Good morning and thank you for joining us. This morning, we will review our Q3 results and update you on our view of market trends and developments as we approach 2014. In the Q3, UnitedHealth Group earned $1.53 per share on revenues of 30 point $6,000,000,000 Revenues grew 12% year over year with continued diversification across businesses and product types. Cash flows from operations were strong at $3,400,000,000 more than 2 times our net earnings for the quarter. The consistency of our efforts and results is guided by a focus on serving the distinct needs of all health system participants, those who receive, deliver and who pay for care.
No other company is engaged so diversely across healthcare. Our services all center around the same three competencies cultivated for nearly 2 decades. The organization and optimization of health resources at the local market level, the application of data and the enabling use of advanced technology. Over the long term, this approach continues to produce distinguishing results, record growth from those who have experienced our products and services, well controlled medical and operating cost trends and improved affordability and access to health care. The emergence of public exchanges, private exchanges, Medicaid expansions, growing dual eligible and long term care need, accountable care experimentation, rising consumerism and the confluence of these elements have the potential to create new opportunities for us to grow and serve in new ways.
We continue to adapt to the market's changing needs. We offer consumers and customers an unparalleled array of health products, services and capabilities and we are steadily advancing along themes of consumer responsiveness, simplicity and affordability. Turning to the quarter, our 12% revenue growth, solid earnings results and steady operating disciplines drove strong cash flows of $3,400,000,000 bringing year to date cash flows to nearly $6,000,000,000 As expected, the 3rd quarter operating margin of 8.6% decreased from last year, primarily due to government underfunding of the Medicare Advantage Program and nearly 40 basis points of impact from lower reserve development. These were partially offset by strong margin expansion in Health Services at both UnitedHealthcare and Optum. Operating costs were well controlled at 15.9 percent of revenue.
Our percentage operating costs are 20 basis points higher than the Q3 2012 despite year over year services growth of 25% or more than twice the growth rate of health premiums. That said, we have intense efforts underway to continue to increase the overall level of productivity and realize cost savings across our businesses. Our debt to total capital ratio was comfortably under 35% at September 30 and we ended the quarter with $1,100,000,000 in available cash. Year to date shareholder dividend payments increased nearly 30 percent to $777,000,000 We have purchased about 37,000,000 shares so far in 2013 at an average price just under $64 per share, bringing our pure share count now under 1,000,000,000 shares. Turning to business level results.
UnitedHealthcare earned $2,000,000,000 on revenues of $28,400,000,000 in the 3rd quarter. UnitedHealthcare's momentum continues as the fastest growing health benefits company in the market. It increased the number of people served by 24%, nearly 9,000,000 individuals over the past year. This includes more than 2,900,000 people in TRICARE and another 4,800,000 people in Brazil, both new markets for us. Within our traditional domestic markets, growth has also remained strong.
Over the last year, we have grown to serve 1,000,000 more people today in the employer, individual, senior and public markets. This growth is varied and diverse across geographies, products and market segments. UnitedHealthcare is achieving consistent results by aligning modern benefit design with strong consumer engagement, empowerment, tools, programs and incentives. These are further aligned to targeted clinical management and wellness programs that channel care delivery through a focused set of networks with proven performance capability and with progressively higher levels of care provider financial incentives for quality outcomes and patient satisfaction. For many years, we have used our commitment to and insight into local market communities to shape our capabilities to fit each unique market as a provider of health benefit.
These same local market insights and relationships play out in our accountable care strategy, which continues to differentiate UnitedHealthcare. We closed the quarter with more than $25,000,000,000 in annual medical spending, driving a spectrum of 1st generation care provider performance incentives. Today, the health care experience of more than 2,000,000 people we serve are directly aligned end to end through the most progressive of these arrangements, including full risk, shared risk and bundled Epistota Care payment approaches. We entered into several new ACO partnerships in the quarter, including our 1st multi entity ACO with Quality Health Solutions, a collaborative of 4 hospital systems and the Medical College of Wisconsin all in the southeast corner of that state. More importantly, we are making significant gainsharing payments to several of our ACO partners based on the actual outcomes they are achieving to improve quality and care effectiveness and efficiency for patients.
This includes Optum's Care Delivery Network, earning payments for its work to improve performance for both UnitedHealthcare and organizations outside UnitedHealth Group. In the Q3, UnitedHealthcare growth was again led by senior market performance. We added 100,000 seniors with Medicare Advantage or Medicare Supplement benefits and sold 95,000 additional Medicare Part D drug plan. We expect to finish 2013 with market leading growth momentum coming through these Medicare offerings. We have already grown by 670,000 people in Part D for the 1st 9 months of the year.
While our overall Medicare Star ratings for 2015 have advanced year over year, we believe we can and execute much better than these ratings reflect. We are intensely focused on steady and significant improvement in this critical performance In Medicaid, UnitedHealthcare grew by 15,000 people in the quarter and was honored to be selected for new awards serving Florida and rural Texas, which will begin over the course of 2014. The number of consumers served through UnitedHealthcare Employer and Individual grew by 30,000 in the quarter, despite expected in group attrition. 2013 will be the 4th consecutive year UnitedHealthcare grows commercial membership organically. And UnitedHealthcare military and veterans membership in TRICARE was well served with its transitional issues now well in hand.
UnitedHealthcare International has added almost 400,000 people so far this year, with particular strength in the large group market. Our UnitedHealthcare International Medical Assistance and Clinics business continues to grow and advance recently receiving new contracts to serve the global oil and gas industry in the Middle East, Africa and now in the North Atlantic. Optum's technology enabled services again grew strongly in a market size at over $500,000,000,000 Our growth potential is particularly compelling as we continue to develop broader, more integrated long term relationship with larger clients who are pursuing new approaches to the market. Earlier this week, we announced the formation of the Optum 360 business with our partner Dignity Health. Working collaboratively and applying advanced Optum technologies, we expect to improve revenue cycle performance end to end from the perspectives of both patients and care providers across Dignity's 39 hospitals and 300 care centers in 21 states.
Through the Optum 360 business, we are together creating the next generation performance organization dedicated to bringing these resources to serve a broad base of large healthcare systems across the U. S. To that end, we are engaged with other care provider systems and believe Optum 360 will develop into a sizable and impactful business. Earlier this week, we announced a multiyear extension and expansion through 2020 of our new 15 year relationship with AARP. Through this extension, we will continue to advance the overall missions of AARP with the broadest offering of senior products and services around health and well-being.
Also this week consulting firm Mercer announced it was using both the Optum multi carrier private exchange platform called My Custom Health and UnitedHealthcare's dedicated exchange platform to serve benefit choice needs of retirees and larger employers. And earlier this year, we created OptumLabs to combine and analyze both clinical and administrative data from large patient population. Insights from OptumLab's research will advance knowledge and understanding of every aspect of care delivery from care protocols to therapeutic agent performance and more. We expect these research efforts to lead to new and better products and services and improved overall system performance. The Mayo Clinic Health System is a founding partner of OptumLab as is AARP.
And other important national relationships are also in various levels of engagement. With these, OptumLabs has the potential to effectively become the national research platform for healthcare data analytics. These initiatives combined with several other important business relationships and awards this year are the results of our efforts to align Optum around 3 major growth drivers modernizing health system infrastructure, aligning and enabling the highest quality, most effective and efficient care delivery and engaging the consumer. These drivers define the broad business opportunities emerging as healthcare evolves and support our optimism and confidence in Optum's sustained double digit growth. And Optum's operating performance was strong again this quarter.
Each business repeated double digit revenue gains. Overall revenues rose 33% year over year over last year to $9,600,000,000 led by the 41% increase at OptumRx. Operating margin expanded 100 basis points to 6.6% despite the increasing mix of comparatively lower margin pharmacy revenues. As of today, our OptumRx pharmacy migration is 96% complete. More than 11,000,000 consumers have transitioned and are now served by OptumRx.
Our team has successfully executed the largest scale and most complex membership transition in the healthcare industry. Optum's strong revenue growth combined with margin expansion has driven exceptional earnings performance. Optum's earnings grew 54% year over year this quarter and 69% year to date. Optum is now contributing nearly 1 fourth UnitedHealth Group's operating earnings, up from 16% 1 year ago. We believe Optum will achieve our 2015 margin target of 6% in 2013, 2 years earlier than originally planned.
The combined and complementary performances of Optum and UnitedHealthcare produced very solid third quarter results as we discussed at the outset, with quarterly revenues up $3,300,000,000 over last year, driven by increasing diversification, producing earnings of $1.53 per share with cash flows of $3,400,000,000 We're achieving our full year results against headwinds ranging from intense government reimbursement pressures, including an unplanned $0.15 per share sequestration impact and $0.17 per share in lower reserve development as compared to the strong reserve development levels of last year. And we're getting there while continuing to make significant investments in our businesses, including the increased level of 4th quarter investment in OptumInsight. All in, we are tightening our outlook for 2013 net earnings to a range of $5.40 to $5.50 per share. At the raised midpoint of $5.45 this would translate to a strong 13% year over year earnings growth targeted for the Q4 this year. Our balance sheet strength continues to differentiate UnitedHealth Group.
In the past week, both S and P and Moody's affirmed our corporate debt ratings and upgraded their outlook. We continue to project cash flows from operations in a range of $7,200,000,000 to $7,600,000,000 and expect to return $4,000,000,000 to shareholders through share repurchase and dividend. Looking forward, we expect our 2014 earnings outlook to be impacted by overall Medicare Advantage funding levels as well as the effects of the non deductible insurer fee on Medicare as we indicated in our last earnings call. The significant and continued level of underfunding cannot be fully offset in 2014 from the performance effects we expect from the balance of our health benefits market. And we see limited potential for dramatic further improvement in overall medical cost trends, recognizing how well medical costs have been controlled over 20122013.
We fully expect Optum to again grow and perform strongly. And we are well along in far reaching efforts to improve productivity and control operating costs
across the entire enterprise.
And we will as always endeavor to use capital judiciously. Given that overall landscape, we expect our 2014 earnings outlook, which we will introduce and discuss in detail at our December 3 Investor Conference, we'll once again begin the year with a broad earnings range that will likely straddle to the upside and to the downside our current year performance outlook of $5.40 to $5.50 per share. We will of course be focused on performing to the highest possible level. 20142015 represent periods we have long described as challenging in the near term, followed by the potential for several years of growth and advancement once these market changes are digested. The history of market changes in the healthcare sector over the past 50 years bears that out.
Our own historical performance provides some context. It is worth noting that today we generate more than $1,500,000,000 in operating earnings from businesses we were not even in at the start of 2,006. We have grown earnings per share at a 14% annual rate since the end of 2,009, accompanied by strong cash flow growth, while going through the most prolonged economic and employment downturn in nearly a century. Over the last 10 years, we've quadrupled our market share and health benefits from a starting point of 3%, yet today we are only 13% penetrated into the overall U. S.
Population. While we have the enterprise serving the healthcare services market, we estimate our penetration into that $500,000,000,000 market at just 6%. Today, our businesses serving Medicare and Medicaid beneficiaries are performing are approaching parity with our 30 year old commercial health benefit businesses. Optum is ahead of our 15 by 15 commitment and moving rapidly to our goal of representing well more than 30% of our overall income contribution and growing at a strong and accelerating pace. We are committed to thoughtful growth pursuing international markets where emerging economies and fully developed nations both recognize the need to meet the growing healthcare needs of their people and are looking to the private sector to play a key role.
And here in the U. S, we have recently taken important steps for the adjacent primary care market, focused on serving populations whose needs are high, where we can make a positive difference to them and to their benefit sponsors, one of the most fragmented yet influential of all sectors across the healthcare landscape. We can only be certain of one thing that UnitedHealth Group will look meaningfully different 10 years from today. We're committed to being a differentiating factor in a better health care system and to grow and productively use capital in the process. We look forward to your questions today.
So we turn to the moderator. Thank you.
The floor is now open for questions. And our first question comes from Justin Lake with JPMorgan. Please go ahead.
Thanks. Good morning. First question, just a follow-up on your 2014 commentary Steve. I just want to make sure I was clear on that. So it sounds like the UHC business will be down in earnings year over year with Medicare Advantage driving down.
Any color on how the commercial and Medicaid businesses will look?
Yes. Well, we're going to kind of try to keep our this call is not the time when we get into the details of this. We provide guidance at the Investor Conference and I really don't want to front run that process. So I will leave it kind of in the context that we put it that when you look at the businesses in total, pressure that's on the Medicare Advantage program from the funding pressures that we have talked about for some time. And then look at the performance of the balance of the businesses, each of whom have their challenges and their opportunities both.
We come out in a range that, as I said, straddles. So with both upside, it's where we are today, as well as probably a downside starting point. And that's largely where we think we'll probably position 2014 as we go in. And we're going to try not to provide a great deal more detail than that other than the upper end of that performance, but that execution remains to be done. And so we'll kind of keep it in that kind of context this morning and then we'll talk about it in much more detail when we get to the Investor Conference.
Okay. And then just a question on Optum. Can you give us some color on the Optum 3 60 revenue opportunity post the Dignity announcement? And also on the PBM, can you give us an update on the Medco integration and how you're positioned heading into the 2015 selling season? Thanks.
Sure. I'll let Larry kick that off.
So Justin, it's Larry.
I'm assuming you read the announcement about our arrangement with Dignity Health. As we said earlier in the year, we were going to try to establish what I would call larger deeper more complex relationships with our clients. And I would say that Optum 360 is an example of that. We won't go into the detail of contract or we won't go into the details of numbers, but what I would say about that is that it is a multi year, multi $1,000,000,000 contract. And it is a next generation RCM that we are starting with them that will candidly will simplify patient billing and as well as modernize healthcare administration.
So, nice win, nice venture that we put together and more to come on that. And I'll ask Dirk to handle the PBM.
Yes. Thanks, Larry. I guess what I would say is the PBM migration and the success has given the market confidence that we can compete. It's given us a lot of scale to be able to purchase more effectively. And I think candidly our synchronization as well as specialty value propositions are resonating well in the marketplace.
So my commentary on 2015 is that ultimately we've not a lot has moved, but what business has moved, we've won more than our fair share. So I think we're really well positioned for 2015.
Great. Thanks for the color.
Next question, please. And we'll try to keep it to 1 per that was a nice portfolio of questions on that one, but we'll try to keep it to 1 each. Thanks.
And our next question comes from A. J. Rice with UBS. Please go ahead.
Thanks. Hi, everybody. Maybe I'll just ask you to flush out a little more your comments about the Medicare Advantage outlook. Obviously, you've now got some competitive information available. Can you give us your assessment of the landscape moving into next year, prospects for overall enrollment growth in that segment and maybe for the market overall if you have any thoughts on that?
And anything you could say on the margin outlook on that?
Sure. I'll have Jack comment on that. But I think our as we look at the benefits, we see that in our position is pretty positive. Jack?
Thanks. A. J, good morning. So in 2014, once again, we are looking at market opportunity that expands upwards of 3,000,000 seniors or so, many of whom who we think will be well positioned to select Medicare Advantage. And I think in our planning this year, we started we start every year and that is with identifying the benefits that seniors value the most, while keeping the year over year total cost changes to them as low as possible.
This year was obviously made far more difficult than prior years given the reductions in the effective rates that we received versus the expected medical cost trend. So you have sure no doubt seen some of the competitive plant offerings. And while it's still very early in OEP, I think today is the 3rd day of selling. I'd have to say that we're pleased. We're pleased with where we positioned ourselves competitively in our key markets.
And we're pleased with some of the things that we are seeing in terms of the leading indicators coming from our field sales teams, our web portals and the busyness of our call centers. In terms of growth, I think as Steve shared in his opening comments, we had industry leading growth in 2013, something we're very happy with. I would say at this distance when we come to you at the Investor Conference, we will be positioning our growth as moderating off of the sort of blistering rate we've had this year. And keep in mind that we're approaching 2014 with almost 150,000 people impacted by our planned withdrawal. So I'm sure we'll have lots more to say about that at the Investor Conference in the next few weeks.
Okay. Thanks a lot. Thank you. Next question please.
Our next question comes from David Windley with Jefferies. Please go ahead.
Good morning. It's Dave Styblo in for Windley. I had just a question on the private exchange. And if you could talk a little bit more about your strategy there, how you guys are approaching it And what sort of success you're having this year as well as the enrollment cycle that's going forward so far?
Sure. Gail, do you want to start that off?
Sure. Good morning. It's Gail Boudreaux. First of all, in terms of the overall exchange market, we see we're very positive about it. We see it as a significant opportunity both for UnitedHealthcare and for Optum.
And I one of the things to remember the private exchange market isn't brand new. While it's certainly seeing some acceleration and going into 2014, we have had offering strong product offerings and feel very well positioned in a number of those markets. Thinking about the private exchange market, I think you have to think about 2 subfactors of it. 1 is the retiree exchange and that retiree exchange has had a very consistent movement over the last few years of employers moving into either group Medicare or into private exchange offerings. Again, our product offerings there have continued to grow and are very strong.
We also offer through Optum an opportunity to do a multi employer exchange, which has increased enrollment in it and we expect to see solid enrollment going forward. The active space is really getting a lot of recent press. You heard in Steve's comments, our offering, we participate pretty broadly actually. And again, feel that we have a very strong product offering in the private active exchange and we expect to continue to see growth. From our perspective, there's a number of different types.
Certainly, the movement from a self funded offering to a fully insured offering is a positive for us. But overall, we're pretty optimistic and positive and we see them as an expanding distribution channel going forward. And maybe I'll ask Mike Weisel to comment a little bit about the Optum opportunity because we work closely with Optum as well and see their opportunity.
Thanks, Joe. David, this is Mike Weisel, Executive Vice President at Optum. And from our perspective, we really see 2 major opportunities for us in the Exchange marketplace. The first is just acting as an enablement platform, using our My Custom Health platform to work with payers, providers, states, employers, really anyone who needs that platform for doing an exchange. Maybe the greater opportunity and the more exciting opportunity for us is how we utilize all the Optum products to assist our clients.
So any company moving to a private exchange often has a greater need for incentives, wellness, care management capabilities to create a consistent experience across their membership. And we just see a strong market for ourselves over time and really using our services to meet that need.
So for us, basically exchanges have been dimensioned. It is a great new channel for us and we'll participate in that channel. And then for our Optum business, it is not we could not only be a channel as that, but also enable others. So we really see exchanges as having 2 business dimensions for us. Thanks for the question.
Next please.
We'll go next to Peter Costa with Wells Fargo. Please go ahead.
Hi. I'd like to zoom in
a little bit on the cost trend commentary about it not being a helper going forward and also combine that with the fact that favorable PPD went from sort of a helper by $100,000,000 last quarter to a headwind of $100,000,000 this quarter. Can you contrast that with your commentary and talk about what you see going on with the medical cost trend?
Sure. I'll have Dan talk to medical cost trends. But we've had very strong performance in those over the last few years. And I think our only signaling was there's only so much you can expect to achieve out of that. So I think that was really the nexus of it.
I don't think we're really planning on offering any new or lightning views about where things will be. Dan?
Sure. Good morning, Peter. Dan Schumacher. With respect to our medical cost performance, as Steve said, we were very pleased with it over the course of the year thus far. But obviously, this is a space where our work is never done.
As you look underneath it, I would tell you that inpatient is an area that continues to be very distinguished for us. So as you look at each of the 3 quarters this year in each of our three businesses, we have lowered our bed days. And that's been true for the last 4 years. So doing well on the inpatient side. As you look at the commercial space in particular, we've had against our expectations some improvement in the out at
the
at the commercial market level, we have a trend expectation that we provided was 5% to 6% and we now expect to be at the lower end of that range. As you think about the development, I wouldn't read into the variation of that quarter to quarter or business to business. Some of the factors that influence that obviously is our operating performance and stability, but also those programs, I was talking about in outpatient as an example. As we introduce those programs and they begin to come into in full effect, we start to realize those in our actuarial process. So there is differences in timing quarter to quarter and business to business.
And last year, we did have exceptional levels of reserve development and that fits into the narrative of the contrast between the quarters, 3rd year of 2012 versus 2013. So next question please.
And we'll go next to Chris Reag with Susquehanna. Please go ahead.
Good morning. Just wanted to touch a
little on the Medicaid business and the industry fee there. I know we're getting kind of late into 2013 now. Any sense for whether you expect some margin leakage there because of the tax? Do you think you're generally going to be made whole in most states? Any color would be helpful.
Thanks. Sure. Steve Nelson, do you
want to
take that?
Sure. Good morning, Chris. It's Steve Nelson. We're actually have made a lot of progress in that area since last quarter. We have a just a kind of level set.
We have a very robust and consistent rate advocacy process where we're consistently engaged with our states around rates in general. And the insurer fee and the tax impact of that is a part of that ongoing conversation. And I'll tell you at this point, we have about a quarter of our states that have formally committed to including both the fee and the tax impact in the rates. And while we have a lot more work to do, the conversations we've had so far have been very productive and positive, I'd say very much in line with our expectations. Great.
Thank you. Next question please.
Our next question comes from Kevin Tushik with Bank of America. Please go ahead.
Great. Thanks. I appreciate your the fact
that you're probably not going to
have an ability to put a fine point to this at all yet at this point. But just the commentary around the headwinds to MA for 2014 just kind of beg the question about what the implications are for 2015 because as we look at 2015 we already know we have the health care reform cuts to the rates. We have the clearing adjustment. We have the industry fee increasing. We have you mentioned the stars maybe didn't improve as much as you would want them to.
So there's a number of headwinds in 2015, which may argue that the rate situation in 2015 might not be dramatically better than 2014. So just wanted to understand if there was any good reason to think that the headwinds in 2015
would be any
better and that a 15 would be any better and that a starting point for thinking about what 2015 looks like as to kind of how you think about how 2014 is going to shape up?
Well, I think you have a good list of the headwinds that we all see and have talked about. So you have been attentive to our calls over the last couple of quarters. Those are the things that concern us about basically the funding approaches that have been taken to the Medicare Advantage Program because it does serve a quarter of the U. S. Seniors and is the fastest growing and by far the most popular of the program.
So that's why we have been vocal about it in that context. So those headwinds are real. Now we are clearly pushing back against those in terms of how we're approaching the business and I'll let Jack speak to some of the actions that we're taking along those lines. And our star performance clearly has to improve. We are not pleased with our execution there and that is something that we have to address.
But we are positioning that business and that business has grown very nicely. And we want to kind of balance the position of that business and continue to grow it because long term Medicare Advantage and whatever other products come forward in the private sector is Medicare are going to be important because the pressures that you're seeing in the funding from these programs are the pressures that are felt in the program in total and the private sector is the best outlet for that.
But just before we get the clarification, Bob.
I'll let Jack respond. Sorry. Yes. I was just going
to say that, yes, I'd love to hear Jack's perspective. But just to clarify, do you feel that 2015 headwinds are the same or worse or better than what you're seeing for 2014?
We don't know. I would certainly hope that funding actions are stronger than they were have been in the last couple of years. And then unique to us, I think that we need to improve our star performance and that's going to affect us in 2015. That's the thing I would say would be unique to us. Jack?
So, hey, good morning, Kevin. Jack Johnston. So, I guess maybe first things first. You've articulated all of the headwinds that we're seeing. And we certainly early on recognized that the shifting of all of the legislative and regulatory prompted rate reductions, recalibrations, insurers, taxes, handling them through benefit design changes to seniors would have been absolute pressure both to them individually as well as I think to the sustainability of the program itself.
We also recognize that notwithstanding that point of view on overall reimbursements, we have a responsibility to ensure that we are doing all that we can to make sure that we make the basic product as affordable and as accessible as possible. The kind of work we're doing is making sure that we have highly performing best in class networks that are aligned not only with us and the physicians, but with the members as well. We are doubling down on efficiency of our clinical programs and then of course the never ending battle we wage on operating costs. So all that sort of goes into make the MA program sustainable in individual And so I think with the work we did in 2014 puts us in a good position to take on those challenging headwinds in 2015. And Let me spend a moment on Starz since that I think was embedded in part of your question.
I would say overall that we're pleased with the progress we've made. We have almost 2.5 times more of our members in 4 star better plans for 2014 that will impact the 2015 payment year. And you need to keep in mind that that star rating represents the activities that we did in 2012. So while that's a nice percentage gain overall, I have to say that we're admittedly starting off from a relatively low level. And we have, as Steve said, much more work to do to get to the point where we're making the progress we should.
I can tell you that we have an intense level of focus all around the company, starting with Steve on down to the United Healthcare Organization and also within our Optum colleagues who are really integral part of our overall success.
Thank you. We are focused on this sector for sure.
Next question please.
Our next question comes from Josh Raskin with Barclays. Please go ahead.
Hi, thanks. Good morning. So I guess I want to talk a little bit about MA in the context of the overall UnitedHealth Group. And I think you guys historically have talked about the sort of 13% to 16% earnings per share growth. Obviously, we're not going to get too close to that this year.
And then it sounds like I don't know what straddling means exactly, but it sounds like the midpoint is going to be something relatively flat on a year over year basis. So it would imply if the overall business is growing even just low teens that MA is going to be down by a third in terms of profitability next year. And so I look at your market actions and I understand there's been some product exits, but you guys are entering 4 new states or counties in 4 different states, new counties altogether. And so I guess I'm just a little bit confused as to what the actual magnitude in terms of the headwind on MA. Are we really looking at a business that's going to lose a third of its profitability in 1 year?
So again, let's go back to the first question. We'll talk about 2014 in more specific terms at the Investor Conference and we will go through each of the business lines along those lines. The pressure on MA is not a new subject. We have been talking about this through the course of the year. We have a lot of opportunities to improve the performance of that business, but we have to take a look realistically at the funding levels that have been imposed there.
And the other businesses also have their individual pressure. So we're going to talk about them on a line by line basis at the Investor Conference and then there's a total portfolio. But if I go back to the range, we are clearly focused on growing earnings in 2014 and the range that we're beginning with encompasses that upside potential. And I don't know, I think it's appropriate for us to be very direct with you all about the headwinds that are in the marketplace and we have done that with you each year and to position range because there are a range of performance outcomes that could occur as a result of those headwinds, not all of which are fully predictable. But we are putting forward, I think, appropriate and I would say positive context, we're thinking about 2014 that we are discussing a range that has upside performance above the upper range of our current year performance.
So I think I would walk away from that in my view in a positive context. There is a lot of work we will have to do to perform that upper end, but we are clearly focused on that.
So I think Steve, I think I understand the context in which your range will encompass potential upside relative to this year. I guess, I'm still trying to figure out and quantify what the actual impact from MA is. You guys have talked about the funding challenges as you think.
Josh, I know you're trying to quantify that, but we are not going to get into quantifying
December 3rd.
Or MA or commercial or Optum or any of the other businesses this morning. Otherwise, there will be not much left to talk about at the Investor Conference.
I'll still show up on these numbers.
I appreciate that.
Thanks, Dan.
Thank you. And our next question comes from Scott Bell with Deutsche Bank. Please go ahead.
Thanks. I was wondering if you could help us think about how pricing is shaping up in the market for commercial and individual and small group both on and off the exchanges? And then without getting into too much detail maybe if you can help us think directionally about how you're thinking about enrollment for commercial large group and national accounts for next year?
So maybe Gail will start out and then Jeff to comment.
Sure. Good morning. Couple of questions there. Let me start with the pricing question. First on the commercial pricing environment, we've talked about this on I think every call I've been on.
It remains a competitive environment. What this year is a little different in that as every year we see I call them different themes that play out in each of our local markets. And some of those themes this year are around what I'll call very selective disruption. It's not broad, but there are some of that playing out as well as some of the early renewals that are occurring in the market. I think what's important to know about our approach is we haven't changed our pricing approach.
It's staying very consistent. Our controls and discipline are staying consistent. And our focus really is around the value based products that we put in the market over the last couple of years and feel that those will resonate very well. In terms of, I think your second question was on national account enrollment. I'm going to ask Jeff to comment on what's happening there.
But before I go actually, you had asked about pricing in the public exchanges. And our comments on that, as you know, we have taken a very modest position in the public exchanges. And unlike any other new entry into market, these are structurally different market to market, very similar to our existing portfolio. So you have to look at those. Again, our approach in those markets is very consistent and we look at things that are basically 2 functions when we set our price.
1 is the expected cost of a product and network configuration is an important part of that And then the expected cost of the people to enroll in that discipline has stayed very consistent. As we look at the pricing across the public exchanges, you would expect to see a broader range because of it being a new market and quite frankly the network product configurations that are in the marketplace today. So I don't think that's unexpected, but that's essentially what we are seeing. And I'll ask Jeff to comment on the national account marketplace.
Thanks. Hi, Scott. It's Jeff Halter. Just to wrap up with Gal, so on pricing, because obviously pricing and our enrollment outlook are tied together. So again, we remain unchanged in our discipline in our pricing to forward cost.
And sometimes, as you know, over our history in doing that, it can tend to cause us to give share back in the short term. So as we think about our enrollment in 14, keeping it high level, Obviously, sitting in the middle of October, there are a lot of things still to play out. But we do expect our enrollment to be down next year. And as Steve said in his comments, we've come off a string of very successful years, but we expect that down to happen primarily in a couple of areas. One, we've mentioned that the national accounts season early on had a structural change and that the pipeline for new business and new business and existing accounts was the lowest we had seen in a number of years and probably based upon all the changes at the national level in the healthcare system.
Many of our national account clients sat still. We've mentioned this before in this morning about the impact of private exchanges, which we think are going to be positive overall financially. But as we do transition some of our businesses and some of our clients that are total replacement into an open exchange model, it would be prudent to believe we're not going to continue to have the total population back. But financially, it's still a very good trade. And then we've got our individual business, which I'll start right out by saying is not a large contributor to our financial performance, but we do have about 900,000 individuals who will be impacted.
So that's those are those tranches. And then I think we've talked about this and the world knows about this. The largest driver of our outlook for down for next year is the loss of that large public sector account, which we are protesting. But at this point, believe it's appropriate to say that's a loss. So those are the that's where we're looking at our outlook.
Obviously, we'll have a lot more detail in December for you.
Thanks. That's helpful. And if I could just clarify on that. So are you saying that when you say expect to be down, is that overall commercial membership? Or is that both overall commercial membership and national accounts membership?
Just want to make sure that we have that clear.
Both.
Okay. Thank you.
Next question please.
And our next question comes from Ralph Giacobbe with Credit Suisse. Please go ahead. Thanks. Good morning.
Just want to go back to public exchange. And I know you guys provided some commentary already. And obviously, you guys have taken a more cautious stance at least initially. I guess, again, now that you've seen the pricing, are you surprised at some of those levels and maybe some of the strategies some have taken? And then any concern of sort of spillover effect onto the commercial pricing environment over time because of that?
Thanks. Gale, do you want to?
So I'll go back to again, there's a few embedded questions in there. The pricing environment in the public exchanges, again, ours is a pretty modest footprint. And they are I think it's hard to draw conclusions at this stage from what we're seeing in the pricing from that market because it is based on a whole group of factors that are not necessarily in the broader small group market. So I think that's the first thing and it does really rely on the estimate of the product configuration, the network that was chosen as well as the expectation of what the population of business enrollment is in that network. So from that perspective, again, what I can't comment on others, we did expect to see some diversity and we think over the long term that as people get experience and understand what's happening in that market, we will see that come into a tighter range would be our expectation.
And then in terms of our pricing philosophy, I keep going back to we've been very consistent. We're keeping that same consistent methodology. The one change that's happening in the marketplace, as you know, is markets going to adjust to community ratings. So that is a change in the marketplace, but it's something we're well prepared for and a large part of our business is already in that
model given the states we work in. Next question please.
And we'll go next to Sheryl Skelnik with CRT Capital Group. Please go ahead.
Good morning and thank you. Steve, I'm very intrigued by your commentary more qualitative obviously than quantitative about 2014, Because my sense is the early perception of the initial straddle guidance in loose terms was negative. And yet when you clarified it, which was very helpful, you suggested that we walk away from it positive. And I think it was negative because it was seen initially early email contact as being a reversal of your prior commentary, which on the Q2 call, I you said that you're intensely focused on if not committed to achieving finding ways to achieve growth in 2014 despite the headwinds. So let me just clarify if I may.
So you said you'd walk away from this positively. Stock is down. Obviously, the Street's walking away from it negatively. This seems to me to be a continuation of what you've said before except represented in a range around current year guidance. That's question number 1.
That's exactly right. So I don't know how many questions you'll have, but that one if go back to our commentary and we do pay attention to what we said in the prior teleconferences, we see today's commentary to be completely consistent with that. We would always have come out in a range and what we're really signaling is that range will have an upper end and we are basically confirming that today.
Right. Okay. So that is good news because obviously with all the headwinds it could have been negative. So the real question if you can give me some qualitative sense are the things that would have to go right to get to an upper end of that range versus a lower end of that range in very broad terms, the positive influences that you see because we've heard a lot about the negatives. But I'm interested in the opportunity to achieve that upper end, which again would temper the negatives for today or decide maybe it's inappropriate to temper that negative?
You. So I'll do my best. But basically we laid the some of the threads out in the teleconference. We expect our performance on our services businesses, our Optum businesses and the services business in United to continue to grow and perform strongly. We said that in the teleconference.
We must execute at very high level along things that are hard to do because of the medical cost trends have been so well managed. We have to continue to not only manage them well, but manage them better than we have. We have to execute on strategies we discussed before on Medicare around focused on specific targeted markets, narrowing networks, ever effective. There are areas where we could make progress in terms of effective care management on the ground level. It would be in the Medicare book of business.
Those kinds of elements of managing and taking our productivity and operating cost disciplines to a next level performance, which think we are very capable of doing are all areas that we see as opportunities. And kind of even to last area of discussion, as I think you all well know that sometimes to improve performance and improve it on the long term, you have to do things in the short term that don't that have a longer term logic to them. So you have to really hold the pricing discipline. Sometimes you will have to give back some membership in the marketplace to perform more strongly in the current year and going forward. So all those elements that you would imagine we have to do and we have to execute well on.
And as we do, we will position ourselves for a even stronger performance position for 2015 because all those things we talk about are structural in nature. And then beyond that, we see growth opportunities that come on to a much harder, much more rigorous platform. That is in essence the elements of the plan. We will be laying those kinds of things out in the investor conference. And to the first part of your question is we put out a range that has a acknowledges an upside to where we are today as well as a downside, because I think we have a responsibility to acknowledge the headwinds that are in the marketplace.
The notion that we are putting out a range that has an upside to it, we think is completely aligned and consistent with the conversation we had last quarter. We are focused on growing earnings of this enterprise. It will be difficult in 2014. We've said that before. But beyond that, we think the things that we're going to do are going to improve and strengthen our business going forward.
And we have very strong businesses and growth opportunities in Optum and we haven't even touched on international. So that's why I think we do take a positive attitude about where we are.
Excellent. Thank you very much.
And we'll go next to Matthew Borsch with Goldman Sachs. Please go ahead.
Yes. Thank you. Just one question on the Medicaid business. You touched on the headwind from the industry fee there. I think though when we had visited you guys a couple of months ago, Jack, you in particular had highlighted that unless I misunderstood that the Medicaid business is on an overall basis you expected earnings to grow in 2014.
I'm just I'm trying to match that up with the size of the headwind that you might be facing and maybe some
of it is just going
to be timing because the rates will catch up. But how do you get there with the industry fee not reflected in many of the rates?
Well, I think we can go back Steve Nelson's comments, but I think what he was offering in his discussion about overall rate advocacy is whether you can pinpoint that element in the rate response from the states. We are getting rate that would suggest that we have opportunity for growth in 2014. So I would have said that to me was one of the more positive elements in terms of his commentary. So I think we are getting that kind of overall rate relief. Steve, is that correct?
Absolutely. There's not only within that positive view on the opportunity to grow earnings, but tremendous membership growth as well. So and the that will come from a lot of sources, but our geographic footprint is really strong. We're in the states that we've developed great partnerships with and we're bringing innovations and capability and have demonstrated competitiveness with recent wins. And so I think there's a lot of opportunity.
We feel pretty positive about that business.
Great. That was important clarification. Thank you. Thank you. Next question please.
And we'll go next to Tom Carroll with Stifel. Please go ahead.
Hey, good morning. So question on the mix shift that you're highlighting with the sizable fee based growth here this quarter as well as last quarter. I believe you commented on it. But looking year over year at the change in your operating cost number as well as your cost of products sold number, those two things together are up about $700,000,000 year over year. And I'm wondering if you can give us a sense of how much of that increase is attributable to the fee based growth?
And should we think about kind of a higher level of operating costs going forward? Thanks.
Maybe Dave Wichman would be best to cover this. But when we talk about operating costs relative to that, we're talking about services. So we're talking about the difference between insurance premiums versus services. There are some services in UnitedHealthcare, but the big pieces of services are Optum. Virtually all of Optum's businesses fall into that category and a significant portion of Emile as well because Emile has a significant care delivery services.
All of those elements contribute to that. So those are the elements that are growing very rapidly and are outgrowing our premium based arrangements and creating the higher proportion of operating costs versus medical costs, because medical costs only come through on risk based products. Dave? Yes. So a couple of things.
First, I think specifically to the lines you're looking at, if you look at our services growth year over year, it's 25%. And if you look at our products growth year over year, it's 19%. And those two things are disproportionately pushing our operating costs which are up about 14% year over year and our cost of product selling, which are up about 17%. So you can see just by the very nature of those few line items that there is a significant influence there. But Dave in the context of the operating cost ratio being up 20 basis points quarter to quarter, I could demonstrate this more fully.
The single largest driver of that increase has been and in this quarter is no exception continues to be business mix changes. And those are the things that Steve just laid out. We had a large funding conversion this year. As you recall in the Q1 that of course reduces our revenue side. We have a meal included and a meal has a higher operating cost ratio in the business.
We brought on TRICARE, which is a significant fee based arrangement. And of course, the results at Optum are eye popping in terms of the growth and that's largely services based business. That again is the dominant component of that. But in addition to that, we have been implementing ICD-ten, PACA, implementing TRICARE and reimplementing it unfortunately this year as well, but also this PBM migration as well. So again, a large contributor to the operating cost ratio this year.
I'll tell you these are significantly offset by the productivity advances of this team, very significantly offset. I'd say our productivity is not only at the upper end of the range, we typically have given you, but an additional 50% more. So very, very strong results this year in terms of the way we manage that. So in general, we're very pleased with our operating cost results and the progress we've made in containing them and that's something that we're committed to doing into the future as well. Thanks.
Thank you for that question. Next please.
And we'll go next to Sarah James with Wedbush. Please go ahead.
Thank you. Can you speak to how you're thinking about public exchange accounting? Specifically, can you reasonably accrue for the 3Rs? And there's been some talk of a plan initiated data share program to aid on understanding market average risk scores. The CMS doesn't provide it until 15.
So is this something that United is considering participating in? And how valid is the insight from this group meaning how much of the exchange market may be participating in the data share?
Dan, do you want to cut carry that? Good morning, Sarah.
Good morning.
With respect to risk adjustment,
I think it's important to recognize that it's not something that's unfamiliar to us. We've got a couple of our large states and very successful states where we have modified the forms of risk adjustment today. And also we operate in Medicare Advantage, which as you know has a big risk adjustment to it as well. To your point, we have absolutely participated with a third party to gather industry information and get some feedback on where we sit. And based on that information as well as our past experience, we feel very comfortable with our ability to estimate the results as we get into 2014.
The other thing that I think is important is our size and geographic diversity is another thing that plays in our favor with respect to risk adjustment.
It sounded like you have already participated with this 3rd party on sharing information. So is there enough out there to kind of tell what the average health of the exchange is? Is there more costly or sick?
Yes. We've participated in 2 cycles of that right now and we will again in the Q1 participate in another cycle of that. And they're endeavoring to get 75% of the market participants at a local level segmented by small group and individual. So we'll be able to based
on that information, we think we've got
a good sense of it. And also again, our size and geographic diversity are things that will be important to us.
Is there any comparison you can offer to your traditional commercial book, how much more sick these people are?
So I think we might be getting a little muddled in this, because I think you might be asking about does this give us insight into what we think the public exchange mix looks like. And I don't really think we're going to get we really don't have an experience with that and I don't think it is our place to comment on that. I think Dan was commenting that the size, diversity and geographic spread of our book gives us a perspective of being kind of very average across the nation. We're a good proxy for a national platform. Is that right, Dan?
That's right. And Sarah, this obviously relates to both on and off exchange business in small group and in individual. It's really that's the reference around our size and scale, not our exchange participation, which as we've said before is modest in
the initial
year. Okay. So, I'm sure we'll be talking and touching more about that at the investor conference as well. So, next question please.
And we'll go next to Karl McDonald with Citigroup. Please go ahead.
Great. Thanks. I wanted to focus on the OptumHealth business earnings up roughly 90% this year and that's come mainly from margins running 300 basis points above your expectations. So just the 2 related questions there. What's driving the margin expansion within OptumHealth?
Do you think a 10% margin is sustainable? Or should we look going forward for that margin to return to more historical levels?
Larry and John, you want to touch that? Before we start, Carl, can you clarify? Are you asking about OptumHealth? Sorry, this is John Pentry. Are you asking about OptumHealth or Optum overall?
I don't follow your question.
OptumHealth specifically.
Thank you.
So Carl, it's Larry Renfro. Let me make a couple of comments and then I'm going to ask John Rex to jump in on this. When we look at Optum, we look at the 3, what I'll call the 3 organizations and we have a margin range of each one of them. In OptumHealth, it's 8% to 10% and OptumInsight is 15% to 19% and OptumRx is 3% to 4%. And we try to manage this throughout the year And I realized that we had a very good quarter in the Q3, but I would say that over the 12 month period based on mix, seasonality and investments that we're making that we still believe that that range in Optum Health is going to be in that 8% to 10% range.
So we don't see anything that's changing that. I think Steve commented that overall and I'll just say this that we believe that this year we'll finish at 6%, which is one of the goals that we had set for 2015 for Optum overall. But maybe I'll ask John to comment on this in more detail. Yes. So if we look at it in particular, so first of all, I'd comment that when I looked at OptumHealth and the performance 9 months to date and actually I'd kind of broaden a little bit and talk about Insight and Rx also within that context.
That when I look at the 9 months, we're within the range of those long term guidance ranges we've given. So 9 months to date within OptumHealth and Optum Insight, we're running at the high end of those ranges. And within OptumRx, we're running just about in the middle of that range. And that would be our expectation going forward. I mean, I think quarter to quarter, year to year, we see impacts from mix seasonality and investments that we'll be making in the businesses.
So that's why we stick to those long term ranges that we've set out. If I were to think about OptumHealth in particular in terms of the 3Q and some of the highlights, I'd say the entire portfolio of businesses within OptumHealth were performing well, but I'd maybe point out local care delivery, our population health and our health related financial services businesses as all strong contributors.
But again, very much sticking with that long term range that we've laid out for these businesses as we will continue to invest. And I think in total, you look at Optum as an emerging enterprise that there is scale opportunities there that are meaningful. And I think that when we talk about things like 1 Optum and so forth, that's what we're really talking about is that we have opportunities to we think continue to improve the performance and yield of that business. Next question please.
We'll go next to Christina Arnold with Cowen. Please go ahead.
Hi. Following up on Optum, hearing a couple of things I just wanted to clarify. I'm hearing that we're within the long term range of margins that we expect, which suggests that margins will be probably not move much next year relative to this year. But I'm also hearing it's an emerging enterprise with scale opportunities. Scale opportunities suggest to me kind of margin improvement opportunities.
So can 14 as they did in 20 13? How do I think about that?
So just let's go back to the very first question of the call. This is again more triangulation around 2014 that we would really prefer to save for the investor conference and can then actually present those things in a coherent and kind of fulsome basis, see all of the offerings across the enterprise as a relative challenges and the relative opportunities. There are clearly opportunities in Optum. We are clearly looking to improve its performance, grow its earnings, improve its margins, but we're not going to comment specifically on 14 until the investor conference.
Okay. Well then taking a different question then. If we look at Emil, can you talk to how that's performing? And is this an investment year? Do I how do I think about this year's Emil performance relative to kind of future opportunity?
Thank you.
Sure. Well, I think we have great growth aspirations for Emil and I think it's performing on or above its plan. But Dave, do you want to talk? Yes. Christine, Dave Wickman.
For the 1st 9 months of this year, Emil is ahead of its financial plan, both in terms of growth and profitability. So obviously, we're quite pleased. I think the economy in that in Brazil is shaping up to our expectations. So it provides a nice platform, if you will, for growth. We are seeing that growth in the business, both in terms of our membership growth on medical lives, which are up about 365,000 since we started.
And then also in the Dental marketplace as well, which are up about 400,000 lives since we commenced just
under a year ago.
And I think that growth is really the great assessment of the strength of Emile's offerings and the value of it, what I'll call semi integrated delivery model and its ability to offer higher quality as well as cost effective products in the marketplace. This quarter, we're experiencing winter. So it's kind of counter seasonal to what we see here in the United States. So as expected, its earnings are off related to seasonality relative to our overall expectations. Just on the integration front, it's going very well.
I'd just point out 2 things. 1 is we're really working with Aneel to, I'd say, bring a more modern technology and operating infrastructure to that marketplace, which I think is a great opportunity for us to distinguish ourselves in the market around service quality and whatnot in addition to the clinical quality aspects of the model that they offer. And likewise, we are they are in turn helping us with ideas around clinical care delivery and how that integrates in local markets and drives superior performance on behalf of the consumers we serve. So overall, you should take away from all that that we're quite pleased to date with our meal relationship. Great.
Thank you. Thank you. So we'll take 2 more questions. So the first of those would be?
We'll go to Michael Baker with Raymond James. Please go ahead.
Thanks a lot. Just a question on OptumRx given the fact that you're at the tail end of the Medco integration here. I was wondering if there are any plans to differentiate your specialty pharmacy management offering given your unique positioning in the marketplace?
Yes, sure. Well, we have a couple of philosophies on specialty. And the first one is we really focus on adherence because adherence with these very sick patients drives lower medical costs for our customers. The second thing is we want to eliminate drug waste. We do a lot of work with respect to making sure that we take lab values and the like to make sure the treatments are working.
And last thing I think we can do from a specialty standpoint is we have great visibility into the medical benefits, so we can see and manage about half the spend that resides there. Thanks. Next question please.
And we'll go last to Steve Halper with FBR. Please go ahead.
Yeah. Hi. Just looking at Insight OptumInsight over the last few years, you've been focused on Optumon and focusing on certain business lines. How is that progressing in terms of achieving the overall efficiencies as well as what were the stronger performers within Insight during the quarter?
Sure. Larry, you want to kick that off and then Bill Booth will start to comment?
Yes. And I'll kick it over to Bill. The overall one off plan and I think you said this, had in it for 2013 that we were pivoting to growth. And pivoting to growth, what we had talked about doing was really being able to position ourselves to attract what would I and I said this earlier, a larger, deeper and more complex relationships. And the Optum 360, the Dignity deal is a good example that is part of Optum Insight and Bill can talk a little bit about that.
I can tell you that as we go down the road here, the pipeline is very strong. We think we're well positioned in the marketplace. And I think that you're going to see more and more of these larger organizations that are going to be part of what I'll call planned investments that we have to put in place as we still have to we really have to develop and innovate as we become more of a potent solutions oriented organization. So we're positioning for the future a lot in the Optum Insight area. So Phil?
Yes. I think we continue to see specifically our compliance offerings expand a lot of the work that we're doing with payers around payment integrity. And to Larry's point, our provider businesses, as we continue to create depth with them and really the one Optum strategy coming together to really give more end to end oriented solutions is being I think very warmly received by the industry. The latest example of that is the Optum 360 relationship with Dignity. And I think we're seeing a continued demand for us to be more end to end in our approaches and that has been the intent of the 1 Optum thought and our product integration and our business integrations and I think we're reaping the rewards for that.
Thank you.
So I think that's it. Let me just briefly finish by thanking you again for joining us this morning, your interest and participation. I think we had a very solid Q3 in the context of a very strong 2013. We think we have meaningful performance opportunities in front of us. We are focused on optimizing the performance of this enterprise and addressing the headwinds of 2014 and we will look forward to sharing more detail with you and insight at the Investor Conference on December 3rd.