Good morning. I will be your conference facilitator today. At this time, I would like to welcome everyone to the UnitedHealth Group Third Quarter 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period.
As a reminder, this conference is being recorded. This call and its contents are the property of UnitedHealth Group. Any use, copying or distribution without written permission from UnitedHealth Group is strictly prohibited. Here are some important introductory information. This call contains forward looking statements under U.
S. Federal securities laws that 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 from time to time, 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 October 19, 2010, which may be accessed from the Investors page of the company's website at www.unitedhealthgroup.com. I would now like to turn the conference over to the President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.
Good morning and thank you for joining us. Today, we will review our Q3 performance and share some reflections about the business environment heading into 20 11. In the 3rd quarter, we continued the positive themes performances based on the breadth of advances and the level of new activities underway across the enterprise. And we believe the underpinnings of this steady performance advancement are sustainable. They include ever stronger and more consistent execution in the fundamentals of our businesses, strengthening clinical and operating cost management disciplines, continuing practical innovation efforts market by market, broader business diversity and expansion efforts, and steady capital discipline.
We believe these aspects are differentiating us in the marketplace. It translates into value for our customers and into growth including stronger than expected revenue and earnings this quarter. On $23,700,000,000 of 3rd quarter revenues, we earned 1.14 $4 per share. 3rd quarter cash flow from operations of $2,900,000,000 brought year to date cash flows 4,800,000,000 dollars We expect our full year 2010 revenue will be almost $94,000,000,000 This is an increase of roughly $1,000,000,000 from our last update with you and up significantly from the forecast at the end of last year. Despite the weak U.
S. Economic environment, we're driving to a full year revenue increase of 8%. And once again this quarter, 4 of our businesses each had year over year revenue growth above 10%. We expect 20 10 full year net earnings in a range of $3.85 to $3.95 per share led by this strong revenue growth and a resolute focus on cost management across the enterprise. Let's break this quarter down along the lines of our distinct Health Benefits and Health Services business groups.
Health Benefits reported the 3rd quarter revenues of 22,000,000,000 an increase of 8.8% year over year. Health Benefit earnings from operations advanced to $1,800,000,000 We are unifying the branding of our health benefit businesses using the strong UnitedHealthcare brand. As we communicated to you previously and as you can see from this morning's materials, the branding integration first and foremost is designed to simplify our overall relationships with the people we serve. We want them to know that UnitedHealthcare can meet their changing healthcare needs throughout their lives regardless of which life stage or market segment they may be in. Importantly, our 4 health benefit businesses continue to serving 1,000,000 more people than we served 12 months ago, including growth of 210,000 people this quarter.
For the quarter, the strongest growth came from the commercial risk and Medicaid offerings. Year to date, the growth leaders are Medicaid, Medicare Advantage, Part D and Fee Based Commercial. This broad based advance of 1,000,000 people the last year is driven by the diversity of our offerings, including innovative consumer oriented products at lower price points and by our focus on simple, highly responsive service for our customers and for care providers. Looking at performance by product category, our Medicare Advantage program is leading the market with 270,000 new members this calendar year. Our benefits are very competitive and our distribution channel management, sales execution and member support are strong and consistent.
Marketing for 2011 began on October 1 and the initial response in the marketplace has been positive. Consistent with our approach in prior years, we are emphasizing stable, predictable benefits at affordable prices and we hope to grow share in Medicare Advantage again in 2011. Our Part D program has seen a net increase in 2010 of more than 1,500,000 seniors served including those who buy their Medicare drug coverage through MAPD products. We continue to position the nation's leading individual Part D plan, the AARP Medicare Rx Preferred Plan for growth in 2011. Due to regulatory limits on the number of basic Part D plan offerings permitted, we have consolidated our Part D Saver plans into our preferred plans in 2011.
As a result, we expect a reduction in the number of subsidized and other Saver plan participants in 2011, but we expect this decrease in standalone plan will be largely offset by new growth for 2011. Our Medicaid business continues to grow strongly increasing 335,000 people this year. There's a steady pipeline of state program procurements across our current product categories between now and 2014 when reform driven growth should expand the Medicaid market. We intend to be active in those intervening years as we have been for the last several years. This includes selectively responding to proposals in the growing aged, blind and disabled private Medicaid market where we can apply our deep experience in directly caring for this population.
In commercial benefits, we again grew our risk based business this quarter with an increase of 95,000 people, bringing our growth to 190,000 people over the past 6 months despite continued pressure in the employment market. Key to this success is responsive and simpler service, intensive cost stewardship for customers and our focus on innovative local market products that provide affordable health coverage all of which combine to improve retention. The commercial market renewal rights agreement in the Northeast with Health Net has worked well for both us and Health Net and we are encouraged by the next opportunity we have from a similar arrangement with Principal Financial Group. Overall, we feel positive about the expanding opportunities in the health benefits market going forward. Turning to the Health Services Business Groups.
We believe the health the service market space is critical to the long term performance and cost of the American health system overall, yet the service market itself is still formative at this early stage. Our company is working in partnership with others who are part of this broad healthcare constituency focused on helping improve healthcare as a system, making it more modern, connected, informed, transparent and simpler. Our Health Service businesses align with this capabilities in information, analytics, consumer engagement, compliance and risk management. We're focused on doing our part to help find more complete solutions to the challenges the overall healthcare system is facing over the next 10 years or more. These include basic connectivity and interoperability, deeper coordination of care centered around informed consumer engagement and the broad application of evidence based medical care by primary and specialist physicians.
The common theme is helping to enable higher levels of care system performance, working locally to help this nation's system improve outcomes, cost and patient satisfaction and optimal resource use. Our health service businesses continued their growth this quarter with combined revenues of $6,200,000,000 an increase of 14.1% year over year. Combined earnings from operations of $352,000,000 again paced ahead of our original 20 10 outlook. We are investing for continued growth including absorbing about $75,000,000 this year in new market start up and development costs in Health Services. In this past quarter, we strengthened our NGENX business through the acquisition of several leading companies in the respective market spaces, enhancing our capabilities in connectivity, informed clinical workflow and revenue cycle in clinical protocol compliance.
Ingenx, 3rd quarter revenues increased by $111,000,000 or 23.1 percent year over year led by growth in serving the government and care provider markets. Operating earnings increased 9.4 percent year over year and 16.7 percent from the 2nd quarter overcoming pressure in the clinical research market and the cost of start up and development activities. The estimated revenue backlog for Ingenix increased by $1,000,000,000 or 48 percent year over year to $3,200,000,000 with about $2,500,000,000 of that expected to be realized by the end of 2011. Year to date, total contract value on new sales increased more than 20% year over year for each of the customer segments of care providers, payers, government and pharma. OptumHealth grew revenue 3.8% year over year led by public sector contract awards and third party market growth, which has been the pattern for the past couple of years.
Expansion in the integrated care market and growth in financial services have contributed to OptumHealth top line performance. OptumHealth's operating margin and earnings from operations of 140 $3,000,000 exceeded our original expectations due to better growth, better operating cost performance and more moderate health system utilization overall. Due to new market start up and development costs, costs related to the implementation of mental health parity legislation and an overall decline in the commercial risk based membership served by OptumHealth customers, earnings from operations decreased sequentially and year over year as we had expected. Prescription solutions continued to grow at top line with a 17% year over year revenue increase in the quarter with normal PBM margin levels in contrast to the higher margins earned in 2009. Overall, our Health Services revenues and earnings continue to perform ahead of our original 2010 forecast.
UnitedHealth Group's consolidated results reflect the strong underlying performance of both the Health Benefits and Health Services businesses. 3rd quarter revenues of $23,700,000,000 increased 9.1% year over year, driven by strong organic growth in virtually all of our businesses. Acquisitions contributed less than 1.5% of this total. Medical cost and quality performance remained strong. Our clinical and care engagement work continues to advance and is producing positive results for customers.
2010 will likely be the 4th consecutive year of flat to down hospital inpatient usage per member in our commercial business. Clinical program success has also characterized our senior business this year. Performance improvements in hospital inpatient and readmission management, ancillary services such as radiology and payment accuracy have built an improved medical cost position as we enter 20 11 as we had hoped. This will help counter the continuing rate pressures across the Medicare market. Our pharmaceutical management programs continue to outperform market norms in the commercial and senior businesses.
Our drug trends are consistently favorable to the market led by the combination of aligned purchasing, science based formulary management and market leadership in the effective use of generic alternatives. The 3rd quarter consolidated medical care ratio of 80.1% reflects the combination of these efforts. It also includes $230,000,000 in favorable reserve development as compared to 100 $1,000,000 in last year's Q3. We expect consumer usage of the health system to rebound in coming quarters, resuming its upward growth pattern from the recent moderation in utilization growth. We will work to manage medical cost trends through affordable network relationships, pay for performance reimbursement programs for care providers and targeted clinical initiatives around improving quality and affordability.
Health benefit businesses will set rates and benefits in light of these likely forward trends. Our consolidated 3rd quarter operating cost ratio of 15% was higher than we expected. We increased our commitment to new business development and to a national corporate reputation effort called Help in Numbers, which hopefully many of you have And we funded increases in employee headcount and compensation expenses included including those related to acquisitions, The growing mix of higher margin fee based health services businesses increases its operating cost metric on a consolidated basis as well. Collectively, these added approximately 60 basis points this quarter as compared to the Q2 of 2010. On the policy front, last week our Center For Health Reform and Modernization published a new report detailing practical options for reducing deficit by $3,500,000,000,000 over the next 25 years.
This report documents, analyzes and applies data from actual scaled experiences. This research suggests that significant savings can be achieved through further Medicare and Medicaid modernization including bringing many of the programs already deployed for large self insured employers for many years to Medicare fee for service. The research also discusses extending to all dual eligible Medicaid and Medicare beneficiaries many of the care management and coordination techniques we have pioneered in these markets. These proposals could all now be tested and deployed at scale using the demonstration, piloting and commissioning authority available to CMS under current law. We've shared this report with policymakers in Washington and our hope is that the Federal Deficit Commission will encourage the use of some of these ideas.
And lastly, in December, through our United Health Foundation, we will issue the 21st annual edition of our community calls to action to our America's Health Rankings. Looking forward, we plan to provide our 20 11 financial outlook when we have the information needed to offer a responsible and informed view. We would typically offer that look in this market update. But the significant pending provisions related to the Patient Protection and Affordable Care Act does not make that possible at this time. Our early perspectives on the 2011 environment take into account a number of pressure points.
They include continued high unemployment with no significant recovery in sight, tight state and city budgets that are already starting to force government job layoffs. State budget pressures also cloud the near term state Medicaid reimbursement environment given the scheduled phase down of a portion of federal assistance for the states by June of 2011, pressures related to ongoing implementation of the Affordable Care Act and Mental Health Parity legislation. There's further decrease in federal Medicare rates in 2011. This is comparatively less dramatic than the reduction of 2010, but nonetheless a negative item to be addressed. The sales season for Medicare Advantage products as you all know has been meaningfully shortened and the low interest rate environment continues to affect the earnings contribution from cash and investments.
Health plans will have increasing expenses to prepare for compliance with federally mandated regulations including ICD-ten coding and HIPAA 5,010 standards to name a few of the larger ones. And within our company, our 20 10 results have been benefited from meaningful prior period development. We recognize there will be an unfavorable earnings impact from minimum medical care ratio regulations for our commercial business in 2011. But we must await guidance from the Department of Health and Human Service to quantify that impact. Given this external environment and its uncertainties combined with our performance trends, our tone as we enter 2011 appropriately measured.
We anticipate some level of year over year reduction in our operating earnings and net earnings per share next year as compared to strong 2010 results, but we simply can't quantify the extent until regulations are released and can be thoroughly analyzed and quantified at the individual market level. We are committed to making 20 102011 performance as strong as possible. And at this distance, we expect to build a clear path to net earnings per share growth in 2012. We're positive about what the future holds. We're committed to working constructively to make health reform a reality and helping states make practical implementation plans for the new reform measures.
We're motivated by the large market opportunities before us and we are optimistic and confident we will emerge in coming years as a market leader and a high performance growth company. We're interested in your questions this morning. We'll hold one question per person so we can speak with as many you as possible in the limited time we have available. We will have an opportunity to discuss our strategy and our evolving businesses in greater detail at our Investor Day, which will be in New York on Tuesday, November 30. I'll now turn this call back to the moderator for questions and thank you.
Your
first question comes from the line of Christine Arnold with Cowen.
Hey there. Could you talk about some of your acquisitions and the strategy behind those recent acquisitions? I think you spent about $2,000,000,000 And if there's any way you could quantify how much revenue and earnings you acquired that also would be great? Thank you.
Sure. I'll have Andy Slavitz addressed that more specifically, but those acquisitions really would play to some of the themes that I commented in the prepared comments around advancing an agenda of contributing to the improvements and the maturity of the overall health system and really plays the themes that we think have been long standing areas of strength and competence using information, using enabling technology and using care management, along themes of connectivity. For one instance around compliance in another, but basically to those common themes that we've actually been talking about for several years. Andy? Thanks Steve.
Thank you, Christine.
So we began to look several years ago at how information and analytics could be brought into the care setting in order to make technology more useful to caregivers and help improve decision making and cost and quality outcomes. So we began that journey a couple of years ago when we acquired and subsequently we developed Ingenix Care Tracker to become one of the first completely cloud computing based electronic health records and practice management systems. So this summer based on some of the important trends that Steve just mentioned, important acquisitions that further that strategy. We've been extending our strategy so that in addition to primary care, we can now provide electronic medical record and operating software in high acuity areas of the hospital. As Steve mentioned, we've become a more significant provider of connectivity.
We're in a strong position to provide full interoperability to the healthcare system needs. And one other area that we are extending our solution offering is into compliance. Our view is that essentially all the pages of health reform will end up boiling down to a number of compliance rules that health reform will need to adopt that health system will need to adopt, excuse me. So, we're building large information libraries and experts to help get that done real time. In each of these cases, you see us extending our strategy to marry information and analytics with a point of care for the business process.
Finally, I'd just add that none of this would be possible if we weren't privileged to be a trusted source for data security and privacy that we are. More entities, states, federal government agencies, health systems and payers are entrusting us to manage their information than anyone. So all of this capability, I believe, ends up at the heart of helping health care communities deliver on their promise for higher quality and more accountability. And we expect this to be a significant contributor to our strong revenue and earnings growth in 2011.
Yes. And in terms of size, these transactions were not that large and they came in over the quarter. So there's really no significant impact to the quarter. And we likely get into greater detail with respect to the individual properties perhaps at the Investor Day. So really just not significant to the quarter at all.
Thank you.
Your next question comes from the line of Sheryl Skolnick with CRT.
Good morning, gentlemen. Thank you very much for taking my question and a lovely job across the board. I'm curious about some of your commentary about the strategic initiatives in this Health Services business. I mean, in particular, you talked about market by market solutions. I think I understand you understood you to say
something that
correct me if I'm wrong here, but that the nature and relationships with providers of the actual structure of the healthcare delivery system are things that you're actually looking at? And might we perhaps see United step outside of its historic diversified business activities and move more directly into directly affecting healthcare decision making, spending, provider relationships through contracting or outright acquisitions?
Well, that is a mouthful of a question. But it's very astute to pick up on the niche issue of market by market. Obviously, healthcare is local and how its approach does vary meaningfully on a market by market basis. This is really an area we have actually been in for some time. Our care management initiatives have gotten increasingly more integrated into the delivery community broadly.
We have had initiatives like EverCare for many years which are clearly direct care initiatives and areas that we've worked with in recent years in terms of Southwest Medical Clinics and so forth. So we think making care more effective on an integrated fashion, enabling it with technology, using information more effectively, continue to move in that direction. So I think that that has been consistent with what we've talked about in the past and it will be it'll play out differently market by market because of the circumstances of each of those markets. So I don't know what I could tell you beyond that. We continue to see if we can be helpful across the broad system.
And in some instances that takes us into deeper relationships in the primary and specialty care areas. And we'll continue to probe that. We find it to be productive.
Fair enough. Thanks very much.
Thank you. Next question.
Your next question comes from the line of Kevin Fischbeck with Bank of America.
Okay, great. Thank you. I appreciate the commentary about some of the headwinds facing you in 2011. I guess, is there anything that you would highlight on the other side of the equation, anything that you look for as a real opportunity into next year?
Well, yes, I think the momentum that we have across our business, the performance, I could ask Gail Boudreaux to talk a little bit about how the market is responding in terms of our commercial offerings and so forth. I think those are very positive signs. And actually if you take a look across all of our businesses, the total expanse of it, I don't think we've ever had a year that really had performance across as many levels as we have had at this enterprise. And our service continues to strengthen, our responsiveness to the market continues to strengthen and our efforts around innovation and so forth are really just picking up. So I'll ask Gail to talk a little bit about the commercial marketplace.
But I think all of those things play into positives for 11 going forward.
Thanks, Steve. Good morning, Kevin. In terms of the commercial marketplace, I think we feel as Steve mentioned in his opening comments positive about the momentum that we're building. A few things as we think about what's going to be required for employers and what's resonating in the marketplace today. The first is really a focus on total cost management.
As we look at the growth that we saw over the last two quarters particularly in the risk business, those are really based on affordable consumer products. And we're seeing nice uptick in each of our markets around that. Many of our markets are growing about 2 thirds. So we see that as an opportunity now. And then employers really three things again there that focus on affordability.
The second focus on consumer engagement. Many of the tools that we're putting into the marketplace around transparency and an ability for employers to help employees live healthier lives, improve their health and wellness have had a nice resonance in the market. And the last is around consumer engagement. And you see that in many of tools that Optum puts out in the marketplace. And again that's contributing to our growth on the fee based large employers as well.
So as we think about the opportunity to manage costs that's where the momentum is coming from and our opportunity to do that in our local markets where we've repositioned ourselves over the last couple of years.
Okay. And if I could just maybe follow-up on that cost question there. I mean, I guess, we had kind of expecting an increase in MLR as the year went on and yet we saw it down sequentially. I mean, can you give some thoughts about what's happening there? Is it a change in benefit design?
Is it that consumers are not responding the way we would have thought? Maybe the deductibles are still maybe too high. Maybe we won't see a snap back in volumes in the second half of the year?
Maybe you could reframe that. I'm not sure I was keeping up with that.
Sure. So the I guess we've been thinking that given the change benefit design over the last couple of years that we would be seeing low MLR in the beginning of the year and it would increase as the year went on. And then in Q3, we didn't really see the sequential increase we might have expected. I guess, are we reaching a point where the change of benefit design has been so great that people or the economy is just so weak that people are looking at this deductible as just maybe so high that they really won't use the healthcare system the way that we thought they would and maybe I'm really kind of wondering whether we're facing a situation where
I don't think so. I think it's I actually think people are more engaged. Our data would suggest people are more engaged with their health care, are becoming more informed consumers. The consumer designs are increasingly begun enable them to use the health care system in a more intelligent informed way. So I think those things are factors.
If you're really talking about the totality of how trend has played out through the course of the year, there's just several major factors that have played into that. The economy could clearly be one of them and we're also not clear that that is sustainable at all. Mike?
Kevin, it's Mike. I would separate the issue between the deductible that you mentioned and that Steve commented on from the sequential medical loss ratio. As we've seen the year play out, we've seen continued moderation of utilization and continued favorable development that have contributed to a lower loss ratio. And we're seeing that really across all the businesses. And so I wouldn't try to connect the deductible wear off per se to the reported BCR.
We are going to see and we have seen increased utilization albeit on a lower baseline this year as a result as the deductibles start to wear off. So I'd make sure you're not connecting the 2 per se.
Okay. Thanks.
Daniel, one more thing?
Yes. The only thing to answer your question specifically about deductibles, we have not seen an acceleration in deductible year over year. It's been increasing about 10% a year. So in total that isn't accelerating this year relative to the economy.
Next question please.
Your next question comes from the line of Scott Fidel with Deutsche Bank.
Market consolidation and just interested if you see a lot more opportunities in the future to do more of these types of assumption arrangements that you've now done with Principal and Health Net and just whether you think that's going to reduce the need that you'll see in the future to have to actually do more acquisitions of commercial targets where you actually have to acquire the equity and instead we'll just have an opportunity to structure these assumption arrangements?
I think the only comment we could offer to that is that we have said that we think the market will increasingly become more rigorous and individual companies will make decisions about what levels they want to participate, what markets they want to participate in. And I think as an enterprise, we have such diversity and resources to bring that I think we can become a good solution to those kinds of situations. And we'll pursue them where they are. But I don't know if that will become a trend. But I do believe that the market will continue to consolidate and they will come at it in different ways.
But I think there will also continue to be very traditional acquisitions in the future as well.
And are you
seeing more interest yet from other multi line carriers in terms of potentially exiting the market similar to what we just saw with Principal?
Could I see that?
Are you seeing it at this point?
I can't say that we're seeing any particular trends. I think these are more individual situations and individual decisions would be the way I would respond.
Okay. Thanks.
Your next question comes from the line of Peter Costa with Wells Fargo.
Hi, thanks. I'm trying to get a handle on commercial cost trend for next year. Can you quantify how much commercial or consumer utilization you expect to rebound next year? You talked about rebounding, but can you say how much? And then can you quantify the effect of COBRA membership declines this quarter and next year on MR?
And lastly, do you think there's any ability for the lawsuit against the Michigan Blue to help your pricing with hospitals or does it perhaps hurt your pricing with hospitals if you have similar type contracts?
Perhaps it's multifaceted a question as I've ever heard. Dan, you want to talk about trends?
Thanks, Peter. With respect to the commercial trend, if you look into 20 11, we do expect our trend to increase and it's really on a combination of a couple of factors. Certainly, we do expect more normal utilization in 2011. We also expect the impact of the coverage expansions from federal reform as well as mental health parity to push up our trend in 2011. In terms of quantifying at this point, we'll look to expand on that in our Investor Day conversation.
On the COBRA front, our enrollment has stayed pretty stable. It still represents about 2% to 2.5% of our fully insured enrollment base. So as you think about the costs, I would characterize those as relatively stable and no material change in the quarter.
And then what about the Michigan Blue? Do you expect to see any impact from that lawsuit
against them?
I don't know if we can really comment on another carrier or a situation like that Peter. So Well,
more the way the fear of more litigation like that spreading from Michigan to other states?
I don't know if you
have any reaction to that Gail.
This is Gail. I mean, obviously, we support a competitive marketplace with hospitals and providers. And quite frankly, we think that that's important. And we're very focused actually on working with facilities around pace of performance. They're trying to change the game that way.
But we very much think a competitive marketplace is important.
Thanks.
Your next question comes from the line of Carl MacDonald with Citigroup.
Thank you. Excuse me, I wanted to understand how your pricing business for 2011 that's most impacted by reform. So are you just assuming normal situation and not thinking about reform until the final regulations come out, at which point you'll make a change? Or have you done something preemptive? And then also what you're seeing from competitors along the same lines?
Yes. Hi. Good morning, Carl. Two things. One, I think we've talked about it the last several calls.
Our pricing discipline has stayed pretty consistent around our forward view of costs. Included in that obviously is the pressure relative reform provisions, mental health parity. We do think as we've talked about we're going to see an increase in utilization from the lower levels that we experienced today. So we're building that into our forward view of pricing. In terms of the competitive marketplace, it remains a very competitive marketplace particularly in the lower end.
It's been rational. We've seen some actions in particular market segments and states, but that has not been a trend. So from this point, I think it's been pretty consistent what we talked about in the last quarter.
Maybe I could rephrase. If you've got a product in a geography where you know you're going to pay a giant rebate next year, is your strategy to cut the price to try to make the product more attractive to consumers? Or do you intend to sort of maintain pricing where it is and just pay the rebate out once the run out finishes?
Yes. I think again we're balancing we're always balancing what we think the right cost structure is by product, by market segment and volume. So our fundamental discipline on that hasn't changed at all. And remember, we are in many markets today where we have a minimum MLR requirement and we have been very successful managing those markets. So our strategy has stayed very consistent to what we think the right cost structure approach is for the marketplace to balance both growth and profit.
Thanks. Next question please.
Your next question comes from the line of Ana Gupte with Sanford Bernstein.
Thanks. Good morning. The question is about your SG and A uptick and could you give us any color on how that impacts your goal of the $1,000,000,000 plus in savings and over what time period that is? And then the second question is related to that more on the selling side of it. You and your competition seem to have alerted brokers on a reduction in commissions.
Are you still likely to follow through on that for 2011? And is that varying by segment in commercial?
Those are two parts. I would offer that many other factors that influenced our SG and A costs in the Q3 and will influence them in the Q4 relate to specific programs that we've investments we're taking and some of it the timing of when we put resources in place, which we think is thoughtful. I don't think it affects our underlying cost and productivity initiatives at all, but I'll have Dave Witton speak to that and then Gail will answer the next question.
Hey, Anna, it's Dave. Just to reiterate for those on the call, we're planning to reduce our cost structure by about $1,000,000,000 over the course of 5 years as we laid out in our last investor conference. And we expect to pace that at about $200,000,000 per year over the timeframe. Those reductions come from 4 principal areas improving our quality, which I think you've seen not only in terms of our cost structure, but also reputationally for the company. We are driving higher automation.
Are consistent with working paper number 2 if you can draw yourself back to July of last year where we released that all around EDI exchange and driving higher levels of automation. The 3rd area is really around advancing our integrations, which we are very far along on today as well as driving a much more simple and modern processing environment. And the last is really around improving our procurement and sourcing. Right now, we plan we are on track to meet or achieve these commitments for 20 10. And we've got a nice pipeline for 2011 as well.
So we're very confident in our ability to achieve the estimates that we put forth for you in the investor conference.
Thanks. Gail? On the commission side, we've been particularly focused in the individual market. And as we think noted on the last call, we had notified our brokers that depending on what happens in the marketplace, we wanted retain our flexibility there. We still don't know the ultimate rules and regulations around that.
So we're going to make our final determination once that becomes clear based on how that market is dealt with whether there stays in at the state level etcetera. So at this stage, we have not made our final determination there.
Just a quick follow-up. What is the likely magnitude of that reduction as you could see in individual?
I mean, again, at this stage until we know what the final rules are, I think we're going to remain flexible because that could change based on each of the states and how that rolls out in the market.
Thanks very much.
Next question please. Your next question comes from the line Sarah James with Wedbush.
Thank you. My question is around the Medicare market. Being 19 days into the special election period for private fee for service, what kind of movement are you seeing on that book? And then second, if you could just give us a little bit of color on the impact you see on the market from the Humana Walmart low cost option, how it's impacting the market dynamics?
This is Tom Pauls area.
Hi, Sarah. As Steve said, this is Tom Paul. I'll first comment on the special election period that's resulting from the disruption in the marketplace. We'll give you more details about our growth expectations at the Investor Conference at the end of November. But at this time, we are seeing positive outcomes from our product introductions and our distribution and marketing efforts in regard to the migration of individuals out of private fee for service or other disruptive markets into our network based plans.
And so at this point, it's been very positive
surrounding the impact on the market dynamics from the Humana Walmart low cost pricing strategy.
Yes. I mean, ultimately, what I'd probably do is first focus on the competitive positioning of our own products and then how we see that as potentially impacted by the Humana Walmart offering. As Steve had said, we consolidated 2 of our basic plans, the Saver plan and the Preferred plan. And ultimately, that consolidation, whereas it did disrupt our Saver Lives, made our preferred plan much more competitive. So we, on average, dropped our premium in that plan for which is the bulk of our membership by $5 per month, as well as we're able to retain a national no deductible plan, which should be the only national product without a deductible.
And our consumer experience and our consumer surveys would tell us that, that is a very important feature, that we were able to retain this year. And again, we are the only national plan that will do that in 2011. We do think that again any time that there is a low cost plan that comes out into the marketplace, it will cause consumers to explore and look. But again, that plan will have a full 3 $10 deductible in it. And as a result, we do expect that we'll be able to retain and continue to grow that product.
Thank you.
Next question please.
Your next question comes from the line of Justin Lake with UBS.
Thanks. Good morning. First question just on your 2011 outlook, the discussion of down operating income and EPS, clearly you've discussed a little bit of certainly a number of the headwinds, some of the positive factors you might be able to put in place like commission cuts. I'm just wondering on those positive factors, whether it's cost cutting or commission reductions, are you building in a full year impact of whatever you expect to do there or would that benefit phase in over time and potentially help fuel the 2012 earnings growth that you talked about?
No, it's first of all, we really didn't give an outlook. We kind of offered basic themes that we are looking at as we look at 2011. Obviously, we work on a number of things in our business and we really look out into the future. So a number of our initiatives just like Dave Whitman's commentary around operating costs for example are multi year initiatives. The initiatives around the competitiveness of our Medicare Advantage offerings and so forth are 4 5 year kinds of initiatives.
So they all have run-in impacts and so forth. And so there will be some run-in to 2011 that will be positive. But what I expect will also be accelerating throughout 2011. So I think it will be a mix of those kinds of things. I don't think there will be it is not like in 2011 we'll begin to initiate a whole series of actions.
We've been pretty much working on these things for some time. I don't know if that answers your question, but that's the best way I could frame a response.
Sure. That's helpful. And you talked about the outlook for 2011. Did I mishear you saying that you expect some reduction in operating earnings and EPS?
No, no, no. You clearly heard that, but basically that's very much a response to the expectation of what will happen with respect to care ratio regulations and things like that.
Got it. And does that include is that regardless of how the federal taxes end up, whether they're in or out of the equation, you expect that number?
I'm not going to get into the details of that. When those regulations clarify, we will really address this fully and comprehensively. Okay. Great. Appreciate it.
And comprehensively.
Okay. Great. Appreciate it.
Your next question comes from the line of Charles Beraney with Credit Suisse.
Thanks. Good morning. Steve, you talked about a few different related items, the state budget outlook, the phasing out of FMAP and also the white paper that you put out last week with opportunities to improve quality of care and lower cost through better management of the dual eligibles. And I wonder if you could just actually connect those three dots for us and give us the mosaic of what you think the opportunity set is for United in the state based and especially the dual populations? And how should we think about the opportunity for top line growth from states moving more lives into managed care, offset by potentially offset by margin pressure as a result of state budget shortfalls?
Are you trying to paint a net positive story for us of growth or highlight a risk of margin contraction in that business in other words?
Well, as the reality of the marketplace, Charles, it's a little bit of both. And that is it really is a robust marketplace. States are challenged. They have seen the merits of progressive managed care approaches to these markets. And so we think opportunities there are strong.
There are like others there are countervailing pressures in the state budget environment and the rate environment that that creates is one of those countervailing pressures. But that has actually existed for years. We have operated effectively through those. I think they increasingly see the value of these programs. So all we're really suggesting is perhaps nothing that is all that more dramatic than we have in the past.
There's always pressure in the rate process at the states as they try to make their budgets. We just point out that the budget environment across the country is understandably perhaps as tight as it's ever been. Jack, would you have anything to add to that?
I would. Hi, Charles. Maybe I'll take on the expectations of growth in the Medicaid marketplace and ask Simon to speak to the working paper comments on the benefit of suggestions we've made around duals. Perhaps I'd address those. I think as you pointed out, the level of procurement activity that's in the marketplace that Abel confirmed and rumored is really unprecedented.
It is across all product types and all geographies. It includes membership that is currently under managed care. And really exciting part is additional populations that have been previously in the fee for service relationship, we believe will also be opened up to managed care participation. As Steve said, we're going to participate in those RFPs as we have done in the past. And really our strategy there is to participate where we can be successful given the kinds of assets that we have and can build, but also certainly keeping an eye on how Medicaid expansion will play out in 2014.
With respect to state budgets, it's not new news that state budgets have been tight. We have worked in that environment for the past several years. I think we had given some guidance about low single digit types of rate increases. That's about where we ended up for the current year. And I know we'll have more to say on this, but we're likely to be looking at base rates at about that level or perhaps just a bit lower next year.
And I think where we excel as a company is certainly working in that very tight base rate environment, but also being successful in getting some of the the additional amounts available on top for quality purposes and performance based incentives. So I guess the punch line there is we expect to grow. We think we understand how to work in a fairly tight rate environment. And as you can tell from Steve, you know, we'll quite bullish on Medicaid.
Yes. And I'd say that's pretty much true across the board. While we're very good at suggesting what the headwinds are, we're very positive about our business and I think we have been successful over the years working through those kinds of things and continuing to grow and we don't change that view at all. Next question?
Your next question comes from the line of Josh Raskin with Barclays.
Hi, thanks. Good morning. A question just around the outlook and I guess the inability to provide an outlook. It sounds like that's based on your view that the MLR requirements are need to be set. So I guess I'm just curious as to is there an expectation then that we're going to see a meaningful deviation from what the NAIC has sort of provided at this point?
Or is it just simply let's wait until it's signed before we could opine on the impact?
Josh, I think it's simply the latter. I mean the reality is that there are those are significant matters that are pending. They are clearly play directly to our business and we'd actually think it would not be responsible to offer guidance right now with something like that pending. It does not reflect a view one way or the other about how we expect those to be considered and determined. It really just reflects the fact that they have are still out there and we don't think it's responsible to offer guidance while they're pending.
David, there will
be a period
where we have to really understand them, analyze them and really assess them on a market by market basis. So it will take a little bit of time before we can really give what we think is a thoughtful response.
Is it fair to say that excluding the MLR minimums for 20 11, you feel differently about that operating earnings and EPS trend that you talked about for 2011?
I would just say, I guess, if we intended to give guidance today, we would have done it. What we would try to offer is some theme. And I would tell you we are very positive about our business, but there are some items that are out there that are significant. They're pending. And we are merely suggesting that as a responsible enterprise, we'll formulate outlook on 2011 when we have the information to do it and really no more drama to it than that.
Okay.
Thanks.
Your next question comes from the line of Tom Carroll with Stifel. Hey, good morning. A lot of commentary today on utilization. I want to just pick at that a little more. As we go into flu season again, could you maybe give us some sense of how you're approaching flu season this year, anything different than prior years given our unusual data point from last year?
Thank you.
Yes. I would say there isn't anything that is unusual. Flu is not a predictable kind of event. You can't predict the extent of it. You can't predict the timing of it.
It is a pretty regular factor on the landscape, but you really just don't know when and to what extent it will affect you. So I don't think we changed our view of that at all. And we don't actually incorporate anything that is specific about flu one way or the other as we develop these outlooks on trend. There's so many other factors that are part of it. Anything else to so I think that would be our response.
Thanks. Your next question comes from the line of Matthew Borsch with Goldman Sachs.
Yes, and understanding this maybe gets a little bit into next year, but it's really not an earnings. Can you comment at all in terms of how you think you're doing with national accounts? And are you still seeing accounts not moving as much as in prior years or has that started to change?
I think this one we can respond to Gail.
Hi, Matthew. It's been an active season in national accounts, but your question around the theme of the trend is absolutely consistent, which is incumbency over the last several years. More than half of the accounts that went out to the market this year stayed with their current carrier. What I would say, however, is in terms of our positive momentum of those accounts that are moving we have done very well. I think our back to Steve's current or his comments at the beginning of the session, there are I think our strong service, our value proposition in the market, we're doing very well on those accounts and are winning a majority of those accounts that are moving.
So we think that's a positive piece of momentum for us in the marketplace. And then secondarily, we had less of our accounts out to the market this year and are retaining more of those. So those are both I think data points that are important from our momentum and what we've been able to accomplish in the national account marketplace.
You're not prepared to put a number around it at this point?
We're still in the midst of the season. So we'll give more guidance at Investor Day.
All right.
Thank you.
Thank you. Next question.
Your next question comes from the line of Dave Windley with Jefferies and Company.
Hi. I was wondering if you were giving any consideration to, I'll use the word collapsing legal structure within states to deal with the by entity by state calculation in the MLR?
No, we are not going to get into that level of discussion with respect to specifics. It is going to vary state by state. So I just don't think we're prepared to answer at that level. Okay. I appreciate the question and it's insightful, but I don't think we're going to respond.
All right. Thank you.
Next please.
Your next question comes from the line of Joe France with Gleacher and Company.
Thank you. You recently announced that your stop loss policy starting October 1 will include an unlimited lifetime benefit as a standard provision. Is this aligned to enlarge a self insured market? Or is it just an add on to existing large group policies?
It's Dawn Owens with OptumHealth. We have an external stop loss business that we underwrite on behalf of self insured employers and TPAs. And to match the provisions required under health reform with respect to unlimited lifetime maximums and so forth, we matched our policies to correspond to those realities of benefit designs
and provisions. Okay, thanks.
Thank you. Next, this will be the last question.
Yes. And your last question comes from the line of Doug Simpson with Morgan Stanley. Hi, thanks for taking my question. Steve, could
you just it's obviously a couple
of years out, but could you talk about how you're thinking about sort of the Fortune 1,000 community and what they may wind up doing with benefits coverage. I mean, can we look at sort of what happened from the 70s to today on the pension side going from a defined benefit to a defined contribution model. Is that a reasonable path to look at for the large employers? Could we see them letting go of coverage and pushing people on in the exchange? And what are you hearing from the larger accounts post reform passage?
I would just react to this at kind of the highest level there is. Obviously, they're very smart companies. They're looking at all of their options and doing appropriate analysis. That doesn't mean that they're inclined to take any action. And there's also no uniform pattern or trend out there.
They see some of these things to be a little bit of a long way off relative to some of their initiatives. And our reaction is that they believe that the reform will shape itself and not necessarily in its final form at this point in time. And so they're withholding judgment. And I would also offer that these are responsible companies with significant sense of responsibility about their sense of responsibility about their employees that their benefits are an important element of their relationships with their employees. And so they're being very measured and very And I would say that many of them will be very, And I would say that many of them will be very circumspect with respect to what steps they take.
So if anything that would move, it would move I think in a very measured way, very slow.
Okay, great. Thanks.
We thank you very much for your participation today. We know that there is an appetite around visibility on 20 11 and we hope that at the Investor Conference we'll be in a position to respond to that more effectively and we expect to see all of you in a few weeks. Thank you for your attention today. Thank you.