Good morning. I will be your conference operator today. Welcome to the UnitedHealth Group 4th 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 risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.
A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8 ks dated 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 opened 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 and 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 20 13 Q4 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 5 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.
But we have plans and actions in place to offset these reductions and to grow revenue to a range of $128,000,000,000 to $129,000,000,000 and produce earnings in the range of $5.40 to $5.60 per share with cash flows from operations between $7,800,000,000 $8,200,000,000 In 2013, we deepened our capabilities and market relationships and successfully moved beyond significant undertakings such as the OptumRx 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 to 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. And 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.
And 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 costs from consumer benefits and well-being 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 $12,000,000,000 or 10.7 percent to $122,500,000,000 and net earnings grew 4% to $5.50 per share. Earnings were at the top end of the range we provided more than 1 year ago, despite the subsequent imposition of sequestration, which cost approximately $250,000,000 in operating earnings or $0.15 per share in 2013. Cash flows from operations of $7,000,000,000 or more than 1.2 times net income.
4th quarter cash flows were $1,100,000,000 and we ended the year with more than $1,000,000,000 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 $200,000,000 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 4,500,000 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 14,000,000 people over just the past 4 years. Our benefit businesses are distinctively diversified locally, regionally and by product and customer type. UnitedHealthcare earned $7,300,000,000 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 5th 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, 3 calendar quarters of sequestration in Medicare and reduced levels of overall reserve development. Despite these pressures, UnitedHealthcare grew 4th quarter earnings 9% year over year to $1,800,000,000 UnitedHealthcare ended the year more aligned than ever with key care provider partners. We have $28,000,000,000 in annual medical spending and 8,000,000 members served under fee for value contract, including more than 2,000,000 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 $65,000,000,000 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 percent to $37,000,000,000 Every reporting segment produced double digit percentage revenue growth. As just one example of Optum's performance, our local care delivery business in Optum Health increased both the number of payer partners and increased the number of people at served by 6% and it expanded operating margins more than 2 percentage points in 2013. Medical cost performance and patient satisfaction levels were excellent with 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 Q4, 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 is 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 $2,300,000,000 grew 61 percent or $875,000,000 over 2012 and are now up 84% over our 2011 baseline year. 4th quarter 2013 operating earnings increased 43%. Optum reached its 6% operating margin target 2 years early in 2013 and now has established a new target called 8 by 16, which means an 8% operating margin by 2016.
As 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. However, 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 MME initiatives begin to form and are implemented. The recent Tennessee Medicaid award for 2015 in which we earned the highest score among 7 qualifying bidders. Our 2015 renewal in Hawaii and the Michigan MME award, all reflect our strong capabilities and establish relationships in the rapidly growing Medicaid market.
We have won 30 new RFPs or contract renewals in the past 4 years and we have grown organically by more than 1,000,000 people served through our UnitedHealthcare community and state business over that period. Continuing on 2014, our initial Medicare growth is within our estimate 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 and 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. Optimum 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. Optima expects strong top and bottom line growth in 2014 with operating earnings in the range of $3,100,000,000 to $3,200,000,000 and $45,000,000,000 to $46,000,000,000 in revenue.
This performance will put earnings growth in the area of 25 percent and 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 twenty fourteen due to growth investments early in the year, such as fully implementing Optum 360 as well as more traditional seasonal earnings patterns. In the Q4 of this past year, both S and P and Moody's affirmed our corporate debt ratings and upgraded their outlook. We ended the year with more than $1,000,000,000 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 $7,800,000,000 to $8,200,000,000 in 2014 and expect to return well more than $4,000,000,000 to shareholders through share repurchase and dividend. 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. We have leading positions in our markets, but our market share is much lower than leaders typically have in more mature industries. We serve large and growing markets, so we have considerable organic growth opportunities for the future.
Our scale benefits to consumers, clients and customers we serve through innovation, cost advantages, efficient service and so on and 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 and putting some big operational tasks behind us.
2014 will feel the impact of the ACA taxes and Medicare funding pressures, but we believe we can produce revenue growth and earnings in a $5 to $0.40 to $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. And 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. So thank you for your time this morning. We now would like to address your questions to discuss areas of interest to you today.
So can we ask the moderator to take over and we'll respond to questions. Again, one for analysts please out of respect for the others in line.
The floor is now open for questions. 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 and I wanted to better understand if that's a headwind compared to 2014, so 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. And we had indicated there that we are continue to be watchful about the funding posture on the Medicare Advantage Program. And we will continue to be watchful of that and continue to advocate strongly for consistent reasons, 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. So that kind of got us to a starting point of down 6% to 7%. And I think about some offsets to that United's been very successful in medical cost savings through ACOs and risk sharing contracts with providers. So could you quantify what kind of trend vendor 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. And as I said before, we're going to continue to advocate strongly for strong and responsible funding to these programs.
And I think we 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 Optum investing in Optum 360 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 Optima and UnitedHealthcare and how they might impact progression of earnings relative to what we've seen historically? I know you talked about Q1 those three factors, but any help
you could give us would be appreciated.
Yes. I think well, 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. But I think that we're obviously suggesting that you relook 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. But John, you want to start?
Yeah. So when I think about Optum in 2014, so we'd expect a pattern to the 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 roughly 40%, 45% in the first half. So 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 that you see particularly as you look across the Incyte and the OptumHealth businesses. Things like Optum 360.
And Optum 360 in particular the ones we've talked about.
Right. And then Steve you want to talk about Medicaid?
Sure. Christine, it's Steve Nelson. We have as you've heard me say before, we have a year round process where we engage based on rates and we call this rate advocacy and especially from a confidence of our business. But the fees and tax impact have been a part of that we consider a part of our cost. As we sit here today, the states have over 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 are continuing to be engaged with them in a productive and thoughtful discussion. So 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 will be relying on written commitments. We have a very good share in hand today, but still have some more to get and we'll make progress over the course of the Q1 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? And are they throwing inefficiency 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 no. So we'd expect to get it in the September timeframe from a reimbursement standpoint. And in terms of how many we have in hand from a written commitment, we have less than half, but more than a third. So we're making strong progress and we've got we expect in the next week and the coming weeks to be more of that as well as for the Q2.
Your other question around pent up demand, that was more I think aimed at the expansion population and the new 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 sale 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 JPMorgan. 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 your expectations. 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 number attrition because of this maybe are you seeing any selection issues happening here in terms of bigger members leaving more significantly than others, etcetera?
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 in the single contract that we lost. So Jack, you want to pick up on that?
Sure. Good morning, Justin. Jack Larson. Maybe before I tackle the multipart question here on the 2014, let me go back and remind you about 2013 and the very strong growth year we had there almost 1,000,000 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 Stop, 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 market for us. And in these particular markets, we had really strong growth and we had retention, member retention that was actually improved over what we had seen in prior years. And I would say in some other markets, we made the decision that we were going to feed some share to others. And 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.
And 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 oneone and you're seeing those numbers in the recently posted CMS results. That will be offset effective February 1 through the win of a large state account in roughly the 90 1,000 member range. So all in, I'd say we're right where we thought we would be this AEP and feel pretty good about our plus or minus 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. And I think we'll have a better point of view the next time we speak in the quarter.
Jack, maybe just in terms of any comments on the impact to enrollment from the physician network changes? And maybe talk a little bit about what benefits that's going to give you in terms of quality improvements and costs going into 2015? And then just lastly on those markets that you've decided to take a step back on, would it be fair to say should we think that the market should be concerned that you're put 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 book, then maybe there could be some selection issues in the market broader? Thanks.
You bet. So as I said earlier, we did see levels of attrition a little higher in those markets that we chose to seed some share. And some of those markets are where we are taking our network optimization, networks restructuring kind of work. And it's also its geography, but it's also products as well. So 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 and Steve referred to it and we talked about at the Investor Conference. And I think that rate pricing pressure is probably most acute in Medicare. The system is fragmented, clearly it has rising costs. And I think everyone agrees it's got the opportunity for demonstrably better outcomes.
I think what we're the themes we see and 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 and 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. And we need to do all of that with far less resources.
And 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. So we're really evolving to meet the requirements of a Medicare program that's going to be successful in the future. So 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.
But 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. And again, hope to respond to CMS' desire to have greater primary care centric networks and better outcomes. So that's happening across all of the benefits businesses and it's really important about as we think about modernizing the health care system.
So what we're trying to do there, I think is evident in Medicare, but it's also evident in our other businesses. And 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. And 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 2 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. But Larry, if you're on the line, do you want to start this and then maybe Andy Slav a 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 26, 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 and then we controlled all the testing. When we got brought in on October 26 to work on fixing the site, we got obviously to work with CMS and HHS and they did a great job of kind of outlining everything to us, so that we kind we were we were operating under what I would call an urgent timeframe for about 60 days to get things accomplished.
And then 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 and I'll have Andy talk about that in a second. But what I would say is, we obviously learned a lot in terms of working with the federal government and being part of the whole process. I would tell you that we are also working with a lot of the state. And 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.
So 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. So it's going to expand what we do. So we appreciate what we were able to accomplish and what we learned, but we believe we're just kind of starting. Andy, you got anything else?
Yes. Just got a couple of
quick thoughts. First of all, and then this is some of this is repetitive 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 3 things.
First is, we try to build our reputation on big complex problems that we can solve for clients in healthcare and hopefully more clients will have an opportunity to see Optiv in action and that's a good thing. 2nd, Steve mentioned it in his opening remarks and Larry just hit on it. We can bring technology outsourcing to this industry in a way that we think is unique to healthcare. And so we think there's opportunities both in and out of government for us to do that. And 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 just finished by reinforcing the fact that 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 have been accomplished. And so really the credit really should be spread broadly.
Okay, great. Question, please.
We'll go next to Chris Rigg with Susquehanna. Please go ahead.
Hi, good morning.
Thanks for taking my question. Just wanted to come back to Medicaid quickly. Understand the comments about the lump sum true up in that most states or all states have essentially verbally agreed to give you the true up for the fee. But from a GAAP earnings perspective, does can you just help us understand whether you can on a GAAP basis just assume you're going to get it in the Q1 and Q2 if you haven't actually received anything in writing or 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. And where we have those, we'll be booking revenue in each of the respective quarters and where we don't, we'll
be waiting until we do. So even though you mentioned lump sum, they may pay in lump sum, but you'll recognize it's appropriate matching once you get a contract. Correct.
But so 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 1st and second quarters of 2014. That's why
we mentioned it. That's exactly why we mentioned it.
Okay. Thanks.
And 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 that's being proposed, Can you just give us
a sense
of what within your business might be doing better in 2015 than 2014? I mean, I'm just trying to 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. So 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 in 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. And the opportunities internationally and then the opportunities for Optum, I think are impressive and they have established a track record of performance. And we are intensely focused on our costs and the continued improvements of our businesses.
So 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. And 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. And 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 2 years and we would think that that would be extraordinarily disrupted.
I appreciate the commentary about the underfunding and it does seem to be a significant cut over a couple of years. But and also it's very difficult to propose or to forecast what's going to come out of CMS at any point in time. But when the rate hits, we have to interpret that the day it happens. And 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 an 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. And then we would take the steps necessary with respect to benefit adjustments, market considerations, network actions, premium actions, cost and distribution costs. So 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.
We'll go next to Ralph Giacobbe with Credit Suisse. Please go ahead.
Thanks. Good morning. It's obviously still early in the year, but the issues around the rollout persist. Over time, obviously, you would think that things would start to work themselves out. But just given the timeline of bids due just in the next kind of 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 it to be a sort of a more active participant? And then maybe just how much if at all is the 15 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. So 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. And as I shared at Investor Day, our decisions around 2050 and our participation will really be very much reliant on how this market matures. So at this stage, we're really not projecting our participation. We will be looking at sort of the 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.
So at this stage, I don't know that we have any additional guidance give you from what we shared at the Investor Conference. But that's our outlook.
Would you expect to have that though just in the next few months? I mean, 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. So we're not going to give guidance around our participation at this stage, but we're going to watch the markets to mature and we'll get more information and we'll be sharing that with you as it becomes known as.
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 we look at each of our markets very specifically and look at the dynamics in those markets. So we will 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 15 is
that we are not dependent on exchanges. I mean, we will take this in a measured way. Next question, please.
We'll go next to Cheryl Skolnick with CRT Capital Group. Please go ahead.
Good morning. And congratulations to the entire enterprise on proving the wiseness 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 dot 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.
And so 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 seems a tad high in the Q4. And I'm wondering if that's anything that might be indicative of this pricing versus cost trend in 2013 and then 2014 adding the compensation of the fee?
Thank you. So we'll have Jeff kind of speak to that pricing discussion. And if we are not yet fully your question, then we clarify it on the end. So Jeff, do you want to start?
Good morning, Cheryl. It's Jeff Walter. So I think the market tests and surveys are correct. Our pricing in 2014 is stronger than it was in 2013. And you mentioned it a part of the reason that's stronger is because of the ACA fees, taxes as well as the essential health benefits across all markets.
And then 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 just a couple of things to think of. 1, we have not changed the discipline of pricing that has gotten us 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, but we're certainly as focused on medical trend as we have ever been in the prediction of medical trend. The medical trend for pricing is was about a point higher in 2014 than it was for 2013.
And we matched our premium to that. Again, I know it's been a few years, but 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. But depending on which market you're looking at or studying, we may have rebates that are still to be paid in that marketplace and we're continuing a long tail to adjust to that very tight band around that MLR. And in other markets, we have the ability to price a little bit stronger.
So that is all in that calculus that creates our forward pricing as we move forward and now more than ever impacts to the ACA are also included in
Good discipline, well aligned with medical cost trends and really not particularly significant changes in the marketplace, still competitive, but we think we're pricing well.
Great. Thank you very much. And the MLR performance in the Q4, were you comfortable with that?
Yes. Gerald, this is Dan. From a Q4 standpoint, as we look at that medical costs were well controlled and 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.
We'll go next to Matthew Borsch with Goldman Sachs. Please go ahead.
Hi, good morning. Wanted to just ask on the commercial enrollment and what you're seeing from employers as sort of 2 part question. Number 1, 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.
And somewhat related to that just curious and comments on the commercial risk enrollment results for the 4th quarter. Just 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. Yes, I think that would probably most happen in our largest clients and it takes a little bit past oneone to make sure that all those enrollment files are correct. And 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. But we haven't seen those results come through yet in our oneone enrollment. Talking 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 in as many enrollees as possible early so that we could give them that advantage of an additional year without the ACA impact and that program was an aggressive program and it was very successful.
And then we had mentioned probably throughout 2013 that there was interest in our small group clients for alternative plan years for them to to be able to keep their benefits for that additional year even prior to the President's announcement. So that did drive some, I'll call it, one time growth in the Q4 of 2013.
Just so I can understand, because I'm a little 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. So in some markets, the value proposition that we put into the market was not matched by some competitors and so we were able to
take some
share. And then you're right, it did help attrition. It also helped just sort of retention of groups that might have left anyway. So when you think of a small group attrition rate of somewhere in that 15% to 20%, Those groups that were renewing in that 4th quarter, there was a higher attrition rate, a better retention rate.
Right. And 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?
We're not 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 OptumRx for a minute in terms of the growth you expect in 2014, 2015 probably from outside clients? But also I want to understand how the rule changes that came out on preferred networks will impact you, whether there's integration savings integration expenses that you'll save that you won't have to do next year? And then from the early marketing window, what are you seeing in terms of how it's starting to look for 2015? And then the potential for your specialty trend to help you win business?
Okay. Eric, this is 3. Okay. So let's start with growth. I think we had a nice momentum coming out of 20 13.
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 $1,500,000 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 is in the rulemaking is the ability to continue to incent the efficient mail channel and manage preferred networks consistent with historical practice.
And 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 and our trend has reflected that over time. I think that got all your questions.
Just integration expenses and 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?
Yes. We did recognize that savings as I talked about at Investor Day. There is 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.
And then nothing incremental for 2015?
No, it's
already in our numbers. Yes.
I would say that's what we put it.
All right. Do you think the changes, 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 well our competitors and we'll be able to speak more deeply about this as the year progresses we get a specific visibility into what the goals 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 2013. So with the expected 100 bps increase in cost trend, how does that compare between small group and large group? And 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. So 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. So 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.
Yes. And 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 is going through the transition to adjusted community rating. And based on your health status previously, there's more variation in the price differentials 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 new change in the marketplace.
No. This is Gil, Pedro. I would just add to Jeff and Dan's comments, to the Tony your question, which is that the small group market has remained pretty consistent with the exception of a change community rating. The market competitiveness is relatively the same as we commented the last few quarters.
Thank you. Next question please.
We'll go next to Josh Raskin with Barclays. Please go ahead.
Hi, thanks. Good morning. Question just broadly about M and A. 2013 was a very quiet by United standards deployment of capital for acquisitions of $300,000,000 or so. So I'm curious is there something in the environment you think that the level of uncertainty around reform has created a bigger divide between buyers and sellers?
Or is there something else going on there? And maybe I know you guys don't talk specifically around a pipeline per se for M and A, but with things you're looking at, would you consider it to be similar to what we've seen in 2013? Or do you think there's going to be more opportunity going forward?
Maybe we'll comment very broadly, but we generally don't like to comment on what our view of the potential expansion marketplace is or what our interest might be or our 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 asset or asset classes. Do you have any comments? Josh, I think I'd just also remind you
that we were coming off the at least for us, we're coming off the Amil acquisition, which was quite substantive in the Q4 of last year. And what shows up more as a financing activity as opposed to an investing activity is the tender that we did for the meals public shares, which is about $1,500,000,000 as well. So it was roughly about a $1,800,000,000 or so allocated to M and A type activity. And lastly, I'd just say reiterate the thing in our investor conference, we are clearly an M and A competent company and our interest in M and A continue. Our agenda is virtually the same, which is really around building key capabilities, geographic market presence, but possibly a slight bias more towards Optum in the international markets, which we think are fast growing and expand the market.
But we also look to for opportunities to leverage our scale broadly in our business.
Okay. That sounds great.
Thank you. Thank you. So we'll take 2 more questions. So the next please.
Next question will come from Andrew Scheinert with Morgan Stanley. Please go ahead.
Great. Thanks for the question. Just thinking about Medicaid, clearly you don't break out Medicaid MCRs. But 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 re procurements? 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, but 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% to 5%, 3% to 6% level depending upon the performance of the business in a particular year. And 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% to 5% for that kind of business. And we're really not changing our perspective on that.
And I think that's well aligned with the marketplace. That said,
Steve, 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 the first as Dan mentioned and as we engage with them in our 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.
So it's part of our business. It's part of the growth opportunity and we're actually really like our position and our opportunities in this space. And just expand on Steve's earlier comments and beginning really strong track record in competing successfully for this business.
So, get it with that. Yes. And it's a very localized business, local programs. So these margins run their range from year to year across that those geographies. And 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.
So it is business with a great deal of variation mark market. It's a 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? And 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, do 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 the specialties?
Yes. Well, just hep C in general. I think we know that new therapies have recently been launched. The competition is valuable for our strategy. I'd say like any other drugs, we compare the efficacy versus the cost of each drug.
And 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. So we're really about trying to manage the overall drugmedical spend as we sort of take our approach to pharmacy management, I think, Hep C is similar. And as far as really on the trend, I'll clarify the truth. Sure.
So
from 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 the mid-twenty 11. But that's obviously something that's part of our forward outlook. It's contemplated in our pricing. In terms of 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 rate add process that Steve Nelson talked about.
Very good. Thank you.
So thank you. I would say that that will conclude our comments today. We remain intensely focused on the challenges and the opportunities of 2014 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.