Morning. I will be your conference facilitator today. Welcome to UnitedHealth Group 4th Quarter and Full Year 2012 Earnings Conference Call. A question and answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded.
Here is some important introductory information. This call contains forward looking statements under U. S. Federal Securities Laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.
A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8 ks dated January 17, 2013, 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 President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley. Please go ahead.
Thank you. Good morning and thank you for joining us. Today, we will review our strong 2012 growth and earnings performance, firm outlook for 2013 and discuss in broad terms how and why we see 2014 and beyond as a period of continued growth and opportunity. Full year 2012 revenues grew 9% to $110,600,000,000 and net earnings were $5.28 per share. 2012 per share earnings increased 12% year over year, attributable to both broad based growth and intense management of medical and operating costs.
Both UnitedHealthcare and Optum exceeded their 4th quarter revenue and earnings outlooks from our November investor conference. Cash flows from operations of $7,200,000,000 were again 1.3 times net income. 4th quarter cash flows were $1,700,000,000 or 1.4 times net income for the quarter. And we ended the year with 1 point cash. We raised our dividend by 30% earlier this year and repurchased more than $3,000,000,000 of our shares.
Before reviewing these results in more detail, I would like to discuss a couple of recent topics we believe have been prominent in the minds of investors. The first topic is exchanges. There is significant interest in the impact exchanges may have on sector in total and on UnitedHealthcare specifically. We can share our thinking about exchanges only in broad terms at this point recognizing 1, there are still many significant unknowns with respect to how exchanges will begin and actually work. And as you know details in this sector count.
So we are holding back on making specific decisions in many cases until greater clarity can be established. And secondly, the way we think about exchange markets and how we may position ourselves state by state with respect to exchanges, we see to be proprietary competitive insights. So to begin, we are advocates of efforts to expand coverage to as many Americans as possible, but we would never have drawn the line at exchanges alone. If you want to expand coverage, then use every channel possible, make it easy, convenient and ubiquitous. We advocate that exchanges be a level playing field and fairly regulated.
The more complex exchanges become, the greater the potential for unintended market distortions and therefore the greater reluctance to use them. Healthcare at its core is local. Theoretically, there will be as many as 100 very local market exchanges, 50 for individual coverage and 50 for small group and that's just the beginning. You can expect each will operate somewhat differently. So there is a great deal to evaluate before pursuing any of these exchange markets similarly to what we do today for Medicare and Medicaid.
The level of interest in exchanges will be driven by how we assess each local market, how the exchange and its rules are set up state by state and our market position relative to others in a market as we see it today and as we evaluate it going forward. And that equation will evolve and change over time as exchanges mature. So going in positions on exchanges will be just that. We are not tied to them in one direction or another. Broadly, we would expect to participate in a number of exchanges.
We're not going to offer a precise number, but a broad range, perhaps from 10 to 25 or more, with absolutely no firm commitment to that range. We will only participate in exchanges that we assess to be fair, commercially sustainable and provide a reasonable return on the capital they will require. And like Medicaid, if we are in a situation or market dynamic that we do not see as sustainable, we will either not participate in the first instance or ultimately withdraw. Similarly, we will continually evaluate state based exchanges that may not have been attractive when initially introduced. So as they mature and evolve, if we see them as both fair and sustainable, we would look to participate.
And in a perfect world, we would participate in them all. Exchanges will create new market dynamics that could impact our existing businesses depending on ultimate member migration patterns for each market, the pace of that migration and its impact on our established membership. We do not expect these impacts to be dramatic or necessarily negative to us. Today, our individual and 2 to 50 member risk based health benefit businesses contribute approximately 10% to our total earnings. Their margins are consistent with our overall commercial insurance results.
And the feedback we receive from this community is that they remain committed to offering health benefits to their employees. So while these earnings are still meaningful, we are diversified to the point where we do not feel compelled to engage in any market where conditions leave us uncertain as to long term viability. There has been speculation as to how exchanges will happen by September 30, 20 13 and what their impact on 2014 will be. And the simple answer is we don't know. The idea that robust exchanges whether state based or federal will be enrolling large numbers of individuals or groups by September seems challenging and our sense is the initial consumer and small business response may be modest.
But we are committed to being ready. We believe we have strong product offerings that are valuable to the market in terms of quality, access, affordability, innovative design and service excellence. And these characteristics and features are compelling in or out of an exchange channel. In the long term, we are expecting and preparing for an exchange category of coverage to become established as a new benefit category between Medicaid and the traditional commercial benefits markets. We anticipate this category sustainable margins and that our businesses and our earnings will grow as exchanges become more established.
Moving to pricing and medical cost trends. There has been no shortage of commentary about the 2013 commercial pricing environment across the commercial benefits industry. The positioning of the ACA insurance fee and rate review and approval processes across states and against the backdrop of 2013 commercial medical cost trend outlooks. We can only comment on our experience, which has seen the commercial pricing environment strengthen from that in 2012 in general. We have nearly 70% of our 2013 business priced and the markets have been rational in our view competitive, but better than 2012 for us.
We have been very steady in our pricing disciplines year to year, consistently adhering to and aligning to our forward view of costs. And we take measured membership losses in instances where we cannot get our price. As we did in commercial risk markets in 2012 and expect to again in 2013 as we discussed at our investor conference. We have a broad and diverse portfolio of innovative product offerings that align to buyer values. So we are able to hit a broad range of price points.
Accordingly, our membership losses have been relatively muted, particularly when considering the ongoing impact of funding conversions. We have included the ACA insurance tax and other ACA cost factors in our 2013 rate filings. We are working effectively with our state partners through the rate approval process. As always, some have been more challenging than others. At the end of the day, we must price to our costs.
And if we conclude that a state's posture on commercial insurance pricing is not economically sustainable, we will have no choice but to withdraw from that market. We have not been put in that position to date. Our medical cost management capabilities have steadily strengthened year by year and our networks are very cost competitive. We have a market leading spectrum of pay for performance arrangements now exceed $20,000,000,000 in annual medical Our 2012 all in commercial medical cost trends were effectively managed to under 5.5 percent. And we are constantly refining and intensifying our healthcare affordability efforts.
We remain comfortable with our 2013 medical cost trend outlook range of 5% to 6%. We are confident in our pricing disciplines. The yields we are achieving in our resulting 20 13 commercial care ratio outlook, which remains unchanged at 82% plus or minus 50 basis points. Now turning back to 2012, both business platforms produced strong well above our expectations as we enter 2012. UnitedHealthcare grew by nearly 2,000,000 people in the U.
S. And added $4,400,000 in Brazil late in the year. And revenues grew by 8% year over year. 2012 operating earnings of $7,800,000,000 exceeded our most recent outlook and our 4th quarter operating margin of 6.1% was stronger than we expected. We expect that ever improving alignment of benefit designs, consumer engagement, clinical management and care delivery relationships to deliver quality healthcare for consumers along with competitive cost performance in 2013 and beyond.
Optum grew earnings from operations by 14% in 2012. Optum's disciplined simplification and integration agenda is advancing at the same time its revenue growth is accelerating and expanding its margins. In the 4th quarter, all Optum segments grew both earnings and operating margins year over year, driven by business growth and the benefits of investments made in the first half of the year. As 2013 begins, we remain optimistic. Both Optum and UnitedHealthcare are solidly on plan as we move into the year.
Our businesses are executing well for customers and we continue to grow market share. The initial OptumRx customer transitions and new business installations across OptumRx and UnitedHealthcare have been virtually seamless, including our new Medicaid assignment in Kansas. UnitedHealthcare's preparations to serve TRICARE, which will begin in April of this year are going well. And we have been awarded the opportunity to serve an estimated 20,000 people in the Florida State Long Term Care Program beginning in August of 2013. UnitedHealthcare is also beginning on an exclusive basis to market to the Medicare beneficiaries residing in The Villages in Florida, the largest retirement community in the U.
S. We continue to feel positive about our Medicare growth across all product categories. UnitedHealthcare is experiencing strong January medical membership growth in excess of 600,000 people, led by public and senior sector growth and positive results for our employer and individual. Strong fee based commercial growth should more than offset the expected decline in risk based products caused by the weak employment market and UnitedHealthcare pricing disciplines. We're also experiencing strong growth in Part D.
UnitedHealthcare created a new affordable basic plan for consumers nationally and elevated its large 4,000,000 member plan to an enhanced plan status. The change to enhanced status changes the seasonal patterns of earning recognition, shifting more of the profits to later in the year with no impact on full year profitability. For Optum, we expect 2013 to show strong growth with operating earnings advancing in a range of approximately 35 percent to over 40% above 2012 levels as we previously communicated. The Optum businesses are seasonal in their progression of earnings and we expect the first half and second half contributions to be proportionately similar to 2012 say 40% in the first half and 60% in the second. Our annual outlook for 2013 remains unchanged, with revenues forecasted in a range of $123,000,000,000 to $124,000,000,000 of net earnings and net earnings in a range of $5.25 to $5.50 per share.
The rest of the 2013 financial coordinates we shared with you at our November 27 conference remain consistent as well. Perhaps I can offer a few comments on consensus earnings estimates for 2013. In total for the year, we are in the same general zone as The Street, which is typically oriented to the top side of our $5.25 to $5.50 per share range. We quarterly progressions somewhat differently, with our progressions more oriented to the second half of the year due to such things as the dynamics of growing seasonality, the mechanics of the Part D program and the like. And we should mention again that last year's Q1 had more than $0.30 per share in prior year net reserve and rebate development, which we do not forecast.
So the takeaway is on an annual basis, the upper end of our guidance is in the general zone with consensus. The quarterly progressions we see for 2013 favor the back half of the year more than the current consensus numbers would suggest, something on the order of a 3% to 4% shift from the first half to the second half with most of it coming from the Q1. Our capital disciplines remain focused and consistent. 2012 was an unusually active year in terms of acquisitions and business development. We expect 2013 to be more moderate.
We continue to forecast operating cash flows to range from $7,200,000,000 to $7,600,000,000 with capital expenditures to stay within a range of $1,250,000,000 to 1,350,000,000 dollars As we have said, we will look to continue to advance and mature our dividend in 2013, a process our Board will address in our mid year session. And we expect to repurchase shares near to the $3,000,000,000 end of the range provided at our investor conference. Despite the fact that we are only 16 days into 2013, there is an unusual level of focus on 2014 given the anticipated ACA changes. Our foregoing comments clearly indicate that we do not have any unique insights or precision around the 2014 performance outlook. And as always, there are other potential factors impacting both the broad marketplace as well as our specific industry sectors that may influence 2014 performance aside from ACA driven market changes.
What we can say is that based on our view of what is known at this point and for our overall mix of business, we do not view 2014 in a negative light relative to our expected 2013 earnings per share outlook and that 2014, 2015 and beyond hold the potential to be periods of positive growth and opportunity for our businesses. Factors that play into that perspective include a belief that the federal administrations charged with ACA implementation are interested in smooth implementation and sustainable adoption, interest shared by critical policymakers and legislators. A meaningful number of ACA market changes have already been introduced to the market, minimal MLR rules, benefit and coverage expansions, etcetera with limited disruption. Administrative and regulatory guidance to date has been rational, predictable and reasonably collaborative given the nature of the ACA legislation. There is certainly a great deal more to work through and significant unknowns.
But so far, it has been manageable. In the end, the ACA expands an enormous national healthcare market that will be served by the private sector. As we have said from the beginning, the ACA will reshape some market rules, but we will not change the basic nature of the market needs for high quality health care at affordable costs and for a higher performing overall health care system. The ACA will not determine who will respond to be the ultimate long term winners or losers in serving those market needs. The ACA actually intensifies the demand for the core competencies we deliver through our businesses.
They are knowledge to optimize care resources and capability to manage both high quality clinical care and costs, information to inform and align healthcare for optimal performance on both individual and overall system levels and enabling technology to make it all work in modern and efficient ways. Over the last several years, we have shaped our enterprise as a uniquely adaptable construct of market facing businesses that serve the critical markets that the ACA is expanding. Today, our businesses are performing at more consistent and higher quality levels than ever before. We have simplified our businesses to be well focused and coordinated. We are more integrated and scaled with steadily increasing productivity.
We've been driving market innovations at higher levels than at any time in our history. We have invested in brands and have steadily elevated our market visibility and reputation. We have strong and deep leadership and have been investing in our people and our culture. We have maintained an appropriate balance in our capital stewardship, steadily returning more capital to investors while building, expanding and diversifying our businesses for long term growth. While working this change agenda, we have continued to execute consistently on the fundamentals.
Since 2009, UnitedHealthcare has consistently taken market share, having grown to serve 4,500,000 more people in the U. S, while positioning to serve another 4,500,000 people in Brazil. Optum has been formed, aligned, re baseline and on its way to doubling its 2011 earnings over a 4 year period, significantly increasing its relative contribution to our overall earnings. At the UnitedHealth Group level, our financial performance has been distinctive in a recessionary environment. Since 2,009, revenues have increased $23,500,000,000 or 27%.
Operating earnings are up by nearly $3,000,000,000 or 46 percent and net earnings have grown by more than $2 per share from a base of $3.24 per share and 18% compound growth rate. We have generated cumulative cash flows from operations of more than $20,000,000,000 over those past 3 years. We dedicated a portion of this amount to repurchase nearly 200,000,000 shares at an average price of about $43.50 per share, reducing our weighted average shares outstanding by more than 11%. This is a different company than it was a decade ago, different than just 3 years ago and it will be predictably different 3 or more years from now. We will remain disciplined in preparing for change and growth.
We're established in our markets, growing market share and producing strong and shareholders. We expect to continue to serve health care providers, governments and consumers to grow and deliver positive results for investors this year in 2014 and in the years to come. So the take aways this morning in our mind are strong 2012 performance across the board, 2012 commercial cost trends favorable to forecast, 2013 commercial pricing competitive, but better than 2012 for us. We're focused on 2013 growth with our outlook in line with our previous guidance. We are working effectively with states, care providers, regulators, the broad group of participants in the healthcare And we are preparing for 2014, including the introduction of exchanges in the market.
So thank you for your time this morning. I hope we've been helpful in answering a few questions, but we'd like to hear from your areas of interest today. So could we ask the moderator to take this over and we'll begin to respond to questions? Thank you. The
floor is now open for questions. You. We'll go first to the side of Matt Borsch with Goldman Sachs. Go ahead. Your line is open.
Yes. Thanks. My question is on
the outlook for Medicare Advantage. And just hearing your comments about the pragmatism of the implementation so far. When you look at all of the provisions that are impacting Medicare Advantage in 2014 2015 in the interest of parity that seemingly without regard to the supplemental coverage that you're providing for low and moderate income seniors. Do you think those provisions as it stands today are manageable? Or do you think that they will need to be revised as you move through the next 3 years?
I would say, if you're basically saying that as it exists today, we would always have an appetite for things that would offer, let's say, more flexibility and more responsiveness in the marketplace for Medicare Advantage. And we would also hold a view that Medicare in total would benefit from themes of what I would might call modernization of the program. And we see those things most effectively in the private sector today. So our posture on Medicare Advantage is that we would be advocates of continued change and kind of proactive change around themes of modernization. As it relates to kind of the specifics of the regulations and the elements that affecting rates and so forth.
I think we would prefer things to be somewhat otherwise, but I think that it is manageable as it exists today. We probably don't have we think that if things that move further would really start to impact beneficiaries, affect quality of care that there would be significant pushback if there were greater activities going forward as you deal with elements like the physical cliff and things like that. I don't know if Gale, you want to comment or Jack?
Thank you. I think Steve said it right. The only thing that perhaps I might point out, Matt, we certainly always would have a fairly short list of things we perhaps might suggest modification, more modernization of anything. But a lot of the provisions with health care reform are things that we are doing more broadly across payment
for success and outcomes and the like that are
embedded in payment for success and outcomes and the like that are embedded in STARS rating. Those are things that are really good and should be preserved. We might have a different point of view on individual elements, of course, but I think the bigger things that are in play are things that will ultimately be good for Medicare Advantage and certainly Medicare
broadly. All right.
Thank you.
Next question please.
We'll go next to side of Justin Lake with JPMorgan. Go ahead. Your line is open.
Thanks. Good morning. Steve, it seemed like you were comfortable in saying that see no real reason why you wouldn't be able to grow earnings in 2014. Is that am I hearing that correctly?
Yes. From this distance and given the opportunities in front of us, yes.
Great. So outside of the exchange uncertainty, which I think we all understand, can you walk us through your main business segments and let us know anything that you believe would take you off the typical growth path. I know you have a 13% to 16% target. Matt just mentioned Medicare Advantage. Anything you could tell anything further you could tell us there are Medicaid, some of the other segments that might be different than what we typically see year to year?
Well, I'm not sure I fully understand the question. But if you're asking what again, what gives us a sense of why 14 could represent continued growth and opportunity is that if you look at across the expanse of our businesses over the last several years as a lot of these elements have been formulating coming in the marketplace, we have been growing market share, growing in our commercial businesses, growing in Medicare. States have been responding in terms of Medicaid and expanding. The military business is coming online. Our Optum businesses are getting really establishing some very positive momentum as they mature at the same time.
Their growth opportunities seem to be taking off because of the pressure in the healthcare system in total. And then there is the opportunity to do this all over again in Brazil off a platform that is already market leading. And that's a pretty good hand to be holding at the moment in particularly in a nation that's looking for positive change and higher performance out of its health care system and population that continues to value high quality benefits, modernization and innovation that comes to those benefits and costs. So costs matter and we are all over costs in terms of the focus of our clinical programs, strategies with our networks and so forth. So and I think that we are executionally trying to take this enterprise to a next level of performance.
So those factors suggest to me that we have as good a chance as anyone of growing and performing in the marketplace.
Steve, do you expect to grow EBIT next year? Or are you talking about EPS?
I'm talking about growing earnings. And I have no interest in giving guidance on $14,000,000 at this distance. So you asked me what themes, that's what we responded. Great. Thanks.
Thanks, Jeff.
We'll go next to the side of Scott Fidel with Deutsche Bank. Go ahead. Your line is open.
Thanks. Appreciated some of the comments on the exchanges. And just interested if you can give us some early thoughts on the 3Rs now that those have come out and whether you think they will be successful in helping to mitigate adverse selection in the exchanges?
So, Gale, man, you want to?
Good morning, Scott. This is Dan Schumacher. I think the guidance that came out was generally in line with our expectations. With respect to risk adjustment, the only modest change is that when you start sharing happens a little later than what I think people were generally thinking. But we do think it is some level of protection in the new
Gail Boudreaux. In terms of Steve's comments on exchanges overall, while the 3Rs are important, the fundamental economics and structure of the exchange is equally important. So as we about that, the discipline of that analysis, I think, around the exchanges and where you participate makes a lot of is very important to us.
Okay. And then just a quick one, just sort of some of the one timers that were in the market more for the Q4. Any just any insights on sort of the impact of Hurricane Sandy and on utilization in the New York metro area and then sort of impact on the flu if you saw any? Thanks.
Sure, Scott. This is Dan again. With respect to the flu, yes, we did see an elevated flu over what we would consider to be normal in the Q4. As we look at that, it added about $50,000,000 of incremental expense beyond what a typical flu is. We did have some moderation with respect to storm Sandy as well.
And when we put all those things together as well as look at our flu experience through the 1st 3 weeks of January, we feel comfortable with our trend outlook for 2013.
Okay. Thank you.
We'll go next to the
side of Chris Rigg with Susquehanna Financial Group. Go ahead. Your line is open.
Thanks. Good morning. I just wanted to come back to the Q4 medical cost side. It looks on a consolidated basis, MR is up 80 basis points, but commercial is flat. I think this is the Q1 in a while where there's sort of been a deviation between trends on the government side versus the commercial side.
Can you provide any color there? Was there anything in Medicare and Medicaid that's worth sort of highlighting?
Dan? Chris, this is Dan again. No, I don't think there's anything to highlight underneath there. The fundamental change in the group loss ratio came down to the change in favorable development year over year. And as we look at each of our businesses in the commercial and relative change.
Okay. And then I just want to try to slip one more in here. Earlier in the call, Steve, you talked about fair in the exchanges. And I guess could you just help us understand what would be something unfair in an exchange? Just
any kind
of detail there would be helpful. And I'll leave it at that.
I'm not going to talk about unfair elements. I'll have Gail Boudreaux respond to this. But I think she was sitting on it before in terms of how they really work, kind of the state's posture, the federal posture with respect to making them viable and what we said sustainable
markets. Gail?
Good morning. Steve fits sort of 3 things in his comments. 1, fair, commercially sustainable in providing us a reasonable return. And as we think about exchanges, just a couple of points, I guess, I'd like to start with. One is, we see it as a market, not the market.
So there'll be robust markets inside and outside of the exchange. And we also expect these the rollout to be more measured so that January of 2014 is just the beginning. But in terms of your specific question, what makes it more attractive is flexibility. And flexibility around product design, clinical models, network configuration, as well as an ability to earn to be priced essentially for the risk and earn a fair return. So as we establish and look at exchanges and the viability of those, those are the kinds of factors that are important in assessing those marketplaces.
Thank you.
We'll go next to the side of Christine Arnold with Cowen and Company. Go ahead. Your line is open.
Good morning. Optum is a huge part of the growth story over the next couple of years and it looks like each of your Optum divisions did a bit better than expected exiting the year. Can you talk about some of the major factors that are resulting in Optum divisions doing better than expected, some maybe what's going really well and ahead of expectations entering 2013?
Yes. I think leadership has a lot to do with it. So Larry, do you want
to Sure.
I'd be happy to. Chris Hane, it's Larry Renfro. If you go back to last year, I think we laid out a few goals. We talked about number 1 that we were going to have a 15% ROIC by 2015. We were going to have our operating margin at 6% by 2015 and we would double earnings of 2011.
As part of that 3 year plan, we dubbed that internally as 1 Optum. And we had 4 main areas of focus during the year with financial discipline, reengineering simplification, portfolio management and growth with 5 main drivers: business alignment, business integration, that's 1 cost management, organic growth, PBM in sourcing and strengthening leadership. I can say that we solidly, from our standpoint, executed and we did it in a simple fashion. So we feel pretty good about 20 13. We are pivoting to growth in 2013.
But I guess it just comes down to execution. And again, first thing, we feel pretty good about where we're at today.
And then Steve, one follow-up. At your Investor Day, you guys said that you see financial services companies, pharmacy retailers, consumer product companies seeking to enter the health insurance market. How should we be thinking about that? We haven't seen new entrants
in a while. Yes, I've
seen elements of that.
I don't know if I could really comment because I don't know what enter the market really means. If they're looking to be a distribution channel that may be fine. I think that this is an extraordinarily complex space and sometimes the complexity of it is not as apparent to you until you actually get into it. It is also an extraordinarily locally oriented environment. So there it is quite a challenge to be effective broadly on a kind of a national scale in healthcare and still be really executing at the street level.
So it's a challenging environment. I think there are actually a lot of competitive barriers to entry and we will see how other non traditional participants may come into it. I take your point that there has not really been a non traditional participant under this marketplace that I can actually think of at least in the time that I've been studying it.
Okay. Thanks.
We'll go next to the side of Josh Raskin with Barclays. Go ahead. Your line is open.
Hi, thanks. So I just want to follow-up on the comments you made around the pricing environment. It sounded like you characterized 2013 as a stronger environment. You guys haven't talked about a stronger pricing environment in a long time. So I'm curious what are the drivers of that?
Is that there's less rebate experience that needs to get incorporated? Is it the industry fee or new costs for reform? I'm just curious what exactly stronger pricing environment means? And any color as to what's driving
that? Sure. Gail?
Sure. Good morning. In terms of your question on a stronger pricing environment, I think first of all, we see it as a stronger pricing environment because we're achieving the yields that we set out and we are able to feel good about our benefit cost ratio at 82% plus or minus 50 basis points. In terms of the overall environment, Steve said in his comments, it's still competitive. There are multitude of different drivers in states and we've talked about that in these calls over the last several quarters.
But we think we've got a really strong mix of affordable products in the marketplace that gives us a very broad portfolio to offer to our competitors and we see that as a driver giving people options in the marketplace. And I think our cost structure helps us do that. So from that perspective, we've been able to achieve what we set out at Investor Day around the yields that we talked to
you about. And just to follow-up on
that, Gail. So I would look at the MLRs that you guys have reported maybe even specifically in the commercial segment in the last year? And it certainly looks like you were achieving your pricing yields. Or is it more you saw extraordinary cost moderation that was not anticipated? And this year you think you're I mean, I'm just trying to pair out.
Are you actually seeing stronger yields relative to expectations? Is that kind of what we're seeing?
We're seeing our yields in line with the expectations that we outlined to you at Investor Day. And there's also a mix component as you look from 12 to 13. We've put a significant amount of affordable products in the marketplace and seeing strong uptake on those. We saw that in 2012 and that continues into 2013. And maybe I'll ask Jeff Alter who leads our commercial business to provide some comments as well.
Good morning, Josh. I think with Steve's remarks, when we say we
see the market, the pricing environment, we're talking about it predominantly about ourselves. So we still believe the market hasn't changed over the long, we'll call it the last few quarters. It's competitive, it's rational. We measure, I guess, weakness versus strong on our ability to grow and retain membership. And during this season, we've been able to perform a better around growth and retention of existing accounts.
So it may be as much around execution as anything else. Maybe we are just executing better this year than we did last. But we seem to be operating in a more rational way with respect to pricing dynamics and we are getting the margins that we are targeting. So I think it's no more complicated than that. Okay.
Thanks. And it is profoundly local. Jeff will school me on this regularly that when we talk about these things in generalities, they really come down to market by market dynamics.
Okay. Thank you.
We'll go next to
the side of Ralph Giacobbe with Credit Suisse. Go ahead. Your line is open.
Thanks. Good morning.
Just want
to talk a little bit about the industry tax in 2014. Maybe if you could talk about sort of your initial conversations with employers and maybe even states for sort of pricing of the tax? And in Medicare maybe specifically, your plans to sort of offset that and if you think that will have any impact on sort of the attractiveness of your product versus fee for service Medicare?
Yes. I don't know how I mean we're not interested in revealing kind of the inner workings of some of these conversations. Generally speaking, it is a cost and we price to cost and cost is something that is universally recognized in terms of the elements of these products and in the rate review process. So do you want to I think the consensus here is that that's pretty much the issue. It's basically a cost element.
All the pieces of the ACA really represent elements of costs that as they're introduced are introduced into the rate approval process and are being discussed. And we think discussed in rational ways in the settings that we're in and regulators who are also trying to achieve their objectives in their respective markets. And for us so far, those conversations continue to be constructive, professional and we will see where they lead.
Okay. And then is the I'm assuming I know it's a small portion, but I'm assuming the industry tax in terms of the timing, some of it's going to be in 2013. I'm assuming that's in the guidance range for $13,000,000 again. I know it's a small number, but any help in sort of helping us sort of figure out what that amount is and or what percentage of the tax that would represent to you?
I think we're feathering it in as it goes through for the year. I don't know if we can actually quantify that for you in a venue like this today. But rest assured that we are basically that is going in on a month by month basis. As that legislation basically is designed.
Okay. Thank you.
We'll go next to the site of Cheryl Skolnick with CRT Capital. Go ahead. Your line is open.
Good morning. And nice job against a lot of headwinds and also the contrary on the call has been very helpful. I want to focus on something that Gail said at the Investor Day and I think I heard reiterated today, dollars 20,000,000,000 of your benefit expense now is pay for performance based. And then I think I heard you say that your goal was to get to $50,000,000,000 I have two questions about that. It seems that that's a key to success across all of the product offerings like many of your other activities, not just on the exchanges.
But I'm curious about what has to happen differently either internally or externally to get to that goal, the timing of that goal? And also what how can we quantify or think about the impact on your performance, on your earnings performance if you get there? Or I should say when?
I think that is a great question. We have been at this actually we think much longer than others. It's been in the different names, but the bottom line is it's been the same fundamental theme. We have a lot of elements structurally already in place along these lines kind of built into our processes. But Gail, do you want to respond?
Sure.
Good morning, Sheryl. So just to reiterate what you said, we are currently at $20,000,000,000 of spend in pay for performance as part of our accountable care platform. And I think we shared that at Investor Day how we think about that, which is a broad spectrum of working with physicians as well as integrated delivery systems around a continuum to meet them where they are, whether that's moving from just straight fee for service in the primary care side to including incentives all the way up through accountable care through integrated pay for delivery full capitation. Our goal is to get to $50,000,000,000 by 2017, which is a pretty aggressive goal. We've made significant progress year in and year out.
In terms of how we get there, I think it's a concerted effort across UnitedHealthcare as well as in partnership with Optum. Optum is clearly helping to enable the delivery system with their tools and what they're doing in the marketplace. And on the UnitedHealthcare side, we're working to really change the relationship that we have working with the delivery system. And that's actually happening in each of our local markets. We're embedding it into the core components of what we do.
And it's not only on the alignment of the network contracts, but it's also our clinical program. We talked a little bit about our healthier lives model at the Investor Conference. That's an integral part of getting there and what has to change and how we work with the delivery system to manage care. And then on our benefit design and our consumer engagement tool, so I think about all of those 4 categories together and how we get there, because paying the delivery system differently without changing our internal product design and structure and our internal processes isn't going to get us there. So we look at it in a comprehensive way.
So that's how we see it and how it translate for us I think is into the medical cost structure we can offer our clients, the cost of products we put in the marketplace. And as you see in 2013, the strong, strong growth we've got in the market. And as I think about even 2013, the strong growth we're seeing across our commercial and Medicare book is indicative of the progress we've already made in some of those fronts.
So said differently, it enables you to price at a value of the entire package, not just the premium per month, but also the value you're getting and the benefit and the access to care that actually makes you well, that that enables you to gain market share while maintaining your discipline on margin in part? Yes.
I think that's very articulately said. Thank you.
Okay. And then but it also gets to the issue of reducing utilization. So if I could ask a follow-up that's only somewhat related, I'll admit. There was a lot of worry in chatter going into the call this morning. What is United going to say about utilization and the utilization trends that you're seeing?
And you've addressed it obliquely, I think, in telling us that your cost trend was somewhat below the midpoint of the range or the 5.5% rather to be precise. But can you give us some commentary on what you're seeing in terms of utilization pattern? And I'm also curious as to whether utilization patterns in the quarter before we go into reform on 2014 might change at all as perhaps benefits change and how you think about that?
Dan, you want to touch
on that? Sure. Cheryl, you faded out at the end. But with respect to utilization, our view fundamentally hasn't changed, which is to say that, yes, we did see an increase in utilization in 2012 over 2011. And as talked about the categories on past calls, outpatient is higher, physician is pretty stable and inpatient has actually been more restrained.
As we look at the full year now, this is the 4th year in a row across all of our Benefits businesses, we've been able to reduce our bed days per 1,000. So we're actually driving out utilization through our programs and through our focus. And so we're very pleased with that result. And with respect to the Q4, we saw a little bit better utilization than we thought as well as a little bit better unit cost. And it gives us comfort in our forward outlook as we look at our 2013 trend in the 5% to 6% range.
Thank you. Next question please.
We'll go next to
the side of Peter Costa with Wells Fargo Securities. Go ahead. Your line is open.
Thanks for all your forward looking commentary today. But back into the Q4, looking at the performance of the commercial business versus the consolidated business, it's clear that there is something that happened in the Medicare, the Medicaid business that seems like it got a worse beyond just the base business. I guess I'm curious was there unfavorable TPD in the Medicare and the Medicaid business in this quarter?
Hi, Peter. This is Dan. No, we had favorable development in both commercial as well as our government programs in the 4th quarter.
Then the current business, did something deteriorate there in those two businesses?
No. It's really when you look at the mix of development across the businesses year over year, it's that change that's driving that dynamic. From a fundamental standpoint, both state and federal pricing.
Would EMEAL have had a favorable impact on the MLR this quarter?
It's negligible. When you look at it 2 months
on the quarter, it's a little bit. No, it would not. All right.
And then just last, just as a follow-up to that. Any commentary about Emil overall and what you think you'll spend there in Brazil over the course of this year for acquisitions and capital
spend? Well, we wouldn't even talk about that whether it was in Brazil or the United States. We can give you some sense of kind of how things are settling out in EMEAL.
Yes, Peter, it's Dave Wickman. Thanks for the question. I'll try to give you some information. Just it's very early stage as you well know. We did close the transaction, the first part of the transaction at the end of very end of October.
We also you 30 point $75,000 offer price that we had offered. So we were successful at doing some of that during the in the November timeframe. We're preparing for the tender right now for the remaining public shares and we expect to complete that tender still in the first half of twenty thirteen. That is on track as we had laid out both in the call around Emil as well as in the investor conference. And just as a reminder, we'll be financing that with debt.
It's about $1,500,000,000 to $1,600,000,000 to complete that transaction. And just generally, I mean, meal's results are good. They're posted about $1,000,000,000 in revenues for the 2 months in 'twelve, was solidly ahead on both medical and dental enrollment for the quarter, which we are pleased with. And as you'd expect the earnings net of minority interest are very insignificant to the quarter and that's what we expected given both the what we expected from the business as well as the purchase accounting applications to that as well.
Thank you.
Next question please.
We'll go next to the side of Sarah James with Wedbush. Go ahead. Your line is open.
Thank you. To follow on the exchange comments, with your view now of the fundamentals and the 3Rs, how are you thinking about the mix of small group versus individual markets that you may participate in for the 10 to 25 that you've mentioned earlier? And I'm assuming that excludes private exchanges. And then for the larger states like California and New York, how likely are those to be broken up into MSAs as opposed to statewide exchanges? And last question on that topic is I appreciate the breakout of the 10 percent individual and small group exposure, but I wanted to look at exchange exposure a different way.
There's several reports suggesting employers of low wage, low skill employees like retail or restaurants are more likely to dump into the exchanges. So what is the exposure across your commercial risk book to those types of employers of low wage, low skilled workers?
Well, so I'll offer a couple of responses. A lot of those that you just mentioned in the latter part aren't covering benefits at all today. So those would be the ones that most of the marketplace look to be added to the exchanges. I would also offer that kind of the gravitational pull of our whole enterprises towards the small group side. We have never been large players in the individual marketplace.
I don't know if you want to comment.
The only other thing I'd add to Steve's comment, this is Gail Boudreaux, is specifically to is this just public or private exchanges, we will participate broadly in public exchanges. We already or private exchanges, I'm sorry, we already do. And we see that as another distribution channel. Opportunities in the private exchange marketplace. So that's a nice growth opportunity for us going forward.
Got it. So more
And then, John, Sarah, we did not count the private exchanges in those broad range totals that Steve offered as a starting point.
Got it. And the part on whether or not you think larger states like California and New York might break up the exchanges into something smaller than statewide. Is that something you're looking into?
Jeff? Hi, Sherry. It's Jeff Altsch. Good morning. It's to comment that only on what we know publicly.
New York has already indicated that there'll be multiple geographic base exchanges there. And so we at least know one state is thinking more than just a single exchange.
Great. Thank you.
Sure. Next please.
We'll go next to
the side of Kevin Fischbeck with Bank of America. Go ahead. Your line is open.
All right. Great. Thank you. Just wanted to follow-up on the exchange commentary. I guess two points here.
First in the context of provider rates that you're negotiating, what percentage contracts do you have signed yet? And what rates are you kind of zeroing in on? You mentioned that this product serves the population between Medicaid and commercial. Are you seeing pricing kind of skew towards one of those ranges? And then also as far as the commentary with the states goes, I appreciate you looking for more clarity.
It makes a lot of sense. Is there a sense for the timing around when that clarity may come into view? And as far as the federal exchange, is there a sense that that will be a very uniform exchange or will they allow for flexibility to account for state
variances? This is Gail Boudreaux. Let me address your multiple questions hopefully in order. First around the pricing issue. As we said a couple of times, the exchanges we see very much as a local market dynamic.
So from a pricing perspective, we see that going anywhere from commercial rates to something less. And our goal is to match our underlying economics to each of the exchanges. So we're in the process of doing that. As you know, we already offer multiple products with network construct to the product offerings in those markets. So we're going to leverage that history.
That's our experience in building networks broadly across the United States to match markets. And as you think about it, remember that we have to acknowledge that our products inside the Exchange will also be available outside of the Exchange. So that expertise will be important in building your overall network construct and offering in the exchange. In terms of your other two I don't know that we have great visibility or speculation on the timing of when those regulations markets and we're preparing our own business to be able to support what does come out. So I don't have any great visibility into the timing of the other two questions at this stage.
Okay, great. Thanks. And that's
50 different timetables. So very again, these are very local dynamics. We have maybe time for 2 more questions. So next please.
We'll go next to the side of Anna Gupta with Sanford Bernstein. Go ahead. Your line is open.
Yes, thanks. Good morning. I wanted to get a perspective on your margin outlook for 2013 in the Medicare business. When you had the Investor Day, you had the rate for 2013, you had your own star scores and what the margin expectations would be based on that. But since then, you've seen your enrollment and disenrollment data and your mix of business possibly relative to your competition?
And then one more quarter of utilization, do you see it being flat year over year on MLR basis? It does likely to get worse or better?
Yes. Well, we really don't provide margin insight with respect to Medicare other than in the most general themes. So Jack, do you want to comment at that level?
Hi, Anna. Jack Larson. As Steve said, we don't comment specifically on margin trends in Medicare. But what I can tell you is that based on the enrollment season that we're just finishing up here effective January 1, the mix of new members that we're seeing is very much in keeping with the mix that we had anticipated in terms of individuals already in Medicare versus new to Medicare, really not seeing surprising or what we had anticipated. So on that front, I'd say we feel very good about the guidance that we offered back in November.
In terms of the age cohorts, are you seeing more of the 65 to 67 type of younger age mix enrolling directly into Medicare Advantage? And any mix shift likely on the 75 plus?
Yes. That has historically been the pattern, Jack. Yes. So exactly right. Do you
think it gets worse or better?
Yes. Well, we really don't provide margin insight with respect to Medicare other than in the most general themes. So Jack, do you want to comment at that level?
Hi, Jack Larsen. As Steve said, we don't comment specifically on margin trends in Medicare. But what I can tell you is that based on the Are you
happy to get worse or better?
Yes. Well, we really don't provide margin insight with respect to Medicare other than in the most general themes. So Jack, do you want to comment at that level?
Hi, Anna. Jack Larsen. As Steve said, we don't comment specifically on margin trends in Medicare. But what I can tell you is that based on the enrollment season that we're just finishing up here effective January 1, the mix of new members that we're seeing is very much in keeping with the mix that we had anticipated in terms of individuals already in Medicare versus new to Medicare, really not seeing anything surprising or what we had anticipated. So on that front, I'd say we feel very good about the guidance that we offered back in November.
In terms of the age cohorts, are you seeing more of the 65 to 67 type of younger age mix enrolling directly into Medicare Advantage? And any mix shift likely on the 75 plus?
Yes. That has historically been the pattern Jack.
Yes. So exactly right. I think we are very aware of the cohort mix. And as I said, we're seeing what we had anticipated with really nothing remarkable to offer.
And then on the Part D side with your new product, can you comment on your margin expectations relative to what you had even directionally in 2012? And then from a seasonality perspective, as you're guiding us to a quarterly progression, will there likely be any change?
Well, we don't comment on the margins with respect to that as well. We're very comfortable with where we put our bids. We have gotten nice market response. The switch to an enhanced plan to open up a new basic plan was a very good move, but it just moves the recognition of earnings under those programs to the back half of the year. And that's the geography of when the earnings come in is really the biggest change in there.
Other than that, we've had a very good Part D season and put forward our bids in what we think is a very rational fashion. And I think we will be very comfortable with that. And then on the downstream impact is that it should drive script volume to OptumRx and that will be a positive for us as well. So that's I think all we could comment on that.
Great. Thank you.
Thank you. Last question please.
And we'll go last to the side of David Windley with Jefferies. Go ahead. Your line is open.
Thank you for squeezing me in. So I'm focused on Optum. Your margins have had really nice improvement sequentially for the last few quarters, ended the year above where your guidance range is for next year. Hoping you could comment on perhaps what other than maybe seasonality might be the reasons that that would be lower than where you ended the 4th quarter. 2nd, could you comment on any early say operational feedback on the internalization of the Medco business?
And finally, give us a sense of how quickly you can get Optum services into the EMEAL market and customer base? Thank you.
Sure. Well, that will be our last three questions then. And Larry, maybe you want to start off? Okay. David, what was the first question?
I got the last. Basically, the margins at Optum, whether they're the 4th quarter or seasonally driven, etcetera.
I think in Steve's opening remarks, he talked about that we do have seasonality at Optum. So obviously the Q1, second quarter, the first half of the year, I think we gave an estimate that that would be about 40%, 60% in the latter part of the year. That was a trend in 2012. We believe that will be will remain the trend in 2013. So what we're trying to do David is balance investments and growth with financial discipline.
So we're comfortable with our plan. We're comfortable with the 3 year plan and how this all fits. But I think you're going to see that seasonality over the year. If I move into the second area and I'll ask Dirk to comment on this as well. When it comes to the PBM in sourcing, I think you know that was a very large undertaking over the past couple of years.
And I'm going to address that on 2 fronts. The first front will be the technology, the operating platforms, the infrastructure. And I can tell you that as we progressed through the year last year, we met our targets, we delivered on that. And Dirk will talk about the conversion that's gone seamless in the Q1. The second part of the PBM as we were getting into the commercial business was our external sales.
And I just want to comment that we kept going with sales as well with I think we mentioned at our Investor Day that we had made 50 deals at that point in time. About half of those deals come from the national account side, the UHC and the other half are independent external sales. And it probably represents about 1,000,000 new members. So maybe Dirk you could comment on your thoughts?
Yes. So on the commercial migration, we just completed our 1st migration wave with 400,000 consumers moved from the ESIMedco platform to our platform, plus all commercial new business and that's going pretty well. We're excited. Actually, right now, we've sort of shifted gears and thinking about the next migration wave, which is on fourone. So the first wave sort of out of the blocks, looking forward to the more conversions.
On the sales side, all I would add is that we saw in 2012 extremely strong RFP season. We actually didn't have enough people to answer all the RFPs. We staffed up in 2013 to be able to handle all that volume.
And Dave, maybe Emile? Sure. So thanks, it's David. I'm going to if you don't mind, I'm just going to take it up a level because it's a very early stage right now. We've just begun our planning for the integration work that we're doing with EMEAL.
As you might suspect, most of that planning is really around the growth opportunities that exist in Brazil and possibly more broadly in the South American markets. Areas of focus for us are really in operations and technology. We think we can add a lot to Emil's platform in that respect. Growth, which is again the opportunities that exist in Brazil and again more broadly in South America. Clinical areas, and I think that's reciprocal.
They're very competent clinically and we're very competent at managing managed care populations that are networked. So, nice sharing there and then really around infrastructure and compliance as you might suspect as well. Certainly, many of the growth beginning to plan those activities now. Certainly, pharmacy is one of those that we are looking at carefully. And broadly, I'd just say we see great opportunity in Brazil and South America also for the benefits business and having just been there last week just reaffirms the terrific platform that we acquired.
So we're looking forward to the opportunities of the future.
Thanks. So thank you for joining us today. Kind of sum up today's discussion, in 2012, UnitedHealth Group continued a steady growth trajectory, delivered consistently in terms of strong fundamental execution, innovation, adaptability. It is a changing marketplace and we think we have resources to respond and adapt. While it's still early in the New Year, we're well positioned to leverage our capabilities, expand our position in the marketplace and then from 2013 and we are off to a strong start in January.
So we look positively to the future in terms of what we offer the marketplace as well as what the demands of the Affordable Care Act, the Accountable Care Act will represent in terms of opportunities for 2014 and 2015. So we thank you for your attention and we'll see you next quarter. Thank you.