Morning. I will be your conference facilitator today. At this time, I would like to welcome everyone to the UnitedHealth Group Second 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.
Contents are property of UnitedHealth Group. Any use, copying or distribution without written permission from UnitedHealth Group is strictly prohibited. Here are some important the Financial Reports and SEC Filings section of the company's Investors page at www.unitedhealthgroup.com. This call contains forward looking statements under U. S.
Federal securities laws. Such 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 filed 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 July 20, 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 Officer of UnitedHealth Group, Stephen Helmsley.
Good morning and thank you for joining us today. This morning we will share with you a review of our Q2 performance, a brief assessment of our 20 10 performance at the halfway mark, and some early themes for 20 11. In the Q2, we again delivered consistent positive performance across our businesses. Our businesses. Customers and care providers are seeing and responding to the increasing benefits of our steady focus on fundamental execution, coupled with a better healthcare experience for them.
Collectively, these drive value for our customers, consumers and the healthcare system in total and they anchor
our
than expected revenues related to stronger overall business growth. We earned 0 point $9 dollars 1,000,000 brought our year to date cash flows to $1,900,000,000 This morning, we will update our full year 20 10 financial outlook. We now estimate 20 10 revenue of about $93,000,000,000 up approximately $1,000,000,000 since our April call and an increase of more than $2,000,000,000 over the December revenue forecast. Despite the weak U. S.
Economic environment, we're driving to a full year organic revenue growth rate of 6%. Once again this quarter, 4 our businesses had year over year revenue growth in excess of 10%. We now expect full year net earnings in a range of $3.40 to 3 $0.60 per share, led by diversified revenue growth and continued operating and medical cost disciplines, all supported by the advancing benefits of our scale. Let's turn to an update of our 2 major business groups. We believe our health benefit businesses serving the employer, individual, Medicare and Medicaid and community program markets all gained market share this quarter and delivered revenues of $21,600,000,000 an increase of 7% year over year.
Operating earnings increased to more than $1,500,000,000 In the public and senior sector, we added a net 165,000 consumers in the quarter, bringing us to a total addition of 800 1,000 people served through the 1st 6 months of 2010. Better than expected growth in Medicaid, Medicare Advantage and Part D is driven by our portfolio of strong, consistent and reliable benefit offerings in tune with the distinct
needs
in
distribution processes have worked more effectively this year than ever before. In Medicaid, our positioning as a committed community based organization that cost effectively provides quality care in local communities is translating into growth. Economic weakness continues to move people to state sponsored programs, but we're also growing through new contract awards such as our recent success in Mississippi. Operating margins expanded year over year both in the quarter and through 6 months through an increasingly effective cost management and the advantage of our operating scale provides in this rate constrained state budgetary environment. Perhaps most significantly on the commercial benefits side this quarter, we grew by 70,000 people, led by growth of 95 1,000 in risk based offerings.
Nearly 2 thirds of our local markets grew risk based membership and nearly half of our markets generated fee based growth in the quarter. These metrics show the steady advancement of a strong turnaround from this time last year. There are a number of reasons for this momentum even in the face of a challenging economy. We are using ever improving local market focus and engagement, while leveraging the advantage of our national scale to deliver more specific, market relevant and cost effective strength. Customer retention is strong with year over year improvements in every line of business and every region for our risk based offerings.
Product innovation has resulted in strong performance from newer, more affordable consumer engaged designs that deliver increased more affordable consumer engaged designs
that deliver increased value to both
employers and consumers.
We are appropriately managing medical and operating costs in a more effective, consistent and systematic fashion. And this success further improves customer value and growth. For the full year $86,000,000,000 a 6% increase over 2,009. The rough makeup of those revenues would be nearly $41,000,000,000 in commercial benefits, nearly $36,000,000,000 in Medicare and senior offering, and a full $10,000,000,000 in revenues from our Medicaid business. Our Health Services businesses include OptumHealth, Ingenix and Prescription Solutions, all of which work to modernize and advance healthcare as a system.
We help drive better medical outcomes while lowering costs, deliver more efficient and consistent access to health care resources and advance consumer education, engagement and care provider performance. Our offering support the millions of Americans who work inside the health system to make the system perform more effectively and consistently. Our Health Services businesses continue the momentum we brought into 20 10. 2nd quarter combined revenues grew 16% year over year to $6,200,000,000 And combined earnings from operations of $357,000,000 were once again better than we had expected. Ingenix continued its strong growth trend.
2nd quarter revenues increased by $108,000,000 or 26 percent with growth driven by the company's increasing government and care provider business opportunities along with some small acquisitions. Revenue backlog increased by $117,000,000 year over year to 2,300,000,000 dollars The portion of our backlog that we expect to deliver within the next year grew 15% year over year to more than 1,600,000,000 dollars Ingenix results include roughly $20,000,000 year to date incurred in startup and development expenses for offerings in new products in markets both domestic and overseas. OptumHealth grew its revenue 7% 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. Optum Health operates critical evidence based information, technology and personalized outreach to help drive better health outcomes. OptumHealth is increasingly engaged with physicians and other care providers in more integrated care delivery.
For example, our Colorado Connected Care telehealth network links to Denver based Centura Health Network physicians with 4 rural health centers to deliver specialty care to those medically underserved communities. And we are expanding our information and care delivery capabilities to other settings such as through various medical group partnerships, our own expanding clinical operations in the Southwest and our Ever Care geriatric nurse practitioners. OptumHealth's effective application to those widely varied settings illustrates our growing capabilities to adapt to the diversity of care delivery settings in the U. S. Ultimately, this deeper integration into direct care settings driven by information and systems based processes will enable us to improve the cost and quality of care delivery regardless of care venue or ownership structure.
OptumHealth and our broad health services platform are critical to this effort. Like Ingenix, OptumHealth has invested more than $20,000,000 so far this year in start up and development expenses in support of expansion capabilities and products serving the new healthcare markets we see emerging post increase in the quarter with normal PBM margin levels. Some of you recently toured our direct mail facility in Kansas City and saw the modern operating technology and high performance platform that serves our PBM customers. Prescription Solutions continues to make the right investments position the company for innovation, improved clinical and benefit integration and continued growth. We are affirming 20 10 growth expectations for our Health Services businesses after increasing them just 90 days ago and expect our combined health services revenues to grow 13% to around 24,500,000,000 in 20.10.
Looking at UnitedHealth Group's consolidated results, 2nd quarter revenues of $23,300,000,000 increased 7% year over year, driven by stronger organic growth across virtually all of our businesses. Our UnitedHealthcare clinical management and care management efforts continue to show positive results. Medical cost performance is favorable to our expectations with 2nd quarter results building steadily on the progress from our Q1 of this year or the second half of two thousand and nine. External factors also influenced this outcome year to date, including a more moderate flu season this spring and lighter overall system use in the Northeast in the first quarter due to winter storms. The 2nd quarter consolidated medical care ratio of 81.5% reflected these internal and external factors and was also impacted by $270,000,000 in favorable reserve development as compared to $30,000,000 a moderate initial 6 months this year and as we experienced the typical seasonal increase in costs under high deductible policies, which continue to grow and represent a larger share of our commercial risk business.
We also anticipate a slight uptick in medical costs in the 4th quarter due to healthcare reform related benefit mandate and are including the ramp up of those costs in our 20 10 outlook and forward pricing model. We project this year's UnitedHealthcare Commercial Medical Care ratio to be in the range of 83 percent plus or minus 50 basis points. Our consolidated 2nd quarter operating cost ratio of 14.4 percent was well within our expectations and reflects the strength of our service, quality, operational integration and cost management discipline. As noted earlier, our updated UnitedHealth Group our consolidated medical care ratio at 82 percent plus or minus 50 basis points and operating costs in a range of 14.6 percent plus or minus 30 basis points. We expect to see increased operating costs in the second half of the year through the shortened and intensified Medicare Advantage selling season.
We expect operating earnings of $6,600,000,000 to $7,000,000,000 for the year with operating cash flows approaching $5,000,000,000 We expect net earnings per share will increase year over year to a range of 3 $0.40 to $3.60 per share. We expect to fund about $140,000,000 in dividend per quarter and to repurchase up to $2,500,000,000 in stock this year. As always, As always, share repurchase can be affected by a number of factors including the level of business expansion activity that occurs. We continue to look for opportunities to expand our Health Services businesses. Currently Health Services contributes about 20% of our operating earnings and we think that is underweight relative to our opportunities in that sector.
Pursuing our natural areas of interest and confidence in health services could move it up toward 30% to 40% range of operating earnings over the longer term. On the Health Benefits side, we're likely to be more opportunistic in assessing mergers. Health Net of the Northeast is a great example of an opportunistic transaction with a positive outcome for all parties involved. Looking forward towards 2011, there are some clear headwinds, which are virtually all external. They include an uneven and jobless economic recovery, continued low interest rates, which affect the earnings affect the earnings contribution from our cash and investments an uncertain view of the state Medicaid rate environment given the pressures on state budgets a comparatively more modest net decrease in federal Medicare rates than in 2010, increased medical and operating cost pressures related to the Affordable Care Act and Mental Health Parity Act and expenses to prepare for compliance with the federally mandated ICD-ten CodeE and HIPAA 5010 standards.
We also won't have visibility on the potential impact from minimum care ratio regulations for our commercial business until the Department of Health and Human Services announces this guidance. With the positives heading into 2011 reflects an organization executing for its customers with rapidly advancing consistency and value. Our revenue growth rate is accelerating and we believe we are gaining market share as we aggressively and broadly address fundamental affordability. We are managing medical costs ever more effectively and consistently and we have outlined areas for further improvement in coming years. We are moving quickly on our plan to remove $1,000,000,000 in operating costs over roughly 4 to 5 years and are working on a path to exceed that amount.
Across the board, our health benefit businesses have improved their local market focus and value and cost positions. This has advanced customer satisfaction, retention and growth, which provides scale advantages to our services operations and cost structure. The health services businesses should benefit from both the Affordable Care Act and stimulus funding as it eventually is deployed. Our balance sheet is strong and we continue to have good financial flexibility. And we continue to nurture a broad pipeline of innovation at many levels inside the businesses as well as in natural market adjacencies beyond the edges of our businesses.
Sustaining strengthening our culture of innovation, innovation that is practical and benefits customers, care providers and the healthcare system overall is critical to our future. We have asked one of our most entrepreneurial operating executives, Rick Jelenic, to lead our new emerging businesses group and Rick will be joined by other talented executives with strong entrepreneurial backgrounds as well. This group will focus on translating internal innovation for application beyond our business' current reach, as well as helping to drive external innovation through our venture capital relationships and investments. Jack Larson will assume Rick's role as CEO of overall direction of Larry Renfro and Tony Welters. These and other changes will come forward as the year progresses and we continue to adapt to the changes we anticipate in in the advantages of scale and an innovative and service oriented culture.
You can literally see us adapting as an organization to the new demands of healthcare policy, the new American healthcare markets that are being created and the new opportunities they will bring. That includes strategic movement of leadership, changes in capital investment priorities, a progressive maturing of our dual platform strategy of health benefits and health services, making health care work better for everyone. We are interested in your questions this morning, which I will hold one for analysts, so we can speak with as many of you as possible in our limited time we have. We will also have an opportunity to discuss our businesses November 30th, excuse me. So let me repeat that, on Tuesday, November 30th, we don't want you showing up there on 3rd.
I will now turn this call back to the moderator to take control of the questions and answers. Thank
you. Your Your first question comes from the line of Christine Arnold with Cowen.
Good morning. My question relates to reform. You indicated that reform in mental health parity will likely increase trend. How do you think about that? And can you give us some examples of what you're doing to mitigate that and to make it more predictable?
Yes. Christine, as you can appreciate, that answer varies greatly across the different settings and venues. So there is kind of no pinpoint answer to that. But I think Gail Boudreaux is probably best positioned to kind of respond to that.
Morning. Hi, Christine. It's Gail Boudreaux. In terms of your second part of the question, which is how are we mitigating some of the trend, I think the focus our focus has been on affordability and overall how we manage that affordability with our employers. So we continue to be very disciplined around cost management, managing unit costs and working with our employers around different solutions around product offerings.
Lean products have been particularly important this quarter where we saw very nice growth in those areas. Our Simply Engage products grew by 78% as one example of that. We're also seeing interest in value based network type products and I think those have begun to gain traction again in many of our markets across the country. So if I would summarize it, I think it's a couple of things. It's our product place in the local markets and it's our ability to help our employers manage their medical costs both through our care management programs, some of our disease management programs.
And the last thing is engagement of the employees themselves. There's been interest in how do we get those employees engaged to biometric screening and other things. So it's pretty much a combination of all those things as employers look to manage their total cost
structure. Okay. Thank you.
Thank you. Next question.
Your next question comes from the line of Josh Raskin with Barclays Capital.
Hi, thanks and good morning. Also reform related, I guess, talk a little bit about maybe the spending. I think you mentioned in some of the segments some investments that you're making. But I wonder if you could break out what your investment spending is regarding reform this year? And then if you could help us understand what the impact is on the 2011 selling season?
Are you seeing different patterns emerge employers and benefit managers?
Yes. I think we'll parse this up a little bit. I might ask Mike to offer a view about our total level of spending. I think that we have been keeping that in check and we are kind of deployed across our businesses with respect to healthcare reform. And then I think in terms of examples I might ask Andy Slavitt and Don Owens to give some of the sense of the examples of the kind of efforts we're making in terms of investments.
Hey, Josh, it's Mike. Steve laid out in his opening comments, the investments that we're making, broadly speaking, within Ingenix and Optum Health. I'm not sure I'd like to quantify all of those is health reform and our business growth prospects are pervasive across all our businesses. We make investments every year. And it's all with the idea of growing our businesses.
So we laid out some examples for you, but I wouldn't want to quantify them as obviously it's a very diverse business. That said, if you just look at our operating costs, we're well within and 30 basis points. We reduced that as we came into the year managing our costs better than we had set our plan to. And continue to drive productivity improvement. So all of these investments are embedded in that and are offset with the productivity gains that we're making.
We're going to continue to drive that into the future.
Okay.
And then the 2011 selling season?
Just one second. Andy or Don, you want to offer a couple of examples?
Sure. Josh, hi. Andy Slavitt with Ingenix. So Ingenix 2nd quarter continued to see strong growth at about 26%. Steve, I think, remarked that we've had year to date about $20,000,000 in investments so far through the year.
And there are areas you might expect. I'll pick 2, EMRs and meaningful use and program integrity and fraud prevention are 2 strong growth areas. So we continue to see a high growth horizon and also we plan to continue to invest heavily in the opportunities to get us there. Dawn?
Yes. And then from the OptumHealth perspective, we're looking at how the opportunity exists to get closer to the actual care delivery system. If you look at what everybody is looking for, it's integration of care, it's patient centered care and so forth. So how we take our tools and our capabilities and them into the health care system to optimize both the access of care as well as the delivery of care. And the Centura Health System example that was cited earlier in the opening remarks of the call is a wonderful example of where we see the translation of what we've been doing in the commercial marketplace with employers that can really help and apply in the direct care delivery space as well.
And so that is really where our activities and efforts are focused within OptumHealth.
Josh, give me 2011 again, what is
your question? Just the impact of reform on the 2011 selling season? Are you seeing different patterns of behavior from your employer groups and or benefit managers?
I think I'd offer 2 versions of that Gail maybe on the commercial side, but then I think we should be talking about the government side because of the change in the selling season on that. So Gail?
Good morning, Josh. In terms of the 2011 season, behavior is pretty consistent with what we've seen. Employers are focused on managing their total cost. And as I said a few moments ago, it's really all about affordability. We're in the midst of the 20 11 season right now for national accounts.
So from that perspective, again, we're seeing 3 things: total cost management, focus on getting employees engaged and getting more value out of the programs that they have. So they're very interested in the care management and disease management programs. And so that behavior has been very, very consistent. And we're obviously working with all of our employers to make sure that we implement the provisions that go into effect in September as part of their renewal process.
And Josh, this is Tom Paul. In regard to the Medicare program, I think as you're aware, the open enrollment period beginning January 1 going through March 31 for this next selling season is eliminated. So that's requiring us to move much of our sales into the annual election period, which begins on November 15 and concludes on December 31. That is requiring us really to to move much of our preparation and onboarding of sales agents and marketing materials, etcetera, at an earlier stage, but we're well positioned to accomplish that. The second thing that I would bring up that is important for this selling season is the special election period that will incur as a result of the changeover in the private fee for service marketplace throughout the industry.
And as a result, beginning in
oneone.
So a lot going on, but I would say in total I think we're well prepared and we expect a pretty responsive marketplace.
Your next question comes from the line of Matthew Borsch with Goldman Sachs.
Yes. Wondering if you can talk about how your pricing on the commercial risk products has evolved during the year. Clearly, the trend that you were experiencing in the second half of last year was or at least it seems was significantly higher, more pressure than what you've seen if you actually brought down your pricing? And I'm asking partly because it looks like the yield is lower or is that a more function of product mix and where do you see that going in the back half?
I think Gail is probably best to respond to that.
Good morning. In terms of there's a couple of points to your question. One is, let's deal with the yield question first. That is a result of the change in mix. And as you think about yield, it's a combination of geography, line of business, customer segment, etcetera.
Our medical costs, as you can see from our results, have been very consistent over the last several quarters. So we continue to price the same way we have, which is to that forward view of our medical costs.
Okay. So you're not you wouldn't characterize it necessarily the way that I have with the sort of step down function from second half 'nine to first half of this year?
Yes. It's really a mix issue. And as you know, we've put a lot of new products into the market as well. Some of those have leaner benefit designs. And again, we're pricing to what we believe is our view of the cost in those products.
So it really is part of mix both geography and product as well as the market customer side.
And are you seeing a meaningful change in the employer appetite on the risk side for the leaner benefit products?
We saw quite a bit of growth this quarter. We're really pleased with the growth we saw. As you saw from our results, we had 95,000 of fully insured growth. A lot of that growth did come from leaner products where employers particularly in the small end of the market are very focused on managing their overall costs. We also saw a nice uptick in our employer retention numbers, which again I think is an example of our ability to offer them a suite of products where they can offer multiple choices to their employees.
So yes, that's been a very positive improvement in our positioning in the marketplace.
Okay. Thank you.
Thank you. And next question please.
Your next question comes from the line of John Rex with JPMorgan. Thanks.
I was wondering if you could just give us a little more precision on what you're seeing in the utilization trends in the first half. So, what appeared to be fairly light slack utilization trends, kind of what areas were surprising to you? And then as you look to the second half, obviously, you're looking for a significant uptick there. And so maybe like aside from the seasonal impact of just higher utilization in commercial books, what elements you think will drive utilization higher in the 2H?
Yes. I think maybe Mike? I'll start from just a broad perspective, John. Last year, at the end of the year, we had anticipated the flu season H1N1, we expected a normal flu season within Q1 of this year. Quarter.
We've seen that true up favorably. That continued into the Q1 as we had a lighter flu season. We did have the storm impact in the Northeast that Steve had mentioned. And then frankly, we've just seen lighter utilization across all cost categories. We're now expecting our trend to come in favorable to what we had originally estimated at 8% plus or minus 50 basis points.
We would revise that to be more in line with 7.5 percent plus or minus 50 basis points today. And again, that's really utilization though that unit cost pressure continues to be the principal driver of trend. But that being said, we are seeing favorable utilization. And with respect to the latter the second half of the year, we all we see, as you know, an uptick, especially in our commercial line of business as a result of the deductible wear off. So there's seasonality.
And we should also mention that lighter flu season that we saw in the first half, obviously, we don't expect that to replicate in the second half. So, we'll see an uptick in our medical loss ratio as we always do in our commercial business in the second half of
year. And are bed days running negative at this point, commercial bed days?
I would say we continue to improve our bed day performance year over year. I would say they're flat to slightly down and we've been driving that. A lot of that is directly related to the clinical programs that we've implemented over the years and we continue to see improvement.
Thank you.
Thank you, John. And maybe we'll go to the next.
Your next question comes from the line of Justin Lake with UBS.
Thanks. Good morning. There are signals in the market that you've begun communicating with brokers on commission levels for 2011. I'm just wondering if you could share with us what you're thinking there in regards to the timing and magnitude of changes and maybe if you could give us any specifics in the individual versus the small group market?
Sure. I think that's clearly Gail.
Good morning, Justin. On the individual market, we did send a letter to our brokers because we don't know the ultimate disposition of the medical cost ratio and we are concerned about the impact that could have in the individual market. We sent a letter in May indicating that
there could be changes in January when we knew when we
know more about what happens. Brokers are January when we knew when we know more about what happens. Brokers are an important part of our distribution channels in that marketplace. And the reaction of our brokers has been they're happy that we are being upfront with them. But at this stage, we haven't been specific because we just don't know what the true impact will be.
In terms of the reception that we've gotten from the brokers, we had a very good quarter in individual business. We grew. We've got strong sales still and our distribution channels have been I think very positive for us. So that's something that we continue to work on and that's really where we've seen the activity in that market and many of our competitors have followed our lead in that regard.
And Gail, do you have any kind of insight into when you think the HHS decisions there or at least the NAIC might be communicating the HHS' recommendation on those MROR forces?
We don't know. And we really can't offer an opinion on this at this stage. We're just trying to obviously stay flexible and stay communicating with our customers and our brokers about that, but we don't know.
Thank you very much.
Thank you. And maybe next question please.
Your next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch.
Okay. Thanks. I was wondering if maybe you could comment on the NAIC process so far. I mean, do you have any concerns regarding the resolutions that have passed so far? Are there any outstanding issues that you're looking forward to giving input on?
Continue.
With respect to the NAIC process, we've been very involved in the process over the last few months and have been giving input to both the NAIC and Health and Human Services and appreciate that opportunity. We have been encouraged by what I guess I would characterize as broad based support and recognition from employers in particular as well as individuals in states the need for cost containment and the value of the clinical programs. And the recognition quite frankly that the care management and disease management programs have real value in the system that they do three things. 1, they improve quality of care. They help us reduce unnecessary costs and ultimately improve people's health.
So from that perspective, I think picking these picking these programs have started to engage in the discussion and provide support about the importance of those programs. In terms of the overall definition, when we get it, how it's defined, what the Health and Human Services does once they have that decision, again, we really don't know and we'll be waiting for their input and for the final resolution of that.
I guess are there any kind of outstanding issues that you feel are some of the more important ones that we should be following?
Actually, we don't. We are engaged in the process, but it is their process, determinations that will be made and what we expect will be thoughtfully made. So, I think that's all we really can offer on that subject. We're all waiting to get a sense of what direction is given.
Okay. Thanks.
Thank you. Next question please.
Your next question comes from the line of Tom Carroll with Stifel. Hey, good morning. How are you analyzing increased medical costs related to family coverage for children up to age 26 towards the end of the year? And how much of your higher cost expectation
Maybe I'm not sure we can answer that in a degree of precision because that is a pretty specific narrow question. We have that kind of varies that, but I'm not sure that we can really give you a precise answer to that question.
The only thing I would add to Steve's comments
is that we're taking a look at this in the
large group on a customer by customer basis. Obviously, provision impacts them has a range of answers. And on the smaller end of the market, we're looking at it by product by product. So rather than give a specific answer, I think, and a weighted answer to how that all flows, we think that would be misleading. Mike,
Tom, I just want to make sure we're clear. All of those items are reflected in the revised trend that I just gave and also in the United Healthcare loss ratio for the year at 83 percent plus or minus 50 basis points. So we've reflected those additional costs of the second half in those forecasts.
Okay. So in terms of magnitude, this doesn't seem to be a, I guess, what I would call a material unknown for you right now. Is that fair?
I agree with that. That is not a material unknown. We've incorporated that into our thinking going forward. It was incorporated into our benefits, our pricing going forward and into our outlook. So that is absolutely true.
Excellent. Thank you.
Thank you.
Your next question comes from the line of Scott Fidel with Deutsche Bank.
Thanks. Wondering if you could provide an update on the implementation of the mental health parity regs and just relative to the final regs, which I know that there was some concern in the industry just around some of the rules included. And if you think that there's going to be any changes to how that business is administered or how plans approach managing behavioral costs because the final parity rules?
The new rules went into effect in July of this year. They go into effect on the effective data renewal date of the group. And so while we have some clients that have gone effective in July, the majority of our business goes into effect in January. The areas of impact are both quantitative, I. E, the parts of the benefit plan design around cost sharing for consumers as well as non quantitative to medical management network components.
And we are very much on track with respect to our compliance, working directly with our customers, our health plans and so forth to make the appropriate adjustments to their plans and to our practices to make sure that we are compliant. So that's included in our pricing. It's included in our operating approach. And certainly, it causes employers and health plans to take a step back, look at mental health management in light of the broader health reform and make some changes and adjustments. But I think we've been very much on the forefront both of communication, consultation and solutions with our clients to help make sure that they can maintain the focus, the cost management and stewardship and support to patients in this very important area of service provision and coverage.
So we've been very busy to prepare for the implementation and the effective date. But at the end of the day, it's just adjusting our models to make sure that they are conforming and compliant.
And do you have an estimate
of what the aggregate impact on behavior
It really depends on client by client, where they're coming from. We had a number of clients because of state parity regulations that were already very fully, in line with many of the parity provisions that were enacted at a federal level. And so it be extremely modest to more material depending upon where a client is along that spectrum.
Okay. Thanks.
Thank you. Next question, please.
Your next question comes from the line of Ana Gupte with Sanford Bernstein.
Good morning. My questions are about 2 reform provisions on the small group markets. So the first one is on grandfather clauses. I was wondering if you are seeing lower switching the role of brokers in that market? The second question was on tax credits for small group low wage employees.
Do you see that to be a meaningful driver of membership growth going forward? Dale?
In terms of the two questions, let me start with the grandfathering question on the impact of small group. The rules on grandfathering intermills have just come out. So it relates to switching at this point, I don't think that we really know at this point the impact that that will have on small group. One of the biggest concerns and I'll go back to this is affordability for small group customers. And when you think about how the rules are written today, they can't shop or move their coverage.
They can't change their cost sharing provisions. And they're limited in the amount that they can change on deductibles. Given that the biggest driver again is affordability, I don't believe that that is driving the retention. I think it's really the offering in the markets around affordable products because we do see employers buying those leaner product designs. So I think that addresses the first question.
And in terms of the second question on tax credits, we are supporting our clients with ways to calculate those credits. We think that there's an opportunity to help them in this marketplace. So we're working with small employers across the board for them to take advantage of that where it's appropriate and we put in place calculators and other support for them. So I think it's too early to tell what the uptake will be, but certainly we think it's an opportunity.
And are you seeing any switching from limited benefit plans to affordable plans you're putting out there with the alliance you just announced on restaurants and potentially with other groups as well?
The alliance with the restaurants I think is a great National Restaurant Association is a great example of offerings with affordable price points and we just launched that. So I think it's too early to tell. We're very encouraged by the opportunity to reach a them and we think that that offering will be positive. We haven't seen a lot of switching in our normal market outside of limited benefit plans. We are seeing a lot of purchasing however of lien plans.
So the market is very fluid and again it's all based on total cost and affordability particularly for the small employer.
Thank you.
If there's any prevailing trend, then it is really the focus on lean plan. I think if anything in the marketplace that would be the takeaway. Next question please.
Your next question comes from the line of Stuart Husansky with Vanguard.
Yes. Good morning. Thank you for taking my question. My question is your current debt to total cap is around 30%. You've stated the past that you have a target of around 40%.
Can you let us know what your whether you've changed your targets and what your plans are in the near term?
I would be happy respect with respect to that. Our capital approaches and so forth remain as they have been. And we think we have very, very significant capacities within our organization. Mike? Stuart, I want
to clarify. We have not said that our target is 40 percent debt to total cap. We've said that we believe this business can support around a 40% debt to total cap level. Our capital position reflects our strategic plan. It reflects the strong diversity and growth prospects and we're going to manage it the way Steve has been discussing over the last several years.
And we feel very comfortable where we are today and feel comfortable, as I said, operating in that range that I mentioned.
So we truly think we have capacities and can operate within a broader range than we have today and our positions on this are unchanged. Next question?
Your next question comes from the line of Peter Costa with Wells Fargo Securities.
Hi, thanks for taking the question. Couple of things. First, quickly, the commercial versus the Medicare PPD, can you quantify how much was where? And second, sort of a broader question in terms of the coming changes to the individual market with guaranteed issue coming and the premium support payments coming on the exchanges and then looking at the pressure on rates right now from the government individual business. Can you describe how you see that individual market evolving over the next couple of years as we get to that?
Is it all going to change in 2014 or is it going to involve ahead of time? I know some of what been doing with the exchanges might be part of your plans going into that. So I'd kind of like to understand more about how you see that evolving.
Sure. I think as it relates to reserves, I'll have Mike offer that and then we'll get to the second part of your question.
As we've said in the past, we don't break out development by line of business. What I can say is, as we've seen in the last several quarters,
favorable reserve true ups across
all of the benefits businesses.
Mean, that is we have been focused and spanning across broadly the healthcare benefits markets for several years now.
So we have been looking across all the markets
and see them in a trying to basically take our cost positions, our service model, our information and focus them on how we could best serve those individual markets recognizing there's going to be movement across them. And we think the exchanges represent potentially another opportunity to segment a marketplace and pursue them with our offerings. And Dale, maybe you want to add to that?
Peter, in terms of the individual market and how that plays out in exchanges, I think too early to predict. There's going to be a lot of variables that affect the commercial marketplace, not the least of which is the economy over the next several years. And quite frankly, there's still a lot to be defined yet on how the exchanges are going to operate. One example, we're already working in private exchanges. A great example is the National Restaurant Association.
And the individual market today sells through Internet exchanges pretty extensively. So we have a lot of experience. We're going to continue to work with other states as they bring up exchanges and we've seen that already in several states. And I think our approach is we're going to try different product offerings, different ways to reach consumers. We're going to learn from that.
We feel like we have some really good results over this quarter that based on trying different products, again putting them in the marketplace, testing them that we will learn really what consumers are interested as part of that and be prepared for 2014 when the exchanges come into play. So our approach is really to learn as much as we can test a number of things really use our innovation agenda. And we have a very strong individual product portfolio today with some very nice traction in offerings that consumers a good price point. So as I think about exchanges in the commercial market and individual, our goal is to be prepared as the rules are defined and as we test things in the market.
And maybe Rick, you could give a
few thoughts. Peter, Gil covered that very well from an individual standpoint. I guess, I might add that in addition to the precursor elements that we participate in, in terms of online shopping tools in the individual and small group market. We also interface with other intermediary type programs today, 1800 Medicare. There are various examples in Medicaid as it relates to enrollment brokers and how we interface at the state level.
And so balancing our experience with the regulated entities on the federal and state side with the more open market on and
there's a lot of information
in terms of regs that have to be written, and there's a lot of information in terms of regs that have to be written, even in the absence of those detailed regulations, we have groups inside our organization today that are beginning to flesh out the participation requirements of the cases that we know about and the ultimate positioning across the enterprise.
Thanks so much. Thanks.
Your next question comes from the line of Michael Baker with Raymond James.
Thanks a lot. My question relates to the MeritChoice business. So back in the Investor Day, you gave an expectation regarding your rate outlook kind of low single digit in light of state budget challenges and FMAP being in the Jack Larson?
Jack Larson? Sure. Hi, Michael. So we did have a point of view at the Investor Day conference of low single digit rates. As you all know, state rate constraints have been something that are not new to us at AmeriChoice.
We are in the same position we were then. We still expect those kinds of rates. Much of our rate increase for the balance of this year will be settled up here in the next 30 to 60 days as states finish up their own internal budget discussions and we're working with them and making sure we stay close to that whole decision process. Thanks. Next question please.
Your next question comes from the line of Charles Barady with Credit Suisse.
Thanks. Good morning. I wonder if you could expand on the scope of the new business group that Rick Jelnik will be heading up just in terms of the total financial commitment and over what period you expect that to be deployed? Just how significant could it be? And would these monies be expensed as part of internal development of new businesses or incubations?
Or do you see it being invested in to show it up as an investment on your balance sheet if it's in the form of making minority investments in other companies or investment in venture capital funds that focus on health care businesses you think are interested?
Sure. Maybe I'll start and then I'll ask Rick to comment as well. But really this stems from an increasing emergence of innovation really across all of our businesses as well as the I think a number of the opportunities that healthcare reform is really putting pressure on. I think those things and some of the questions that were asked earlier in the course of the morning are around enduring themes about new approaches to affordability, new patterns or opportunities in terms of getting access and distribution of product into the marketplace, a whole spectrum of issues that you can only imagine from healthcare reform as well as our efforts to really expand and broaden innovation really across our businesses. In some instances, I think our capacity to take these kinds of thoughts and translate them into spawning new businesses that we needed to put more resource, more focus, more dedication to that.
And this is really an effort to do this. This isn't going to be a reporting business group from a formal point of view. This is really on getting some strong entrepreneurial resources focused on these opportunities. I've expected most of it will be largely expense in nature and kind of pulling these efforts together across our enterprise where we're already spending money.
Some of them could be
investments. I hope you know that we already make a number of investments and invest in the venture community and invest in a number of other areas. We have no plans to change in that agenda, but maybe get closer to it and have Rick and his team engage with it more directly. This is really making sure that we pull resources together to make sure that we optimize our opportunities as we continue to expand innovation agenda and as healthcare reform opportunities emerge on the marketplace.
I guess I'd just add Charles that over the last decade, we've built a very adaptable organization that can respond quickly to emerging opportunities in the changing market. And examples I might highlight in the past have been our response and I guess ultimate leadership position in areas such as Medicare Part D or consumer directed health plans, health banking, health technology and the like. And like most of you, we believe the pace of the market will quicken over the next decade. And so this focus intent is to take advantage of that so that we can identify these opportunities early and act swiftly. And given that we are just creating the group, what the plan is, is to instill the business objectives of this into our 2011 capital and business planning process.
And so we'll accommodate that into our next year's plan. So we're excited about the opportunities and think this will create some additional business and growth for the company.
It sounds brilliant and United does have a long track record of incubating successful businesses. And I'm just trying to put parameters around it. We talk about $50,000,000 a year, dollars 100,000,000 a year, but just kind of rough ballpark on the capital you'll be additional capital you'll be putting into this effort above and beyond what you've already been doing on a run rate basis.
Well, maybe a couple of points I'd like to make sure that we come back and reinforce. One is, we are deployed throughout our businesses in innovation and in responding to the marketplace. I think you heard some that from Ingenix and from Optum today. That's not going to change. This is really coming on top of it.
The amount of capital we're deploying there, I am not going to really respond to that. We'll talk about that I think a little bit more when we do our Investor Day review. But I think most importantly is the intensity around pulling resources together already exists across our enterprise and making sure we are basically taking 2 bites at the entrepreneurial opportunities over and above it. I don't think it's something that is going to be require that much in terms of capital, etcetera.
Your next question comes from the line of Doug Simpson with Morgan Stanley.
Steve, obviously, there's a lot of market focus on the coming MLR floors and pricing in general. Maybe if you could just talk a little bit broadly about your expectations looking into 2011 and beyond and your relative level of confidence in the outlook for commercial, the commercial risk business specifically. And if you could tie that in just to how are you thinking about capital deployment and the share buyback program versus the dividend versus the dividend you raised last quarter, just relative to this uncertainty, how are you thinking about making that investment in share buybacks?
So, I might offer there's kind of 2 parts to that. Obviously, we don't know where the where regulations are going to set with respect to the care ratios and the impact in the commercial marketplace. And as we said earlier in our prepared comments, there are certainly a number of external factors as there were last year as we headed into 2010 that we're concerned. I would offer that almost all those factors continue. We've progressed well through positively in that regard.
So we have a positive outlook on our business and on 2011 relative to the market's perception of us and their response. All of those are encouraging and it's quite broad based in both our benefits and our services businesses. We just don't know about where the care ratios will sort out and we will respond in a constructive and hopefully creative way as they do. So I can't really offer more on that. It hasn't really changed our perspective in terms of the overall direction of the business.
We are committed and think positively about the benefits base of what the needs of individuals are. And we think we can respond with our capabilities with better information, technology and care insight. We do think that we're underweighted on services and that we have opportunities to deploy those same 3 competencies in a very impactful way across healthcare services. And so we are in our heads allocating more of our expansion capital in those directions. At the end of the day, it doesn't really it hasn't changed our capital outlook.
We are investing in our core businesses. We are maintaining, we think, a prudent capital structure. I think Mike responded to that earlier. We are committed and contemplated that for more than a year. We expect that our dividend to we think we came out in a market relevant position and expect to maintain that and look at all the metrics with respect to how our dividend is positioned and consider it each quarter and each year with our Board.
I would say more broadly is the more allocation and focus on the healthcare services sector.
Okay. And then, Mike, if I could just ask, as you're discussing leverage, should we be thinking about the leverage comfort range or however you want to say it, maybe being a little bit lower right now? And would leverage, all else being equal, maybe drift back up, it late 2011, 2012?
I think you got to take into consideration all the opportunities that are in front of us and the timing of those. I'm not sure that I would change what we've said. We're operating at 30% debt to total cap today. We are committed to the share repurchase program that we put out for 20.10, the dividend that Steve just referred to, and we've got ample flexibility with a strong balance sheet to invest in the business both through organic and expansions. And I think as I stated earlier, in terms of what the business can support, we feel very comfortable that the business can support.
And we've said this for years and we've grown and diversified since then, that the business can support 40% debt to total cap. So I think you got to look at it as fluid and we're going to remain flexible and very prudent in our capital investments.
And really unchanged from when you stand back and look at this, our capital positioning and the capacities that we have really provide a really great opportunity for us to continue to expand and grow the business on both sides of the benefits and services, maintain a prudent capital structure, maintain dividend and
Your next question comes from the line of Carl McDonald with Citigroup. Thanks. Historically, the strategy has always been to price to trend and
to try to improve margins of the overall business. Do you think that's still a viable strategy today? Sort of said differently, if you're looking at the pretax margin of 7%, give or take, can that still go higher in this environment assuming a similar business mix?
Well, I think that I think the issue is I think that you can still price to trend. I think that is the appropriate long term positioning of the organization. And I think the interesting thing is the mix of the business, how you have to take the look at the totality of our Healthcare Services business and the diversity of it, how we serve all of the market sectors as they move from one layer to the next, the tremendous leverage that exists given the fact that we have integrated our technology and our operations and are increasingly integrating those. So I think there is tremendous capacities to deliver ever better value in the marketplace and to grow and to price to your underlying cost trends and continue to advance that business. And then on the services side, I think health care reform has I've said this before, put the kind of dynamics into the marketplace around affordability, around the need to modernize and simplify that the allocation of capital there represents a growth opportunity for us for an organization that has been dedicated over the years to information technology and care expertise.
So I think we're pretty positive with respect to what the prospects could be if we really engage in trying to advance the healthcare system, which is I think the mandate of this health reform movement.
Next question.
And there are currently no further questions in queue. I would like to turn the call back to management.
Well, we thank you this morning. We did have, we think, very solid strong second quarter results. The striking elements being the kind of characteristics in the acceleration of organic growth and I would say the increasing quarter by quarter effectiveness of our overall programs with respect to managing very appropriately medical costs and our operating costs. And while people are justifiably focused on health reform, this is really only one element of the market dynamics. The market broadly presents challenges and great opportunities and we are really preparing to meet them and to respond.
So we thank you for your attention this morning.
And thank you, ladies and gentlemen. This will conclude today's conference call. You may now disconnect.