Good morning. I will be your conference operator today. Welcome to the UnitedHealth Group fourth quarter and full year 2013 earnings conference call. A question and answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded. Here are some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. These statements are subject to risk and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings.
Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K, dated January 16, 2014, which may be accessed from the 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. Please go ahead.
Good morning. Thank you for joining us today. Given that we provided a comprehensive review at our investor conference just over a month ago, and that our 2013 fourth quarter and full-year results are generally in line or ahead of that discussion, we'll keep our formal comments brief this morning and spend more time on your questions and topics of interest. We see five takeaways from this morning's discussion. 2013 was a very strong year as we meaningfully advanced the enterprise's capabilities, our growth and growth potential, diversification profile, and market momentum. There are certainly near-term 2014 pressures, particularly from ACA implementation and Medicare funding actions that will divert more than $1.50 per share in earnings from us in 2014.
We have plans and actions in place to offset these reductions and to grow revenue to a range of $128 billion-$129 billion and produce earnings in the range of $5.40-$5.60 per share, with cash flows from operations between $7.8 billion and $8.2 billion. In 2013, we deepened our capabilities and market relationships and successfully moved beyond significant undertakings such as the Optum Rx insourcing, the implementation of the large long-term TRICARE contract, and extensive ACA readiness and compliance efforts. We move into 2014 with operational readiness and performance levels stronger than ever before. As Medicare Advantage underfunding is hurting seniors' benefits and causing disruptions of beneficiaries, our focus will remain on advocating for fair and consistent government funding to this program that now serves some 30% of this country's Medicare beneficiaries.
On continuing to innovate, shape and improve our Medicare Advantage products and services to sustain these benefits and bring the best resources and service experience to American seniors. We will continue to focus on delivering earnings per share growth in 2015, with our ultimate performance dependent in part on the results of the Medicare Advantage rate-setting processes for 2015. Finally, while we will work intensively through the near-term pressures just discussed and covered comprehensively at our investor conference, we believe even more firmly that long term, no organization has greater ability to serve and enable a more effective modern healthcare system and to respond to a national imperative to improve the performance of healthcare and reduce its cost from consumer benefits and wellbeing to care delivery and enabling technology. UnitedHealth Group's long-term growth and earnings potential in these undertakings has never been more compelling than it is today.
To briefly review 2013, full-year revenues grew nearly $12 billion or 10.7% to $122.5 billion, and net earnings grew 4% to $5.50 per share. Earnings were at the top end of the range we provided more than one year ago, despite the subsequent imposition of sequestration, which cost approximately $250 million in operating earnings, or $0.15 per share in 2013. Cash flows from operations of $7 billion were more than 1.2 times net income. Fourth quarter cash flows were $1.1 billion, and we ended the year with more than $1 billion in non-regulated cash. We raised our dividend by 30% once again in 2013. It is now at a $1.12 per share annual rate, and we purchased nearly $3.2 billion of UnitedHealth Group shares in 2013. Return on equity for the year approached 18%. UnitedHealthcare continued its extraordinary growth in 2013.
We came to serve 4.5 million more people this past year, entirely through organic growth, including more than 900,000 people in public and senior market benefit programs and nearly 400,000 people internationally. Stepping back, UnitedHealthcare has grown by a remarkable 14 million people over just the past four years. Our benefit businesses are distinctively diversified locally, regionally, and by product and customer type. UnitedHealthcare earned $7.3 billion in 2013. UnitedHealthcare's operating costs were well managed in 2013, as were medical costs, with commercial trends in the area of 5%. Hospital usage per capita was lower for the fifth consecutive year in 2013 and was lower across all our major benefit businesses. UnitedHealthcare's results were negatively impacted by funding pressures on government-sponsored benefits, three calendar quarters of sequestration in Medicare, and reduced levels of overall reserve development.
Despite these pressures, UnitedHealthcare grew fourth quarter earnings 9% year-over-year to $1.8 billion. UnitedHealthcare ended the year more aligned than ever with key care provider partners. We have $28 billion in annual medical spending and 8 million members served under fee-for-value contracts, including more than 2 million people under the most progressive of these performance arrangements. We are intensely focused on expanding our integrated and accountable care leadership throughout 2014, and we have set an aggressive target of having more than $65 billion in value-based contracts with care providers by 2018. Turning to Optum, our health services platform. Our focus on growth, simplification, integration, and building larger and deeper relationships produced record revenues and operating earnings in 2013. Revenues grew 26% to $37 billion. Every reporting segment produced double-digit percentage revenue growth.
As just one example of Optum's performance, our local care delivery business in OptumHealth increased both the number of payer partners and increased the number of people it served by 6%, and it expanded operating margins more than two percentage points in 2013. Medical cost performance and patient satisfaction levels were excellent, with the overall trend held flat, and our physician groups participating in health plan contracts with quality star ratings ranging from no less than 3.5 up to 4.5 stars. During the fourth quarter, Optum QSSI was honored to be engaged by and serve CMS in their efforts to enroll millions of Americans through the federal and state exchanges.
Great progress was made over the past 90 days, and we are pleased to be a part of that effort, and we will stay involved in a senior advisory capacity as this project moves to its next phase of development. For the year, Optum's operating earnings of $2.3 billion grew 61%, or $875 million over 2012, and are now up 84% over our 2011 baseline year. Fourth quarter 2013 operating earnings increased 43%. Optum reached its 6% operating margin target two years early in 2013 and now has established a new target called Eight by '16, which means an 8% operating margin by 2016. We enter 2014 with our company in a very positive position, we will continue to closely study the development of the individual public exchanges in 2014 and will be selective in our approaches for 2015.
We expect to realize strong growth by serving it in several ways: as established Medicaid programs grow through the ACA expansion, as eligible Medicaid prospects are identified through the federal and state exchange market, and as the inevitable dual-eligible MMP initiatives begin to form and are implemented. The recent Tennessee Medicaid award for 2015, in which we earned the highest score among seven qualifying bidders, our 2015 renewal in Hawaii, and the Michigan MMP award all reflect our strong capabilities and established relationships in the rapidly growing Medicaid market. We have won 30 new RFPs or contract renewals in the past four years, and we have grown organically by more than one million people served through our UnitedHealthcare Community & State business over that period.
Continuing on 2014, our initial Medicare growth is within our estimates, with balanced new membership growth and large employer wins during the year, offset by our exit from plans covering 150,000 people and the loss of over 90,000 seniors in one state account. Our Part D and Medicare supplement offerings continued to grow well in the marketplace. We continue to expect commercial group risk membership to be stable in 2014, with our commercial individual insured membership declining over the course of the year and the number of consumers served in fee-based arrangements declining due to the loss of that large state account, as well as some migration to private exchanges for both retirees and active employees. Our 2014 plan includes the collection of insurance fees and related taxes from state Medicaid customers.
We have strong oral commitments from our customers that these will be paid. We will record these revenues as written contract amendments are finalized over the course of the year. The timing of these final commitments could affect quarterly earnings progression. UnitedHealthcare's earnings in the first quarter will also see year-over-year variances related to reserve development, capital gains, and the effect of sequestration, which did not take effect until April 1, 2013. Optum continues to build out its businesses around the themes of engaging consumers, aligning and optimizing care delivery, modernizing the health systems infrastructure, and using data and analytics to make the health system more informed, aligned, and effective. Optum expects strong top and bottom-line growth in 2014, with operating earnings in the range of $3.1 billion-$3.2 billion on $45 billion-$46 billion in revenue.
This performance will put earnings growth in the area of 25%. That growth rate includes, in both years, the earnings contributions from realigning our IT and global services businesses into Optum in 2014. This natural alignment will help us create and capture growth opportunities in business process outsourcing for healthcare and in healthcare IT assignments similar to our efforts in service to CMS. Optum's earnings are expected to be strong in the second half of 2014 due to growth investments early in the year, such as fully implementing Optum360, as well as more traditional seasonal earnings patterns. In the fourth quarter of this past year, both S&P and Moody's affirmed our corporate debt rating and upgraded their outlooks. We ended the year with more than $1 billion in available cash and a ratio of debt to total capital below 35%.
We continue to project cash flows from operations in a range of $7.8 billion-$8.2 billion in 2014. We expect to return well more than $4 billion to shareholders through share repurchase and dividends. Standing back from the numbers, UnitedHealth Group is in a very strong position. We have posted consistent growth for several years as measured by people served, revenues, contract backlogs, cash flows, operating earnings, dollars under value-based contracts, and so on. Our market share is much lower than leaders typically have in more mature industries. We serve large and growing markets. We have considerable organic growth opportunities for the future. Our scale benefits the consumers, clients, and customers we serve through innovation, cost advantages, efficient service, and so on. This naturally engenders further growth.
That model is expanding in care provider services and care delivery with government agencies and national employers and with consumers and in Brazil, in Europe, and beyond. Very large and sophisticated customers are seeking an enterprise-level partner, one with proven capabilities and the financial strength to help them navigate the changes that both consumers and government regulations are driving throughout the market. A partner like UnitedHealth Group. In closing, I would simply once more shorthand the key takeaways. 2013 was a very strong year in growth, achievement, and capabilities in putting some big operational tasks behind us. 2014 will feel the impact of the ACA taxes and Medicare funding pressures. We believe we can produce revenue growth in earnings in a $5.40-$5.60 per share range. We suggest the quarterly earnings progressions need to better accommodate the first quarter and first half factors we discussed this morning.
Finally, in the longer term, we believe our prospects to grow and produce positive change across the health system for the benefit of all the system participants and our shareholders remain exceptional. Thank you for your time this morning. We now would like to address your questions, discuss areas of interest to you today. Can we ask the moderator to take over and we'll respond to questions? Again, one per analyst, please, out of respect for the others in line.
The floor is now open for questions. At this time, if you have a question or a comment, please press star 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 we can get to as many participants as possible. Please do not utilize a speakerphone or headset when asking a question. We'll go first to Sarah James with Wedbush. Please go ahead.
Thank you. You touched on Medicare headwinds for 2015 in the prepared remarks. I wanted to better understand if that's a headwind compared to 2014, an incremental headwind in 2015?
I don't think we were really suggesting anything other than we had said at the investor conference that obviously there were rate actions taken related to 2014 that we believe significantly underfunded the program. We had indicated there that we continue to be watchful about the funding posture on the Medicare Advantage program. We will continue to be watchful of that and continue to advocate strongly for consistent reasoned funding of these programs and the continued commitment to American seniors who participate in them. I think we didn't really mean anything more than that.
As I think about items to watch, there was that update in December of the 200 basis point change in fee-for-service cost trend assumptions. That kind of got us to a starting point of down 6%-7%. I think about some offsets to that. United's been very successful in medical cost savings through ACOs and risk-sharing contracts with providers. Could you quantify what kind of trend bender these efforts could create across the entire Medicare book?
I don't think we can at that distance. We think these programs are extremely effective, and they're effective in terms of their cumulative effect, and we are intensely engaged on them across Basically all of our benefit businesses, but certainly as they relate to the government programs. In terms of the discussions that were held in December, we are not going to speculate really on what ultimate funding may come forward or change our position on that. We are going to be intensely engaged as that process goes forward. As I said before, we're going to continue to advocate strongly for strong and responsible funding to these programs. I think I really can't speculate on a process that is really just not even really formally begun. Next question, please.
We'll go next to Christine Arnold with Cowen and Company. Please go ahead.
Hey there. Thanks for the question. Steve, you highlighted some seasonality issues, both in investing in Optum360 and then some seasonality issues there, as well as some timing issues potentially with the health insurance fee. Could you help us think about some of these timing issues within both Optum and UnitedHealthcare and how they might impact progression of earnings relative to what we've seen historically? I know you talked about first quarter, those three factors, any help you could give us would be appreciated.
Yeah, I think the general theme is to be, I'm going to hand these off because they do really touch different parts of our business, and I'll probably ask John Rex to speak to some of the front end on Optum and then in terms of the Medicaid activities, Steve and Dan. I think that we're obviously suggesting that you re-look at the progressions in terms of, again, I'll say the first half versus the second half of the year, given the timing of when these Medicaid contracts will actually fall in formal terms and the patterns of the Optum business, both in its new business and its traditional seasonality. John, you want to start out?
Yeah. When I think about Optum in 2014, we'd expect a pattern, a first half, second half pattern of roughly 40%-60% in terms of earnings progression for the year. Now, if you think about 2013, we were up to 40%-45% in the first half. The impact there, you're seeing some impact in the investments we're making in these larger, more comprehensive relationships that we've talked about, and that would be an impact you'd see particularly as you look across the Insight and the OptumHealth businesses.
Things like Optum360.
Optum360 in particular, the one we've talked about most.
Right. Steve, you want to talk about Medicaid?
Sure. Christine, it's Steve Nelson. As you've heard me say before, we have a year-round process where we engage the states on rates, we call this rate advocacy, and it's actually become a competency of our business. The fees and the tax impact have been a part of that. They're a part of our cost. As we sit here today, the states have, I'd say, overwhelming majority of our states have agreed to reimburse us for both the fee and the tax impact. Actually, no states have technically said no to us. We continue to be engaged with them in a productive and I think thoughtful discussion. It's more work to do, but the progress is really significant and our outlook is positive. In terms of how we recognize the revenue, Dan, do you want to comment on that?
Sure, Christine. On the revenue recognition side, as Steve mentioned, the overwhelming majority, we've got commitments. With respect to revenue recognition, we'll be relying on written commitments. We have a very good share in hand today, but still have some more to get, we'll make progress over the course of the first quarter and throughout the year, and that will influence the timing of the revenue recognition.
Can you elaborate on what portion, maybe you're not comfortable, but if you are, what portion you have written commitments on that health insurance fee to get all of it recovered? Are they throwing in efficiency adjustments below the line by telling you that you're getting the health insurance fee, but then saying you're going to get all this new membership, so maybe we don't need to pay you as much, or are they recognizing the pent-up demand? Thank you.
You fit a couple in there. With respect to the insurance fee specifically, the majority of our states are looking to do a lump sum true-up once the fee is actually known. We'd expect to get it in the September timeframe from a reimbursement standpoint. In terms of how many we have in hand from a written commitment, we have less than half, but more than a third. We're making strong progress, and we expect in the next week and the coming weeks to see more of that as well as into the second quarter. Your other question around pent-up demand, that was more, I think, aimed at the expansion population and the new and past members into those markets.
We do have an expectation of higher use related to those new members, and we have, in the vast majority of our states, a separate rate cell that does account for and reflect a higher initial use pattern. We'd expect that obviously to moderate over time as our clinical programs take hold.
Great. Thank you.
Thank you. Next question, please.
We'll go next to Justin Lake with J.P. Morgan. Please go ahead.
Thanks. Good morning. Just wanted to follow up on Medicare Advantage. Sounded like you said you're seeing membership on track versus I was wondering if we can get a little more color here in terms of what you're seeing in open enrollment, specifically maybe talking through some of the impact from changes to your physician network and on member attrition because of this. Maybe are you seeing any selection issues happening here in terms of sicker members leaving more significantly than others, et cetera?
I'll have Jack respond to this, and I'm sure he will hit this point too, but we would remind you that we start out the year 250,000 or so down, given the market exits we took and the single contract that we lost. Jack, you want to pick up on that?
Sure. Good morning, Justin. Jack Larsen. Maybe before I tackle the multi-part question here on the 2014, let me go back and remind you about 2013 and the very strong growth year we had there. Almost a million new members with something around 425,000 in Medicare Advantage alone. With respect to the 2014 AEP performance, let me take the growth part first. I'd say we were on our plan in all of our major product lines, Med Supp, Part D, and MA. I think for individual Medicare Advantage, we took a little bit of a different approach this year and really aimed at preserving and in fact, growing our share in markets that we would consider to be long-term, financially stable, viable markets for us.
In these particular markets, we had really strong growth, we had member retention that was actually improved over what we had seen in prior years. I would say in some other markets, we made the decision that we were going to cede some share to others. In those markets where we made some benefit decisions, we saw retention slightly less than historical levels, as well as the rate of production on new business. I think as Steve referred to, you hit it right on. We started with about 150,000 people affected by market withdrawals. Now, on the group side, we, I think, chatted at the investor conference about the loss of a large state-based contract of about 90,000 people effective 1/1, and you're seeing those numbers in the recently posted CMS results.
That will be offset effective February 1st through the win of a large state account in roughly the 90,000 member range. All in, I'd say we're right where we thought we would be this AEP and feel pretty good about our ±50,000 member growth that we shared with you at the investor conference. In terms of mix, it's just way too early. I don't think we're seeing anything that surprises us, but we're doing that analysis now. We need to see a little more information on our inbound members from CMS, I think we'll have a better point of view the next time we speak on the quarter.
Jack, maybe just in terms of any comments on the impact to enrollment from the physician network changes, maybe talk a little bit about what benefits that's going to give you in terms of quality improvements and cost going into 2015. Just lastly, on those markets that you did decide to take a step back on, would it be fair to say, should we think that the market should be concerned that the members that are being put back into the market or that you're exiting are significantly different in terms of morbidity or risk code versus those in the existing books? Maybe there could be some selection issues in the market broader. Thanks.
As I said earlier, we did see levels of attrition a little higher in those markets that we chose to cede some share. Some of those markets are where we are taking our network optimization, networks restructuring kind of work. It's geography, but it's also products as well. We differentiated between HMO products and PPO products. I think in terms of just what we are trying to accomplish in our network activities, there's just a ton of pressure all over the system, Steve referred to it, we talked about it at the investor conference. I think that rate pricing pressure is probably most acute in Medicare. The system's fragmented, clearly it has rising costs, I think everyone agrees it's got the opportunity for demonstrably better outcomes.
I think the themes we see, really what the Affordable Care Act is telling us as law and CMS is suggesting us through regulations is that the industry has to change, we have to change. We have to be more integrated. We need to be more aligned. We need to have a provider network that is aligned with us better, both in terms of data and financially. We need to do all of that with far less resources. I think these are the themes that we're responding to. This is what you are seeing us and others do in the marketplace with respect to reaching out and making affirmative changes in our network. We're really evolving to meet the requirements of a Medicare program that's going to be successful in the future.
While it's going to be a little noisy and a little turbulent, we acknowledge that. I think we're conforming our business in the right way to be successful in the Medicare program in the future.
Gail, do you want to comment?
Sure. Hi, Justin. It's Gail Boudreaux. In addition to what Jack just said about network, I think it's important to think about this activity across network is going on across all the benefit space and
Jack referenced some of just the incredible pressure in the system around rising costs, connectivity, and quite frankly, getting better outcomes. In addition to just the shaping of the network to meet the unique populations in Medicare, we're also very focused, as you know, on increasing our pay for performance across Medicare. We talked about that a little bit at our investor conference, moving that up dramatically over the next few years. Greater clinical integration, and it's all to drive better outcomes. Again, both to respond to CMS's desire to have greater primary care-centric networks and better outcomes. That's happening across all of the benefits businesses, and it's really important as we think about modernizing the healthcare system. What we're trying to do there, I think, is evident in Medicare, but it's also evident in our other businesses.
Our support is to provide better data and allow these physicians to better and more effectively manage these patients.
Great. Thanks for all the detail.
Thank you. Next question, please.
We'll go next to A.J. Rice with UBS. Please go ahead.
Thanks. Hello, everybody. I think I might just switch gears and ask you about Optum and experience with QSSI. Obviously, in the last two months, you guys have gotten a lot of kudos for how that's worked out. Can you comment on maybe your thoughts on the business implications of the way that's played out? Does that open up other contracting opportunities with the federal government, outside the federal government, and beyond? Give us some flavor for that, if you would.
Sure. Obviously, I think as you're suggesting, that it's had a very positive reputational effect. Larry, if you're on the line, do you want to start this, and then maybe Andy Slavitt comment as well?
Sure. A.J., I think you probably know this, but let me give you a little history here. When we started the project prior to October 26th, and I'll just use that date, we were a contractor that built the data services hub as well as the registration process, something called EIDM, then we controlled all the testing. When we got brought in on October 26th to work on fixing the site, we got, obviously, to work with CMS and HHS, and they did a great job of outlining everything to us, so that we understood where we were at. That's why we became the general contractor. Becoming the general contractor, we were operating under what I would call an urgent timeframe for about 60 days to get things accomplished.
We were able to get through that, learn a lot, and it's now in what I'll call a more normalized environment, and we have just become, as I'm sure you've read, a senior advisor. I'll have Andy talk about that in a second. What I would say is we obviously learned a lot in terms of working with the federal government and being a part of the whole process. I would tell you that we are also working with a lot of the state. I think that when we were at our investor conference, we talked about we were moving over on the UHG IT side, what we do with our technology infrastructure and so forth. We believe that's going to tie in nicely to what we did for the government to be able to offer candidly around the industry.
It's going to expand what we do. We appreciate what we were able to accomplish and what we learned, but we believe we're just starting. Andy, you got anything else?
Yeah. Just got a couple quick thoughts. First of all, some of this is repetitive of what Steve and Larry covered. Clearly, this was a job done principally by CMS with the help of a lot of contractors. We were glad to be, and continue to be glad to be involved. I think in terms of implications, I just point to three things. First is, we try to build our reputation on big, complex problems that we can solve for clients in healthcare. Hopefully, more clients will have had an opportunity to see Optum in action, and that's a good thing. Second, as Steve mentioned it in his opening remarks, Larry just hit on it, we can bring technology outsourcing to this industry in a way that we think is unique to healthcare.
We think there's opportunities both in and out of government for us to do that. The third, there are situations very much like this around the country in state-based exchanges, where some level of business problem-solving, prioritization, and leadership will be called for, and we're happy when we're able to jump into those situations as well.
Okay, great. Thanks a lot.
I'd just finish by reinforcing the fact that we were pleased to be part of that. That was a broad team effort. There were more significant efforts and progress made, in terms of the participation from CMS and their leadership and their staff and all of the partners, the outside suppliers around that. Everybody pulled together in an extraordinary way to do that, the only way that could've been accomplished. Really, the credit really should be spread broadly.
Okay, great.
Next question, please.
We'll go next to Chris Rigg with Susquehanna. Please go ahead.
Good morning. Thanks for taking my question. Just wanted to come back to Medicaid quickly. Understand the comments about the lump sum true-up and that most states or all states have essentially verbally agreed to give you the true-up for the fee. From a GAAP earnings perspective, just help us understand whether you can
On a GAAP basis, just assume you're going to get it in the first quarter and second quarter if you haven't actually received anything in writing? Just generally how the fee might impact EPS on a quarterly basis. Thanks.
Chris, hi, it's Dan Schumacher again. With respect to recognition, obviously the expense associated with the tax will be incurred in each month across the year. On the revenue recognition, we will rely on written communication. Where we have those, we'll be booking revenue, in each of the respective quarters. Where we don't, we'll be waiting until we do.
Even though you mentioned lump sum, they may pay in lump sum, but you'll recognize it appropriate matching once you get a contract.
Correct.
In theory, this could create a, if you don't have something inked, at least early in the year, it could create a bit of a headwind in the first and second quarters of 2014, is that correct?
That's why we mentioned it. That's exactly why we mentioned it.
Okay, thanks.
We'll go next to Kevin Fischbeck with Bank of America. Please go ahead.
Great, thanks. I want to go back to the commentary around 2015. I obviously appreciate that it's a little bit early to be talking about it, but with all indications that the 2015 MA rate may be as bad if not worse than the 2014 at least being proposed, can you just give us a sense of what within your business might be doing better in 2015 than 2014? I struggle with the concept. I think you start off by saying you expect growth in 2015, but the impact will really be determined by the final MA rate. I just want to see if the rate is as bad in 2015 as it is in 2014, what operational levers within MA or outside of MA can you see at this point that might help you show a growth rate better than what you're showing in 2014?
Well, again, we're not going to speculate on where the funding activity will ultimately play out. We have a very broad and diverse business. We are intensely focused on improving our performance across the board, and as you can see, the performance that has been achieved broadly in several areas across UnitedHealthcare. The sense of growth in Medicaid, the very strong performance that we had in the commercial business this past year. The opportunities internationally and then the opportunities for Optum I think are impressive, and they have established a track record of performance. We are intensely focused on our costs and the continued improvements of our businesses. I would think that they would be all the traditional kinds of things that one would be pursuing, and we are pursuing them, I think, with significant intensity.
I just think that in January, off the strength of a phone call conversation in December with CMS, that we shouldn't necessarily take undue direction from that and that we will see how this process proceeds. As I said before, I think that there is a broader sense of responsibility to American seniors than to have underfunded the program by our measures about 6.7% last year. If there is speculation that there would be underfunding at that level again in this year, that would be almost a 13% pullback on Medicare Advantage over the course of two years, and we would think that that would be extraordinarily disruptive.
Yeah.
It remains to be seen.
I appreciate the commentary about the underfunding, and it does seem to be a significant cut over a couple of years. Also it's very difficult to forecast what's going to come out of CMS at any point in time. When the rate hits, we have to interpret that the day it happens. Everything that you've outlined to me sounds like things, to your point, that you've been working on for 2014, and you're seeing benefits from in 2014. I guess the question is, so that if we see something similar from MA in 2015, if you do the same things to offset it in 2015, there isn't a reason for acceleration outside of the MA business, or is there, I guess is my question.
Well, I think that we have probably more areas to accelerate and to grow and build on than perhaps anyone else in the space. Then we would take the steps necessary with respect to benefit adjustments, market considerations, network actions, premium actions, cost, and distribution cost. There's a broad repertoire of actions that we are taking, and the question really comes down to the intensity of those, and that's where we get down to disruption.
Okay, great. Thank you.
Yep.
We'll go next to Ralph Giacobbe with Credit Suisse. Please go ahead.
Thanks. Morning. It's obviously still early in the year, the issues around the rollout persist. Over time, obviously, you would think that things would start to work themselves out. Just given the timeline of bids due just in the next few months, I guess, what are your thoughts on playing in the exchange in 2015? Should we expect a similar approach, and maybe more limited activity, or have you seen enough where we should start to expect you to be sort of a more active participant? Maybe just how much, if at all, is the 2015 MA outlook just sort of influential on that decision or not, or is that sort of something that's kind of mutually exclusive? Thanks.
Sure. Gail and Jeff, you want to start?
Sure. Well, first of all, in terms of the public exchanges, I think you know that we've got a very modest footprint. As I shared at Investor Day, our decisions around 2015, our participation will really be very much reliant on how this market matures. At this stage, we're really not projecting our participation. We will be looking at how robust the enrollment is, what the risks in those markets are, and the consumers participating, and quite frankly, the cost structure is in those markets. At this stage, I don't know that we have any additional guidance to give you from what we shared at the investor conference. That's our outlook.
Would you expect to have that, though, just in the next few months? I'm sure there'll be some level of incremental.
Again, it's a maturing marketplace. It's really early. It just rolled out. We'll be looking at a market-by-market basis. We're not going to give guidance around our participation at this stage. We're going to watch the markets mature, and we'll get more information, and we'll be sharing that with you as it becomes known to us. In terms of your second question on Medicare and does that influence our exchange participation, I would say no, it doesn't. We're going to look at each of our markets very specifically and look at the dynamics in those markets. We'll take a very focused look at exchanges, and as you heard from Steve, we'll also look market to market in Medicare, just as we did this year.
Okay. Thank you.
Generally, our view on 2015 is that we are not dependent on exchanges.
Right.
We will take this in a measured way. Next question, please.
We'll go next to Sheryl Skolnick with CRT Capital Group. Please go ahead.
Good morning, congratulations to the entire enterprise on proving the wisdom in the decision to separate benefits and services, create Optum, and then bring it back in to learn from and help the rest of the organization, especially with respect to fixing healthcare.gov, which kind of proves the point of the whole organization. Tremendous effort. Thank you.
Thank you.
Not my question, though. I'm sensing some sensitivity among investors and indeed some uneasiness on my end. Perhaps I don't understand exactly what kind of pricing decisions you made for 2014 with respect to your estimates of cost trend and recoupment of the fees through higher premiums where possible. There's a sense out there that trend is kind of tight to premium right now, and that perhaps if the fees are 100 to 200 basis points, there's only 80 basis points or so of wiggle room. That was one statistic suggested to me. I'm wondering if you could comment on that and give us some comfort or some indication of what's happening there, especially with respect to a trigger here, that the medical cost ratio seemed a tad high in the fourth quarter.
I'm wondering if that's anything that might be indicative of this pricing versus cost trend in 2013, then in 2014 adding in the compensation of the fee. Thank you.
We'll have Jeff kind of speak to that pricing discussion, and if we not get fully your question, then we could clarify it on the end. Jeff, you want to start?
Sure. Morning, Sheryl. It's Jeff Alter. I think the market tests and their surveys are correct. Our pricing in 2014 is stronger than it was in 2013, you mentioned it. A part of the reason it's stronger is because of the ACA fees, taxes, as well as the essential health benefits across all markets. When you look at small group and individual, the move to community rating, depending on which side of that marketplace you're looking at, you could see some much stronger pricing. Your suggestion around cost trends versus pricing, just a couple of things to think of. One, we have not changed the discipline of pricing that has been successful for us for a very long time. We look at our forward costs, which now include, as I mentioned, some impacts due to the ACA.
We're certainly as focused on medical trend as we have ever been in the prediction of medical trend. The medical trend for pricing was about a point higher in 2014 than it was for 2013. We matched our premium to that. Again, I know it's been a few years, we'll go back to the MLR. We manage this across hundreds of intersections so that we try to stay as close to that rebate line as possible. Depending on which market you're looking at or studying, we may have rebates that are still to be paid in that marketplace, we're continuing a long tail to adjust to that very tight band around that MLR. In other markets, we have the ability to price a little bit stronger.
That is all in that calculus that creates our forward pricing as we move forward, now more than ever, impacts to the ACA are also included in it.
Good discipline, well-aligned with medical cost trends, really not particularly significant changes in the marketplace. Still competitive, we think we're pricing well.
Thank you very much. The MLR, the performance in the fourth quarter, were you comfortable with that?
Yes. Sheryl, this is Dan. From a fourth quarter standpoint, as we look at that
Medical costs were well controlled, and if you look at the implications on both loss ratio and trend, they were very much in keeping with our expectation from Investor Day and set the stage for the right jumping-off point into 2014.
That's what I needed. Thanks so much.
Next question.
We'll go next to Matthew Borsch with Goldman Sachs. Please go ahead.
Oh, hi, good morning. Wanted to just ask on the commercial enrollment and what you're seeing from employers as sort of two-part question. Number one, are you seeing anything significant in terms of employee uptake of coverage now that there's this broad awareness of the individual mandate? Some employers evidently are seeing that. In some cases, I gather it's significant. Somewhat related to that, just curious on comments on the commercial risk enrollment results for the fourth quarter. Those were stronger than we expected. I just wondered if you could remind us there was a special factor there.
Sure, Matt, it's Jeff Alter. I guess on your first question, it's sort of hard to tell. Yeah, I think that would probably most happen in our largest clients, and it takes a little bit past 1/1 to make sure that all those enrollment files are correct. We usually feel better about commenting on sort of the national account growth or growth in existing accounts by the time we get to February. It's a little too early to talk about that. We do see interest for some employers to create a different benefit construct that could allow for growth, we haven't seen those results come through yet in our 1/1 enrollment. Talk about our Q4 2013. I think there were a few things that were driving that.
There was a fairly large push in our individual business to sign up as many enrollees as possible early so that we could give them that advantage of an additional year without the ACA impact, that program was an aggressive program, and it was very successful. We had mentioned probably throughout 2013 that there was interest in our small group clients for alternative plan years for them to be able to keep their benefits for that additional year, even prior to the president's announcement. That did drive some, I'll call it one-time growth in the fourth quarter of 2013.
Just so I can understand, because what I'm a little confused about is I would think that those dynamics would make you feel more secure about retention at the small group and individual level, but not necessarily explain growth if you're doing early renewals with your current account base. Was there an element to this that also drove some growth?
Yes. In some markets, the value proposition that we put into the market was not matched by some competitors, we were able to take some share. You're right, it did help attrition. It also helped just sort of retention of groups that might have left anyway. When you think of a small group attrition rate of somewhere in that 15%-20%, those groups that were renewing in that fourth quarter, there was a higher attrition rate, a better retention rate.
Right. Sorry, just last thing on this. Wouldn't this make you maybe feel a little bit better about the guidance on individual? Not that it necessarily moves the needle much, but given what you saw towards year-end?
At this point, we're not changing our guidance for 2014. There's a lot to play out.
Okay. Thank you.
Next question, please.
We'll go next to Peter Costa with Wells Fargo. Please go ahead.
Thanks. Can we talk about Optum Rx for a minute in terms of the growth you expect in 2014, 2015? Probably from outside clients, also I want to understand how the rule changes that came out on preferred networks will impact you, whether there's integration expenses that you'll save that you won't have to do next year. From the early marketing window, what are you seeing in terms of how it's starting to look for 2015? The potential for your specialty trend to help you win business.
Okay. Sorry, because it's three. Okay, let's start with growth. I think we had a nice momentum coming out of 2013. Our value prop continues to resonate in the marketplace. If you look at 2014, sort of excluding our last wave of the migration, we'll probably grow north of 1.5 million next year. Based on what we sold on 1/1, we're pretty confident in that number. As it relates to CMS, I'd like to comment more broadly. I think what we'd like to see from the CMS proposal, any CMS proposal, and the rulemaking, is the ability to continue to incent the efficient mail channel and manage preferred networks consistent with historical practices. We believe both those things are really good for the beneficiary and good for the Medicare program. Last thing with specialty trend, I would say a couple of things.
I think we continue to have a good advantage with our ability to manage not only the specialty benefit within the specialty spend within the medical benefit, but also on our formulary. I think that's a good thing that we've historically done, our trend has reflected that over time.
I think that got all your questions.
Just integration expenses and you bringing in the costs from doing the big integration that you've done this year of bringing that PBM in-house. Is there some substantial savings that we should be expecting going forward?
Yeah. We did recognize that savings, and as I talked about at Investor Day, we're not changing our guidance for next year. The avoidance of those expenses in 2014 compared to 2013 definitely provided us with an earnings lift in 2014.
Nothing incremental for 2015?
No.
It's already in our numbers.
Yeah. I would say that's the best way to put it. Already in our numbers.
All right. Do you think the rule changes, if they happen as they are proposed, will hurt your competitors more than they will hurt you in terms of preferred networks?
I can't really speak to what I think about that right now. We'll hold off. We're sort of in the rule-making phase as we speak right now. We got to let the full rule play out. We'll give our comments during the comment period, as will our competitors, and we'll be able to speak more deeply about this as the year progresses, and we get a specific visibility into what the rules are.
Thank you.
Thank you. Next question, please.
We'll go next to Scott Fidel with Deutsche Bank. Please go ahead.
Thanks. Just wanted to follow up just on the commercial pricing and cost trends, and would be interested if you can maybe drill in, just comparing small group and large group for your expectations for 2014. With the expected 100 basis points increase in cost trend, how does that compare between small group and large group? Then maybe just an update on sort of the pricing environment in small group versus large group, and whether you're seeing any variance there.
Jeff?
Sure. We're not going to get into that level of detail in a call like this. I would say, just a comment around small group pricing. This is a transitional year for many markets. We're moving out of medically underwritten into community rating. I think on a call like this, in a summary discussion, it's hard to discuss small group versus large group when you have such a transition going on in small group as we move to that community rating formula.
Yeah.
Scott, this is Dan Schumacher. I would just add that obviously in small group, there's a lot more variability than there is in large group because small group's going through the transition to adjusted community rating, and based on your health status previously. There's more variation in the price differential at the group level in the markets than there is at the large group.
Which is always the case. I don't think there's any particularly new change in the marketplace.
No. This is Gail Boudreaux. I would just add to Jeff and Dan's comments to the tone of your question, which is that the small group market has remained pretty consistent with the exception of the change to community rating. The market competitiveness is relatively the same as we've commented the last few quarters.
Thank you.
Next question, please.
We'll go next to Joshua Raskin with Barclays. Please go ahead.
Hi. Thanks. Good morning. Question just broadly about M&A. 2013 was a very quiet by United standards, deployment of capital for acquisitions at $300 million or so. I'm curious, is there something in the environment, do you think that the level of uncertainty around reform has created a bigger divide between buyers and sellers? Is there something else going on there? Maybe, I know you guys don't talk specifically around a pipeline per se for M&A, but with things you're looking at, would you consider it to be similar to what was seen in '13? Or do you think there's going to be more opportunity going forward?
Maybe we'll comment very broadly. We generally don't like to comment on what our view of the potential expansion marketplace is or what our interests might be because we consider that to be somewhat competitive and strategic. I would just offer broadly that often the biggest impediment is valuation and whether we feel comfortable with how the market is valued across a particular set of assets or asset classes. Do you have any comment, Dirk?
Josh, I think I'd just also remind you that at least for us, we're coming off the Amil acquisition, which was quite substantive in the fourth quarter of last year. What shows up more as a financing activity as opposed to an investing activity is the tender that we did for the Amil's public shares, which was about $1.5 billion as well. It was roughly about $1.8 billion or so allocated to M&A type activity. Lastly, just to reiterate the thing at our investor conference, we are clearly an M&A competent company, and our interests in M&A continue. Our agenda is virtually the same, which is really around building key capabilities, geographic market presence, with possibly a slight bias more towards Optum and the international markets, which we think are fast-growing and expansive markets.
We also look for opportunities to leverage our scale broadly in our business.
Okay. That's helpful. Thank you.
Thank you. We'll take two more questions. The next, please.
Next question will come from Andrew Schenker with Morgan Stanley. Please go ahead.
Great. Thanks for the question. Just thinking about Medicaid, clearly you don't break out Medicaid MCRs. At a high level, how should we think about the cost for the business, maybe excluding the industry fee, reflecting kind of the growth and mix that you'll be seeing, including long-term care, duals, the expansion, the reprocurement? How big an impact can mix have on MCR, and would any changes be temporary, once you get these people into your care management programs or should there be a long-term shift upward in the MCRs for that product? Thanks.
We don't comment. Maybe Steve can make a few comments on this, in general, we really don't get into margin discussions at that level of depth. We have historically suggested that the range of margin for those businesses in a 3%-5%, 3%-6% level, depending upon the performance of the business in a particular year. That mix ultimately, even if one offering were to be particularly strong, it tends to generally, ultimately come down into that general range of 3%-5% for that kind of business. We're really not changing our perspective on that, and I think that's well-aligned with the marketplace. That said, Steve, you have anything to offer?
I think those are good comments. I would just say, generally, the opportunities to grow in Medicaid are robust, and they include a variety of populations. For example, more complex populations. The expansion population has different utilization characteristics, at least at first, as Dan mentioned, and as we engage with them in both the complex populations and expansion population, engage with them in our distinctive clinical models and our variety of capabilities that we have, I think, a really strong track record. We'll be able to bring a lot of value to our state partners and good outcomes to these populations. It's part of our business. It's part of the growth opportunity, and we actually really like our position and our opportunities in this space. Just to expand on Steve's earlier comments in the beginning, a really strong track record in competing successfully for this business.
Happy with that.
Yeah. It's a very localized business, local programs. These margins run their range from year to year across those geographies. Given our scale, we aspire to the higher ends of those margins, but we will run the range of those margins across our markets over time. It is business with a great deal of variation market. Very good question. Next question, please. Our last.
Our final question comes from David Windley with Jefferies. Please go ahead.
Hi. Thanks for taking my questions. On specialty drugs, I'm hoping to get a sense of magnitude. Do the hep C drugs have the potential to make a meaningful impact on the trend in specialty? From a rate advocacy standpoint, are you having discussions with the states, as I understand a lot of this may hit in Medicaid. Are you having discussions with the states about them potentially backstopping you in some way on the costs of a drug like SOVALDI? Thanks.
Dirk, you want to comment in general, and then I think that sounds to me more like a Medicaid question than a drug question, but maybe you want to talk about specialties.
Yeah. Well, just hep C in general. I think, we know that new therapies have recently been launched, that the competition is valuable for our strategy at stake. Like any other drugs, we compare the efficacy versus the cost of each drug. When we look at those, we'll decide where to place them from a tier perspective. We would, of course, steer utilization from a tier strategy standpoint to those that produce the most effective and most efficient outcomes. We're really about trying to manage the overall drug/medical spend as we sort of take our approach to pharmacy management. I think hep C is similar. As far as where they are on the trend, I'll turn it back to Steve.
Sure. We do expect higher utilization of these drugs in 2014. We did see that in 2012 as well when we had the new introductions that came in in the mid-2011. That's obviously something that's part of our forward outlook. It's contemplated in our pricing. In terms of the implications on our trend, we are talking basis points, not points. It's fully reflected in our forward outlook. With respect to Medicaid specifically, just as the insurers fee and other elements are components of cost, it is an element that goes into our buildup. It's an active part of our dialogue to the extent that we're covering pharmacy benefits in a state, and it will be part of our P.A. process that Steve Nelson talked about.
Very good. Thank you.
Thank you. I would say that that will conclude our comments today. We remain intensely focused on the challenges and the opportunities of 2014 and 2015, and we thank you for joining us, and thank you for your continued interest in our enterprise. Thank you.
This does conclude today's conference. You may now disconnect and have a wonderful day.