable cost structure and pricing below what we believe are costs. We've always maintained pricing discipline. We're a market share leader in New York. We've had a long history of several decades of consistent performance in that market, we do think that there is a market correction needed. We're going to stay very disciplined in our pricing. Again, because of the dynamic that's going on there, it's something that Steve and we highlighted in our opening comments.
Hey, Peter, good morning. It's Jeff Alter. Just to add a little color to that, as most people are probably aware, we've served that marketplace successfully for a couple of decades. We know that marketplace really well. We've got leading economics. We understand the pricing, and we really believe at this point that that market has got to come back to a more sustainable level. We're comfortable with our pricing in that marketplace. It's just that others have chosen to be well below our pricing, and that's going to create an issue in that marketplace.
We will talk to the regulator about it, in the short run, we are going to maintain our discipline like we have. That discipline has served us well in that marketplace, it will put pressure as we think about 2014. As we pace into the other quarters in 2014, it will put some pressure on our risk-based membership.
Thank you. Next question.
Our next question is from Dave Windley from Jefferies. Your line is open.
Hi. Thanks for taking the question. I wanted to shift over to Optum. Curious how you see your margins progressing in Optum through the year. You mentioned ramping Optum360, making investments there. You clearly need to see a pretty substantial ramp up over the course of the year to get to that margin guidance range. Interested in the progression there, please.
Yeah, we do expect that. Optum is performing exceptionally well and doing it while balancing investments and the assimilation of new business. It's impressive performance. John, Larry, which one of you?
John's going to start.
Okay
Hop on here.
Yeah. Just to lead off here, I'd say both overall Optum and the individual segment results were in line with the expectations. I think part of what you're alluding to there, Dave, is within Optum Health and Optum Insight, earnings were down year-over-year about 4% or 5% respectively here. What we're doing here is really investing for the future. I would say it's centerpiece of One Optum, Chapter Two. It's all about investing for our future growth outlook. I draw the parallels to Optum Rx, and what we did there over the last few years, investing several hundred million dollars into that business. You can see the results as we are kicking off into 2014. As we look at 2014 for ourselves here in Optum Insight and Optum Health, we'd be looking to invest over $200 million in those businesses this year.
All about next generation clinical administrative data analytics, Collaborative Care, our Optum360 business. We're consistent with the look we provided at Investor Day. Back to your direct question on progression, looking for a 40-60 split in terms of earnings progression first half, second half. To get direct to that.
Dave, it's Larry Renfro. Let me make a couple of comments. As John said, Steve said, we are investing, obviously, in future growth. This is all part of the One Optum plan, a plan that we put in place three years ago, where we're continuing to balance growth investments and cost management. I won't go back over what John was talking about in terms of some of the examples, but I will mention the PBM because that is the perfect example of something we invested in for a couple of years, and we're now starting to see the payoff of that. I would also tell you that you could refer to healthcare.gov and the way that we have been working with the Federal Government as well as the states, as we're starting to partner. That's part of one of our disciplines of larger and deeper relationships.
We believe that that's going to pan out. The most important thing probably is that $60 million of expense in the first quarter was a planned expense. We haven't deviated at all from our plan and where we said at this point in time. I think you can look at both business segments and see that the revenues are up. I would tell you that the OI or the OptumInsight backlog is up 18% to $7.2 billion. I can also tell you that OptumHealth and OptumInsight's pipeline is up 58%. All this is planned. We're pretty comfortable where we sit with a solid start to the year, and believe that we'll be strong moving forward for the rest of the year.
Thank you.
Our next question is from Sarah James from Wedbush. Your line is open.
Thank you. I wanted to follow up here on SOVALDI. First, if you could frame it. The $100 million is about 1,200 cases. Could you split that between the three segments? To follow up on pricing, is it currently priced into your commercial product for this year? How does factoring it into Part D work? Gail said that she expected SOVALDI to be reimbursed for Medicaid. Does that mean retroactive to the drug launch or more going forward?
I think we'll respond in more general terms. We are certainly not going to get into case specific across segments. Absent that, I think we can give you a response.
Sure. Good morning, Sarah. Dan Schumacher again. With respect to the new patient volume that we're seeing, we are seeing the highest volume on a percentage basis in our Medicaid block, as you would expect, as well as in Medicare, and then followed by commercial. When you translate that through to the impact, obviously Medicare is lower because of the reinsurance aspects of Part D. That gives you a sense of where the volume is coming from. With regard to the reimbursement, I'd ask Austin Pittman to provide some perspective.
Sure. Thanks, Dan. Again, as Gail mentioned, we're working diligently with all of our states. First to get in alignment with their coverage decisions. Second, on risk mitigation strategies. Where we are covering, again, we do expect it that is a funding gap that will be solved. It's an issue of timing, and we would expect that to be solved for the contract period.
Does that mean retroactive?
Yes.
Yes. Okay. Thank you.
Sarah, it's John Penshorn. Just I'd offer caution on estimating number of people, because as Steve mentioned, the federal government is also covering some of this cost through their funding for the Part D program, catastrophic coverage.
Got it. Thank you.
Next question, please.
Our next question is from Christine Arnold from Cowen. Your line is open.
Hey there. At your Investor Day, you mentioned that you were targeting 10 or more really large customer relationships by 2016 within Optum. I hear you about the backlog and the pipeline. Could you talk about kind of where you see those large relationships progressing and when we might see some of those?
Sure. We'll respond in general terms. Obviously, it's sensitive in terms of these things are active in the market today, we don't comment ever on specific clients or opportunities. In broader terms, Larry, you want to?
I will start, and I might ask Dirk, and I might ask Andy and Bill Miller, all three to comment on this. We obviously are talking a lot about what we're doing with Optum360, and in that marketplace, that is a growth marketplace for us. The pipeline, as Steve said, we from a competitive standpoint, would not really want to talk about that right now, especially what we're doing on the revenue cycle management side. I will ask Bill in a second to talk about that. I would tell you on the PBM side, we continue to grow. We continue to see a large number of RFPs that we are participating in, and I'll ask Dirk to speak to that.
On the government side, obviously, what we're doing with the states, what we're doing with the federal government and some of the programs that we are involved in are larger deals. Also, we are concentrating in the, what I'll call our Optum Collaborative Care area. That's our care delivery organization. We're gonna beef that up a bit, I might ask Jack Larsen to start with that and just give a little feel for what we're doing there.
Thanks, Larry. Morning, Christine. Jack Larsen. We would view the opportunity to invest in or align with some of the better performing primary care physician-oriented physician groups and other specialty groups around the country as really central to Optum taking on the mission of some of the toughest challenges of the healthcare system. For example, today, in our local care delivery organization, which you can think about as our broadly speaking, our physician groups, we serve in 19 markets today, and we serve just a little over 1 million people as patients. I would expect this to continue to grow through some of those larger, more comprehensive relationships that your question was sort of pointing at, as well as grow it organically and the continued use of M&A, which I think we're pretty good at there.
Maybe Andy, you could talk about the government?
Sure. Yeah. Hi, Christine. Really quickly, we've been pleased to have the opportunity to serve both federal and state governments. I think what they've seen is something that's emblematic of the answer to your question is, they've hopefully seen the technology, the general healthcare and the execution capability that an organization like Optum can provide. I think that will build relationships both at the state level, as well as we take our technology out commercially in a bigger and bigger way, really substantial relationships where we become a more embedded part of our clients.
Maybe Dirk on the PBM.
Yeah, on the PBM. Hi, Christine. Our pipeline's up a bit year-over-year, this is really on top of a nice, strong sales showing last year. If you look at finalist meetings we've attended, we're certainly getting our at-bats with big customers. For example, this year I've already attended two finalist meetings where opportunities were in the half a million member range. We're certainly getting our opportunities. We're excited about our pipeline, although I'll tell you, we're really still early in the season and a lot is TBD.
Two more areas, I'll ask Michael Winkel, this goes back to Steve's comment, in his opening remarks about the 700 organizations that we do not do business with today. Obviously on our consumer solution side, we're starting to really target. Mike, maybe make a comment on those.
Sure. This is Michael Winkel. From an employer perspective, the 700 of the Fortune 1000 that Optum doesn't serve in any way today, we think there's a large opportunity out there for us to take a lot of our consumer solutions directly to those and wrap those services around them. We're ramping up the sales force. We're in conversations, starting those conversations with a number of these large employers. We're also starting conversations with a number of associations and other places to try to get to consumers with products and services that we think will really empower them to take ownership of their healthcare in new ways.
Now in with Bill Miller. Bill, could you talk a little bit about our hospital market?
Yeah. Christine, thanks a lot. There's three things that I'll touch on and where these big relationships will continue to grow and foster in our three basic areas, as we mentioned, Optum360. We are in several negotiations with the next phase of clients. We obviously aren't gonna expose those right now. I'd also remind you that that business
platform is adding clients every day. They may not be the big, large, multi-year arrangements. If you look at our backlog growing 18% to $7.2 billion, that's a function of those tools that we have out in the marketplace or subsets of a full-blown end-to-end deal being absorbed by many clients on a quarterly basis. Those set the stage for larger arrangements down the line. Some of those are measured in the 10s to $50 million arrangements over the course of three to five years. We'll see other very large ones added over the year. Then I think we're doing far more work on the ACO side, helping hospitals re-engineer themselves to become ready for fee-for-value. We've had several large transactions in that space, we'll continue to see those through the year.
Finally, the other area of emphasis for us, both in our payer-provider, Andy touched on it, in the government market, is our continual ability to impact the marketplace from a BPO standpoint. With our technology scale, with our state-of-the-art technology and ready-to-go technology, along with our consulting services, we're finding acceptance in the marketplace, whether it be amongst payers or providers, to slide into position where we're really managing large chunks of their, if you will, core business so that they can focus on care, so that they can focus on taking care of their members. With our backgrounds, both on the payer and the provider side, we end up being a pretty suitable partner in those really game-changing decisions that governments, payers, and providers are making on a more consistent basis as margin pressures and talent pressures continue to mount in the marketplace.
Great. Thank you.
I might complete that very comprehensive response by saying that, if you listen, Optum's challenges are more around abundance. There are significant opportunities getting those relationships started right, recognizing they're going to be substantially larger than the relationships we've had in the past, that they are going to engage a broader spectrum of services, and that they're much longer term. We are trying to be thoughtful about these approaches in each of our businesses there, as well as continuing to make sure that we are investing so that we are delivering ever better value. They're navigating in those kinds of waters right now, which are really great waters to be in at the moment. Next question.
Our next question is from A.J. Rice from UBS. Your line is open.
Thanks. Hello, everybody. I guess I was thinking you hadn't really said much about your views about how the whole public exchange first-year process played out. Now that we're done with the open enrollment, you've got to think fairly quickly about what you're going to do with respect to 2015. Give us any updated thoughts and assessments of how it played out and what your posture will be for next year.
Sure. Well, I'll have Gail and others to respond principally to that. We were involved from the Optum side, so we do have some perspectives from that. It is still very early in the life of the exchanges, and the second year, in terms of how they will evolve, will be affected somewhat by what I call a lot of spontaneous change over the course of the first-year implementation, which we understand but does require some consideration and calibration as we go. Gail, do you want to start?
Sure. Good morning. As you know, we had a very modest footprint in 2014, and as we've said, and still believe, we do have a bias to increase that participation in 2015. There's a lot happening in that, and we're in the process of doing our evaluation. Obviously, we're looking at how the markets and products are regulated, the networks that we would put in place. There are some things that we did learn in the first part of the market. First, that the size of the overall market is positive, and that the configuration of products around Silver is also a positive for the market, and that there's now some experience and a desire to keep these exchanges stable. We don't know much about second-year pricing. We do know first-year pricing.
Again, at this stage, I'll just reiterate that our bias is to increase our participation in 2015, and we will share more with you as those decisions are made over the coming months.
Okay, great. Thanks.
I would also observe that while we will be engaged in readiness, you really don't have to commit until September, right?
Right.
We have time to see how this plays out a bit.
Okay.
Next question, please.
The next question is from Ralph Giacobbe from Credit Suisse. Your line is open.
Thanks. Good morning. Just wanted to go back to the comments on intensified pricing. I guess one, just want to make sure, is it just in N.Y., or are you seeing it start up in other markets? Second, did you say that in N.Y., it was coming from new entrants and existing competitors? Just the last piece, just trying to sort of tie it in on how related it is to the public exchanges plans, maybe pricing that would encourage dumping, or are you saying it's just sort of head-to-head off-exchange sort of land grab? Thanks.
I think Gail and Jeff are perfectly prepared for this.
Morning, Ralph. A couple of things, because there's a number of questions embedded in there. Let me start first with your questions around exchanges and early renewals. One of the first things is that we had a very successful early renewal of our small group customers in the fourth quarter. That clearly is a big positive for us going forward. In terms of the N.Y. issue, I'm going to let Jeff specifically address it. We talked about it, but it is a unique to N.Y. issue. Yes, it is both existing competitors as well as new entrants, but there's some unique dynamics in that market.
Your broader question around what's happening in the competitiveness of the overall market, as Steve said in his opening comments, we have seen in the first quarter, again, after a very successful early renewal of small groups and intensified pricing in some select markets. That is having an impact on our fully insured risk because we have stayed very disciplined in our pricing. That's really the dynamic that's going on. It is select markets, and there is a dynamic of the early renewal that occurred, that's having an impact on that. N.Y. has some unique characteristics, and we wanted to point that out because of those unique characteristics, and I'll ask Jeff again to comment on that.
Good morning, Ralph. When you think of that N.Y. marketplace, it was probably one of the least affected by the ACA. It has been community-rated, fairly stable from 2013 going into 2014. There were some new entrants into that marketplace, that in our opinion, clearly are underpriced what the cost structure is in N.Y., not only our cost structure, but certainly their cost structure. Over the last few years, we've had competitors that have left the N.Y. marketplace that chose to reenter the marketplace in January of 2014. We see those competitors also underpriced for what the economics would call for. Next question, please.
Our next question is from Scott Fidel from Deutsche Bank. Your line is open.
Thanks. It's clearly very early here, but just wanted to get your thoughts on expectations for the 2016 MA rates and just sort of thinking about some of the factors that benefited the 2015 rates that CMS said that they may revisit, for example, freezing the move to the new risk adjustment model and then also delaying the proposal on the HRA proposal. I know there was hope and expectation that the 2016 MA rates, we could see the sky sort of clear there, but just given some of those factors that I mentioned, just interested in your thoughts here on 2016 MA rates.
I'm not sure that we offer a public perspective on future rate settings that we don't really have any control over. We're aware of the factors and many others that go into thinking in terms of rate setting. We're still digesting 2015. I really am not going to comment about that rate-setting process. If you look back, our batting average on that would be pretty poor. I don't think we're going to step into that. I would just speculate that there has been pretty steady funding pressure in terms of the Medicare Advantage program, that it has been hit severely by the insurance taxes. It's been affected by the funding posture in the various ways that CMS develops the rates each year. This has now been several years, against a moderate but still rising overall cost trend.
We will be very watchful and careful with respect to continuing to advocate for fair funding to the Medicare Advantage segment. It's a segment that serves 15 million seniors. It continues to grow. It continues to perform exceptionally well, particularly in comparison to the fee-for-service program. We would be advocates of thinking that program really should be more the future of Medicare and funded appropriately for that purpose, and that it affects seniors. Our posture there hasn't really changed, and it won't change in 2016. We will be hopeful that the funding perspectives take that into consideration going forward. Beyond that, I really can't really respond to your question.
Okay, thanks.
Our next question is from Chris Rigg from Susquehanna. Your line is open.
Good morning. Thanks for taking my question. Just want to make sure I understand the messaging on the Hep C. Sorry to come back to that, Dan, I know you said percentage-wise you're seeing the most volume in the government segments, in the press release, the only area where you specifically highlight it is in the commercial side. Is it fair to assume that sort of the greatest area of surprise has occurred in commercial, or has it been across the board? Thanks.
Good morning, Chris. It's Dan. We've been surprised on the volume, the pent-up demand across all three businesses. Maybe I'll step through the commercial care ratio and how that goes into the consolidated and how you think about Medicare and Medicaid to put it in context around the pieces. If you look at the commercial care ratio, it was higher this quarter than we had expected, and there's really two pieces to it. One, obviously, is the Hep C, and the other element is the early renewals. We saw greater volume of early renewals, so customers choosing to stay with their existing plan, typically healthier and younger, and that led to less premium.
Those were the two factors that were really influencing the commercial outcome, and then when you blend that together with Medicare and Medicaid, which had pressure from Hep C, but overall are performing well in line with our expectations, it meets the impact at the consolidated level. Hopefully that provides greater color on the implications inside each of the businesses.
Understood. Thanks.
I wouldn't take any undue significance to the order. We just merely talked about commercial first and got it in there first. There was no intent there. Next question, please.
Our next question is from Sheryl Skolnick from CRT Capital Group. Your line is open.
Good morning. I have to say that to put it just in context of $0.35 worth of earnings pressure to come up with this, a decent quarter, was hard work on a big organization, and it's appreciated. I respect it very much. The question I have to get away from the important detail of hep C and some of the other items is, to step back and perhaps take a look at the bigger picture of the company for a second. I noticed that, for example, you spent $345 million, if my numbers are correct, this quarter on acquisitions. You're spending another $ couple of hundred million on investments in the two Optum businesses, Health and Insight, in order to create platforms and structure and opportunity for further growth.
What I'm really trying to get at is, what else can you tell us or share with us about your thoughts on capital deployment, whether it be acquisitions or investment in the business, or indeed, dividend policy and share repurchases, that we should be looking for as not so much offsets, but positioning the company for growth this year as well as in the out years?
I'll offer a response that probably won't be very surprising, then ask Dave if he has any comments. Our capital postures haven't changed in the broadest sense, and they are oriented towards a balance of building for the future and continuing to grow and diversify an enterprise in a thoughtful and logical way. Then making sure that we are returning capital to shareholders in an efficient as well as balanced way. We will continue to invest organically, actually first and foremost, and you can see those investments play out in our Optum business, and there are also investments in the UnitedHealthcare business.
I would also offer that a lot of our internal capital spending, as you see it in the financials, are particularly related to technology and continuing to advance and refine a better and more modern health system that we can propagate across the country. We continue to balance that with external growth, and we continue to maintain a disciplined appetite to continue to grow and expand our business where we see opportunities to either expand or position a market share that we are looking to pursue a market position. Secondly, cultivate a capability, and much of our investment is around bringing capabilities to bear and adding them to our portfolio. Optum is a great example of this, and our technology is as well.
Then lastly, to return capital by way of a balance between dividends, which we have been advancing strongly and will continue to take an orientation to make sure that we are advancing them to a market payout position and share buyback. Those have served us well, and they've been very consistently applied. It provides a nice balance in terms of being able to continue to advance, expand, and diversify the business and capture that growth, which is really the sustaining longer-term growth and opportunity, as well as maintain a discipline over capital efficiency and maintain appropriate and hopefully accretive capital returns and earning returns.
Having that be virtually impossible to say anything in addition to Sheryl, it's Dave Wichmann. I will offer a couple of additional comments. First, probably as you've seen in this quarter, we had a nice cash flow quarter, particularly compared to last year. We are managing cash flows and our return on invested capital very hard and in a very disciplined way. The increase in cash flows for this year, to the $7.8 billion-$8.2 billion level will be invested, as Steve discussed. I think you've seen that we had a very strong repurchase period in the first quarter here.
We said $3 billion-$3.5 billion in shares repurchased through 2014, clearly we're on track towards the upper end of that range at this stage. In the spirit of continuing to return capital to shareholders, as you know, each of the last three years, we've increased our dividend by 30% or more. That is something that we are committed to reevaluating periodically. We really look at the outlook of our business, the capital requirements of our business, and then also what our peer benchmarks are. I don't think it's news to anybody that we have some room to improve there.
On the M&A front, you notice it was a relatively modest investment, I think strategically important because they're aligned to what we said at our investor day. They're really oriented more towards our Optum businesses, where we see stronger growth prospects, earnings growth prospects. In that case, we think we acquired the leading consumer digital health platform in the country. In addition to that, we continue to extend our reach internationally with relatively modest but strategically important investments, particularly in South America, where we think there's a wonderful opportunity long-term to grow. With that, I'll end. Thank you.
Thank you for the question.
Thank you.
Next question, please.
Our next question is from Joshua Raskin from Barclays. Your line is open.
Hi. Thanks. I appreciate you guys taking the question here at the end. I really just want to drill into this commercial MLR issue and make sure we're not overreacting to N.Y. and a couple things. The good guys in the quarter to me would be the ACA fees. It'd be helpful if you could tell us what the actual ACA fee was, and maybe by segment that'd be particularly helpful. The impact of weather. It looks as though with your payables up four times as much as your premium sequentially, you're probably just assuming that that utilization comes back, and we'll figure that out when we get to see March, April claims. On the bad side, Hep C's $100 million is 36 basis points. Obviously, not all of that is commercial, I'm assuming maybe that's 10 basis points.
That certainly is not getting you above your range. N.Y. State, I calculated, about 7% of your overall premium, every 100 basis points there is seven basis points. I'm struggling to figure out what's going to drive you above the 80.5% ± 50 basis point range in commercial, really want to just make sure that N.Y. is not bigger than sort of a 7% impact or something that I'm calculating.
Well, we'll respond, I think, more in general terms. I agree there shouldn't be an overreaction. I would also agree that it is a portfolio of issues and pressures. We're kind of alerting you to that portfolio. That as a kind of a context. Dan, you want to respond?
Sure. Good morning, Josh, it's Dan. You add a lot of pieces to that. First, I want to clarify, you talked about the commercial loss ratio. The commercial loss ratio guidance is 79.2% plus or minus 50 basis points.
Okay, yeah.
The consolidated loss ratio guidance is 80.5% plus or minus 50 basis points. As we look inside the commercial business, we have two principal pressures, the bigger of which is the early renewal impact and having less premium. Good long-term thing, it impacts our premium in the near term. The second, in the order of impact, is the hepatitis C impact. When you put that together, that gets muted on the Medicare/Medicaid side because they don't have those other dimensions we're talking about other than the Hep C. On a consolidated basis, that might suggest that our loss ratio may lean towards the higher end of the range.
Right.
That's about also, I think the ACA fees.
Our fees in the quarter were in the range of about $450 million on an expense basis. Obviously from a reimbursement standpoint, we have reimbursement in the commercial business, which is higher because it has insurer fees and the reinsurers' fees. We have less in Medicaid because it's just the insurer's fee, and then there isn't a mechanism in Medicare in premium to recover that. Hopefully that gives you some more context around the pieces.
You didn't even mention New York as a pressure in commercial overall now. Is that because it's not big enough in terms of magnitude?
That's more of an impact on the enrollment. You look at our risk-based enrollment and some of the pressure we're seeing there and potential forward, that's more a commentary on the enrollment and less on the loss ratio.
I guess I'm still struggling to understand the commercial ratio, 79.2 plus or minus 50 basis points, to see an impact of more than 50 basis points. Again, I know Hep C is the smaller. The early renewals, I assume, has to be a huge impact then, much bigger than you guys were expecting, right?
It's a very meaningful impact. On the early renewal side, we saw more than two times the volume we had expected.
Okay.
Again, also a good thing in terms of how it positions us and how it sustains that membership and does it for a good period. I think while there's a resulting pressure, the reality is, I think, a very good business decision and a good outcome for us.
Right. No impact from weather then? Because that wasn't mentioned.
I would tell you that as we look at weather in the quarter, it was a very smallish impact. As you look at which days were the heaviest in relation to what we see in normal patterns, as you look at where our densities are from a population perspective, it wasn't particularly meaningful.
Okay, thanks.
You have a very good list, Josh. You were listening very attentively.
Trying.
I think that will conclude our Q&A session for this morning. As always, there's an opportunity for you to talk to John and Brett and so forth through the course of the day. I just might sum up by saying UnitedHealth Group, Optum, and UnitedHealthcare are tracking to the plans we've shared with you. As we told you in December, we fully expected challenging conditions throughout 2014, and we are working through the headwinds of ACA implementation, the Medicare cuts, competitive market dynamics, et cetera. We would have had an underlying growth rate of more than 20% absent the impact of the ACA taxes and the regulatory provisions. We believe we have the right plans in place to deliver on our commitments, and we know the people of this company have the talent, the experience, the innovation, and the drive, and are determined to succeed.
We thank you again for joining us. We'll see you next quarter. This concludes this morning's call. Thank you.
This does conclude today's program. You may now disconnect event lines.