Good morning. I will be your conference facilitator today. At this time, I would like to welcome everyone to the UnitedHealth Group First 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 will reference the non GAAP amount.
A reconciliation of the non GAAP to GAAP amount is available on 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 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 April 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 President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.
Good morning and thank you for joining us this morning. Today, we will provide a brief review of our 20 10 Q1, an update on our view of full year 2010 performance and an initial high level view on our preparations for a post perform environment. We performed strongly in the Q1 in virtually all our businesses, extending the momentum we built steadily throughout 2,009 in a wide range of key performance areas. 1st quarter revenues grew beyond our expectations as more people purchased our products and services in the Q1 than anticipated. Again, this quarter, we effectively managed medical care and operating expenses on behalf of our customers.
We also further strengthened our administrative infrastructure and systems and as a result improved performance quality, consistency, responsiveness and operational efficiency. First quarter earnings per share were $1.03 and operating cash flows were $1,200,000,000 We are updating our full year 20 10 earnings outlook to a range of $3.15 to $3.35 per share. This is based on stronger revenue growth, the cumulative impact of ongoing operating and medical cost management efforts, and improving operational integration in our distinct health benefits and health service business platforms. Over the past 2 years, as you know, we have steadily pursued an agenda of consistent execution on the fundamentals of our businesses. Customers are responding well to that execution.
We continue to deliver distinctively in key areas such as responsive service and integrated consumer engagement and clinical management, which we provide at significant scale while customized to individual needs. We have built on our leadership and innovation by focusing on practical development to help modernize the health system. Last week to illustrate, we introduced the Diabetes Prevention and Control Alliance in a novel partnership with YMCA USA and retail pharmacies beginning with Walgreens. This pioneering program will use adjunct networks of lifestyle coaches and pharmacists to help people prevent diabetes or better control their condition. We will use advanced analytics from Ingenix to identify people who are at risk of diabetes years before the condition sets in.
The program is distinct from but aligns with our diabetes health plan. Our use of biometric screening to drive wellness in our new partnership around healthy eating and nutrition with Sesame Workshop. These are part of a broader and more sophisticated effort to slow the U. S. Diabetes epidemic than has ever been pursued, addressing the condition that potentially could affect more than 25% of the U.
S. Population. We are delivering non practical innovations to our health services businesses as well. Ingenix formed a joint venture with technology leader Intuit to co develop the Quicken Health Expense Tracker, which is now subscribed by several large insurance companies including UnitedHealthcare where we already have 50,000 users in just 4 months. It automatically assembles for consumers a complete picture of their medical related savings and expenses by drawing on claims and benefits data.
This helps people better understand and manage their health expenditures and brings them the industry's first automatic online bill payment application. Last week, the United Health Center For Health Reform and Modernization issued its first post reform research report providing analysis and ideas that help with the execution and implementation of the new law. We identified nearly $370,000,000,000 in potential savings over 10 years for the Medicaid system through the application of proven techniques and programs and suggested a substantial portion of those savings be invested in strengthening primary care resources. This follows 2 earlier research reports where we identified more than $500,000,000,000 of savings available in the Medicare program and more than $330,000,000,000 through the greater use of modern technology and the health system broadly. These reports are available on unitedhealthgroup.com.
We have more activity in the pipeline and we remain committed to being a progressive and innovative voice helping advance healthcare modernization. Let's turn now to an update on our major business groups, beginning with Health Benefits. Health Benefits includes our commercial, Medicare, Medicaid and military veterans businesses. We are steadily integrating and simplifying those businesses across network and clinical care management functions, services and technology, administrative and regulatory capabilities, and local and regional market relationships. We're beginning to advance these efforts for UnitedHealthcare AmeriChoice innovations behind a unified UnitedHealthcare brand name.
Our Health Benefits businesses began 2010 with good momentum, led by performance in the public and senior markets where we added 635,000 consumers in total. Growth in Medicare Advantage 215,000 seniors including 55,000 from Health Net was more than double the upper end of our full year outlook for 2010. This strong start brings us to 2,000,000 seniors in that product set and puts us on a course to grow as many as 250,000 for the year. The product mix was favorable with 70% of the net growth coming from network based products. This growth carried over to Part D offerings as well where we grew by a total of 505,000 for the quarter with 240,000 of that in new standalone Part D members.
Reflecting the overall economic climate, we continue to have steady Medicaid growth. We added 100 and 45,000 beneficiaries this quarter and now serve more than 3,000,000 people through this business, which is dedicated to state based government sponsored benefits. Our member engagement and care management programs have become steadily more consistent and effective in addressing the care needs of these often underserved citizens. UnitedHealthcare commercial membership performance improved significantly over the last few years and was above our initial expectations. And that is in the face of continued high levels of unemployment and related attrition.
Self funded benefits grew 170,000 consumers this quarter, propelled by annual enrollment from large customers and strong sales in the midsize employer market. For risk based benefits, our 1st quarter decrease of 275,000 people was meaningfully better than both our original first quarter outlook and prior year Q1 results. Persistently high attrition levels driven by the economy prevailed in our commercial health benefit business. Attrition losses exceeded organic sales growth again this quarter. Put another way, we would have reported net commercial growth if there had been no attrition during this quarter and that would have been true as been true at last quarter as well.
Realized premium yields have been as planned and are on track with projected 20 10 medical cost trend. Our commercial benefit sales recovery has been steady and broad based. More than 60% of our local markets delivered year over year growth in both risk and fee based commercial benefits. Growth has been driven by an array of simpler and lower price point products aligned market needs and preferences, including consumer directed high deductible plan in which we now have more than 3,300,000 consumers enrolled. Consumer value products featuring consumer responsibility and accountability design have grown 80% year over year to 600,000 people.
Our leaner benefit offerings that feature variations in network design such as premium designated network incentives grew more than 30% to 900,000 people. In total, our health businesses produced $21,600,000,000 in revenue for the quarter, a 4.7% year over year increase. They contributed $1,700,000,000 in operating earnings with strengthening margins from improved scale and operating cost efficiencies. For the full year 2010, we see health benefit revenues of about $86,000,000,000 which would be a 6% increase over 2,009 with overall operating margins in a range of 5.6% to 6.1% for the full year. Rough makeup of those revenues would be more than $40,000,000,000 in commercial benefit revenues, nearly $36,000,000,000 in Medicare and senior offerings and almost $10,000,000,000 in Medicaid.
The improvements come from higher growth, which we hope will continue to improve our commercial benefits with employer related attrition levels inside over the balance of 2010. Our Health Services businesses which include OptumHealth, Ingenix and Prescription Solutions serve markets that offer exceptional long term growth opportunities, are less restrictive and are in much earlier stages of development in the health benefit markets. These health service businesses help to modernize and advance the healthcare system by driving better outcomes, lower costs, higher and more consistent resource access and efficiencies, consumer and care provider simplicity and convenience with higher satisfaction levels at both institutional and individual levels. Our Health Service businesses also began 2010 well. Combined revenues grew 14.5 percent year over year to $6,000,000,000 for the quarter.
Earnings from operations of $334,000,000 were slightly better than expected. While the businesses are all on their earnings targets for 20.10, the operating margin percentage for Health Services is lower year over year as we had projected and communicated last fall. This is driven by 2 main factors. First, the continued growth at OptumHealth in large long term public sector contracts that have lower relative margin combined with a commercial health benefits market that is contracting under current economic employment conditions. That trend should reverse when employment levels recover.
And second, the return to more normal PBM margins following the discontinuation of performance based pricing under the Medicare Part D program. Part D sponsors now receive variable pricing adjustments throughout the year rather than locking in committed purchase prices upfront. Prescription Solutions continued to grow its top line with a 16% year over year revenue increase in the quarter with normal margin levels. The business steadily advanced in scale and capability, solidifying its position as a strong alternative to a very concentrated PBM market. Ingenx continued an exceptional growth trend.
First quarter revenues increased by $120,000,000 or 31% with growth driven by traditional businesses and recent acquisitions. Our revenue backlog increased by more than $1,500,000,000 year over year to $2,300,000,000 a 29% gain. OptumHealth grew its revenues 6% year over year led by public sector and third party market growth as has been the pattern for a couple of years now. OptumHealth Financial had striking growth in the quarter with active accounts now reaching $2,000,000 and assets under management reaching $1,000,000,000 We're raising our 20 10 expectations for these businesses as well. We expect their combined revenues to grow 12% to a range of around 24,500,000,000 We project a combined operating margin of about 5.5 percent recognizing that margins vary significantly across this portfolio from 3% for prescription solutions to 15% or more for several Ingenix products categories.
Looking at consolidated results for UnitedHealth Group, 1st quarter revenues of $23,200,000,000 increased 5 point 4% year over year driven by stronger membership growth relative to expectations. Medical costs for 2,009 each of our risk based businesses were lower than we had estimated. In part this reflected lower levels of H1N1 influenza and the integration of effective consumer engagement and clinical management. The severe winter in several U. S.
Markets particularly in the Northeast reduced discretionary use of the medical care system during the Q1. The consolidated medical care ratio for the quarter of 81.3 percent reflected those conditions and was impacted by $490,000,000 in favorable reserve development compared to $200,000,000 last year. A consistent focus on clinical performance fundamentals is helping drive appropriate trends in health system utilization. In Medicare Advantage, hospital days per 1,000 members decreased by a total of nearly 8% over the past 3 years, while maintaining access and improving clinical quality. And commercial medical care management results are favorable as well.
We achieved these results for our customers by more effectively reaching people as they engage the health system and providing them with useful information by fundamental execution on care management. There is more opportunity around appropriate science based medical cost containment, including developing more sophisticated performance based payment contracts and broadening the use of a variety of integrated care models such as medical home, modern reimbursement arrangements with the accountable care organizations and the like. Our consolidated Q1 operating cost ratio came in favorably at 14.1%. In large measures, this reflects the continued strength of our efforts around service, quality, operational integration and management discipline. This efficiency reflects the improvements in our customer and care provider service metrics which are clearly being recognized in the broader marketplace.
The consolidated operating cost ratio includes the impact of our strong health services mix as its direct operating costs are proportionately much greater than that of our health benefit businesses alone. We foresee significant additional opportunities in operating cost management. We will steadily advance integration and alignment to get closer to our end markets and customers, while retaining enterprise wide control processes and systems. We'll also drive savings from better sourcing and purchasing disciplines, increased use of proven modern technology and further gains in quality. For the full year 2010, our revised UnitedHealth Group outlook puts consolidated revenues at about $92,000,000,000 We see our consolidated medical care ratio at 83.2% or lower and operating costs in a range of 14.6% plus or minus 30 basis points.
We expect operating earnings to be in a range of $6,100,000,000 to $6,500,000,000 for the year with operating cash flows of $4,400,000,000 to $4,800,000,000.35 range. This includes the impact from an increase in our expected tax rate which we estimate will cost about 0.07 dollars per share this year. Turning to the post reform environment, the Patient Protection and Affordability Care Act mandates far reaching changes in how healthcare benefits will be acquired and administered. The broad outlines of the law are known, but how it will be implemented is understandably not precise. Accordingly, we'll be cautious with assumptions and comments on how the provisions will actually work, how states will approach implementation and how the laws will ultimately be interpreted.
It is important to underscore that we are firmly committed to making this new law work as successfully as possible for the American people. Our new Medicaid paper is just one example. So as our decision yesterday to ensure there is no gap in coverage for dependents graduating from Powell. Some of the most immediate changes impact underwriting practices in the individual and small business commercial market. They concern guaranteed issue requirements, the elimination of lifetime limits, prohibition on policy rescissions and extension of dependent benefit to age 26.
We supported these elements and are fully prepared to incorporate the economic effect of these changes into our underwriting processes. We expect these changes will proceed in an orderly fashion and they are included in our revised 2010 outlook. Actuarial soundness and integrity are the core of responsible benefit underwriting, pricing and regulatory oversight. So we believe price changes required by rising medical cost trends and the cost associated with the revised underwriting rules required under the Act will ultimately prevail across the state. Medical cost ratio requirements will go into effect in 2011, so those enter into pricing and actuarial considerations as well.
These types of requirements have existed for years in several markets, including New York, New Jersey, more recently New Mexico. There are several unknowns about how these rules will specifically work, but we should know more after the initial work from the National Association of Insurance Commissioners is completed and made public. And we will be providing comments on the commercial medical cost requirements as well to the Department of Health and Human Services by its May 14 deadline. The Medicare Advantage rates for 2011 were announced April 5. They were within the range we had expected and they appear to be manageable for us.
We are well underway in planning 2011 benefit design. That submissions are due on June 7. We have said for some time now that our Medicare Advantage business must ultimately be able to perform better than fee for service Medicare on a comparable benefits basis and with care quality considered. We believe we can achieve and sustain that standard in the majority of our local market. Since undertaking that performance goal almost 2 years ago, our Medicare Advantage business has strengthened measurably in basic medical cost and operating efficiencies, in quality metrics, and effectiveness of service and distribution.
And we expect to see steady growth again in 2011. Our senior market plan is straightforward. We'll continue to focus on the same four points that have been driving success this year. Adjusting benefit levels in Medicare Advantage, preserving the benefits that consumers value the most, adding earnings through targeted growth in current and new products, further diversification in natural senior market adjacencies and further intensifying both medical and operating cost management. Turning to the uninsured, this administration plans to significantly expand and subsidize health coverage for an estimated 32,000,000 additional people, split roughly evenly between Medicaid and the commercial market for coverage, or roughly 10% of the U.
S. Population. We are uniquely positioned and fully intend to help serve these people, however that coverage expansion occurs. We have the products, the cost structure, the technology, the experience and the innovation to help at remarkable levels with that commitment. This government driven expansion will place extraordinary demands and cost pressures on the health system, which we believe our health service businesses are uniquely capable of helping to address.
We are well positioned to help with expansions in health information technology, anti fraud efforts and administrative simplification as well as the development of a modern infrastructure that will support standard services. We have said for some time now that the UnitedHealth Group business model was built for change, adaptability and scale. We will prove that in the months years to come as the new law works its way through our society and economy. We have diverse experiences in both the commercial and government sectors and enduring competencies in information, technology and access and management of care. We actively develop and deploy practical innovations at large scale.
We can operate in the increasingly regulated world of health benefits and the less restrictive markets of health services and the Patient Protection and Affordability Care Act will need and engage all of these assets. To wrap up, we feel positive about our continuing fundamental execution and the results we are delivering for customers and we can identify important opportunities for growth under healthcare reform. We're interested in your questions this morning with the understanding that we do not yet fully know all the impact of healthcare reform on our businesses. We ask that you limit your question topics today in deference to time and I thank you for your interest this morning in UnitedHealth Group. With that, we will open it up to questions.
We'll give them a minute or a second or 2 to queue them.
Our first question comes from the line of Scott Fidel with Deutsche Bank.
Thanks. Good morning. First question just is on how you're thinking about the individual business now in the post reform environment. And do you still view this as a fully sustainable business? And then maybe talk about some of the primary changes that you expect to make to the business?
I know Steve, you just mentioned some of the underwriting changes, but maybe some of the other adjustments you may need to make, relative to broker commissions?
We do think it is a very viable space, one that is going to be important kind of in the broad spectrum of the healthcare markets going forward and under reform. It has actually been one of the areas that has really been a bright spot in terms of our risk based growth over the last year. But I'll ask Gail Boudreaux to comment with respect to kind of the prospects in the individual market.
Sure. Good morning. There's a couple of questions in there. So let me take them in order of the way you asked them. The first, I think as Steve outlined, one of the issues around the individual business first is understanding the impact of the medical loss ratios.
And we know what the minimum thresholds are going to be, but obviously don't know yet in terms of how the definition what's going to be included in that loss ratio as well as how that's going to be implemented. So as you think about that, that process is underway with Health and Human Services asking the National Insurance Commissioners for some guidance. And as Steve mentioned in his opening comments, we will also be providing guidance. In terms of the individual market specifically, clearly that market is more sensitive to some of the changes that are coming. The products on whole to put in perspective are more affordable than small group products.
And when you think about distribution costs in the market, while distribution costs on a per member per month basis are equivalent to the ones in the small business market, as a percentage of premium you're dealing with a smaller premium base. And as a result that percentage of premium is larger and that and other factors lead to a lower medical loss ratio in the individual market. Just put again in perspective and I'll talk about commissions a little bit in a second. I want to give you a sense of how we think about the business. We have had nice growth in that business as Steve mentioned.
But to give you a sense of the impact for us that business right now represents about $2,000,000,000 of revenue on a roughly $92,000,000,000 base. So a relatively small percentage of UnitedHealth Group's overall revenue. The second question specifically on commissions and how we're thinking about that. Our distribution partners have been an important part of the individual and our group business and we expect they will continue to be a very important part of that business going forward. As we look at our arrangements, we pay compensation differently based on our different business segments etcetera And that can range from a percentage premium all the way to a fixed per employee per month.
So again, going back to the issue on the individual market, we do have in our arrangements our relationships, the opportunity to make changes. We have that based on reform or other options. And at this stage, we're looking at and assessing the overall impact as we know more about the overall factors that I talked about at the beginning.
Thank you. Next question.
Our next question comes from the line of Josh Raskin with Barclays Capital.
Hi, thanks. Good morning. I guess just a question on the prior period reserve development and how we should think about that. I know it's only sort of 1 quarter in. And I guess if I look at it as a percentage of prior year costs, it's now a little bit more consistent with sort of a 10 year average.
Should we think about this as a more normal course of business and probably being consistently reserved for in the current year?
Hey, Josh. I don't know that I would I don't know how it relates to previous years in terms of what we should project in the future. But I want to reiterate and I said this last time in the Q4 call that our reserve processes remain the same today and that our total prior period development is consistent with previous years, Josh, as you mentioned at or below 1% of medical costs. The prior period development experienced in the Q1 is a continued theme that we've been seeing throughout the later half of 2,009. Those themes I talked about as you may recall on the Q4 call.
We had numerous changes in 2,009 in our mix of business within our risk customer base. The government business, as you may recall, grew sharply, while commercial business declined. This obviously creates some volatility in our claims data. We continue to benefit from the operational improvements we've been discussing for some time now. As I stated before, our actuarial models take time to adjust for those continued improvements in quality and accuracy of our claim payment.
We also now are seeing that we had lower utilization in the Q4 than we had originally estimated as we didn't see the level of benefit rush we typically see in the commercial business. When we take into account that H1N1 flu and that we Q1. We book, as we've stated for years, Josh, to a best estimate. We don't forecast favorable development, but I want to remind you that our reserve processes are consistent centrally controlled and haven't changed over the years.
Okay. And then I'm sorry, Mike, just a follow-up on that comment on utilization. You talked about lower utilization as I remember back in the Q4 as well. Could you comment how that trend progressed in the Q1 and maybe specifically around the facilities?
Yes. We well, we did see utilization in the Q4 continue to subside. So if you look at our trends overall for 2,009, we had given a range of an estimate of around 8% plus or minus 50 basis points. That has trued up favorably. We'd still be in that range, but it would be at the lower end.
We expect to see comparable trends for 20 10. 10. Specific to utilization, we saw favorable utilization in the Q1 related to flu as the lighter flu season as I know you know, and we saw we had the storm impact out east. That being said, we continue to see utilization in facilities to moderate and those are specific to all the actions we've put in place across our health benefits businesses, not just the commercial business. Thanks.
Next question please.
Our next question comes from the line of Christine Arnold with Cowen and Company.
Hi there. I respect that you guys don't generally break out development by product line, but I think the elephant in the living room here is 79% commercial loss ratio with MLR floors. Even if you add 500 basis points, you're still pretty significantly under that. So can you give us some sense kind of it sounds like you had a significant amount in commercial? And then as a follow-up, could you just talk about kind of your expectations for Medicare Advantage versus where you kind of came out?
Mike, can you respond to the when you ask about where we came out on Medicare Advantage, put that in context for me, Kristine.
Kind of relative to your expectations, how much of the results you feel you really know right now versus how much is flow through from 1,009?
Okay. Mike, do you want to take the first part?
Well, the commercial loss ratio, Christine, as you know, we reported an 84% medical loss ratio for commercial in 2,009. We expected a slight decrease in that loss ratio in 2010 with no expected H1N1 flu. You know our business is seasonal. Our loss ratio within the commercial business increases over the year, especially into the Q4 where we expect that as deductibles wear off, the utilization will increase. Last year, as I just mentioned, as part of the favorable development, we did not see that level of increase.
You could surmise that a portion of it was related to the economy, could be so, but we do anticipate that development or that utilization will increase. In 2,009, we had a fair amount of favorable development in the last two quarters. We don't forecast favorable development. So if you just take the natural progression of our loss ratio throughout the year, including the uptick in the Q4, you would get to our revised estimate of 83.5% plus or minus 50 basis points for 20 10.
Okay.
Larry, the second half? So, but how did the if we were to restate 2,009 commercial loss ratio with this positive development,
It would still be within the range that we gave plus or minus 50 basis points. It would have trued up favorably, but I would not draw the conclusion that all the development was on the commercial side. I would say it was evenly mixed through the benefits businesses.
So if it's 84% reported in 2009, I can take 50 basis points off that and say it was no better than 83% chewed up in 2009?
Hassane, I would say that it would stay within that I don't have the exact number. It's 84% plus or minus 50 basis points.
So we'll move to the next question because that was 3, if I'm counting. I'm sorry. So next question please.
Our next question comes from the line of Tom Carroll with Stifel Nicolaus.
Hey, good morning. United continues to have a very strong balance sheet and as you're reporting this quarter debt ratio is down, cash at the parent $1,900,000,000 You raised your cash flow projections a bit.
I'm just looking, has
there been any change or maybe evolution in your thinking in terms of how you expect to deploy cash over the next few years? And in particular, I'm interested in your discussion, your thoughts on a share a larger shareholder dividend? Thank you.
Sure. Maybe I'll comment on that. We have, I think, over the last couple of years, been distinctive in terms of how well the balance sheet has been managed and kind of the financial affairs. The cash flows are strong. It does not change our view of how we would deploy that capital.
We still see our priorities being wherever we can find opportunities to deploy for growth and strategic expansion of our business model that is our primary focus. It also includes the continued investment in kind of the continuous improvement of our existing businesses. And I think that that's been manifest in a number of the performance gains over the last couple of years. We continue on that path. And then a view that we should be both buying shares as well as having a dividend and we have signaled in the past that we were pursuing and evaluating, strengthening our dividend levels and that we were looking for the reform period to pass along those lines.
So we are moving down and progressing on that same event. A stronger dividend has been in our sites for the last 2 years.
The next question comes from the line of John Rex with JPMorgan.
So I understand kind of the vagaries of the reg writing process. One thing I just want to focus in about kind of where the first question was and maybe if you can help level set us a little bit in thinking about, if you look at a loss ratio in an individual book, if you look at a loss ratio in a small group book, if one were to strip commissions out of the revenue line, so as it's reported, on average kind of for those 2 books, kind of what would be the basis point impact in the reported MCR? And then just kind of the second part of that is, are you building in flexibility for are you building in flexibility for 11 given the riding business that extends into 11 right now? Are you building in any flexibility to impact how you pay commissions and the commission levels depending on how all this comes out?
The flexibility part I got, the first part you're going to have to repeat.
Okay. If you stripped commissions out of the if you just stripped commissions out in those books. Commissions are one of the big reasons that the loss ratios appear low in an individual book, for example. If you were just to strip commissions out of the line, take it up, pull it out of there completely, say you're paying $10 in commissions on a $100 PMP business, you strip it out, here's your new MCR. What I'm trying to get is a sense for your book of business, if I took the individual book, if I took the small group book, stripped commissions out of the revenue line?
No, I would have to say that on this one, this is going to take some calculus And I don't really think that we should be kind of doing that in this venue. So we'll be available throughout the day for questions because I can imagine.
Well, I guess maybe my point is just is it fair to say that's I mean that is obviously several 100 basis points of impact to your reported MCR and I was just trying to get your sense of the range?
Well, I'm not sure we can answer that and I'm confused by the commissions and the MCR.
Commissions are embedded in your revenue line, right? So, it deflates the fact that it's in your revenue line deflates the MCR. And so if you were to pull commissions out, your MCR goes up.
Yes. So that even more intensifies my first response and that is you're asking a very complicated question and we really don't want to speculate on that. So we'll answer that for you through the course of the day, if you would call back.
Okay. That's fine. And then just how about flexibility on the 11 commission levels depending on how this all falls out?
I think Gail had answered that, that basically our relationships with the distribution channels have been and have been for years flexible and variable with respect to how those operate. So I think we have a wide range of options available to us as we work with the distribution channel. But also that it is important that it is a factor in the healthcare landscape and has to be recognized
as well.
But I guess my point was, could your signing writing business right that goes into 2011, could you still affect that business that you've already written that goes into 2011 at this point or would that have to come later?
Dale?
In some instances, yes. I mean, as we said, we do have a variety of relationships across our different distribution channels and we're in the process of having those discussions with them now and assessing the overall impact. But again, there's a lot in this that is still unknown as I said before. And I do want to reiterate that this product is a complicated product and we do believe that the distribution channels are going to be important now and in a post reform environment. So, it does vary based on the different arrangements we have.
Next question please.
Our next question comes from the line of Kevin Fischbeck with Bank of America.
Okay. Hello, good morning. I just have a question about the guidance because it looks to me like when you take into account the upside in the quarter, I guess offsetting a little bit by the higher taxes in the quarter, it looks like you're basically leaving the rest of the year guidance unchanged even though it seems like cost trends were a little bit better than you thought in Q1 and revenue was coming in better than you thought. So I guess if you could give any color there on the outlook for the rest of the year?
Maybe I'll try to put it in perspective. I appreciate the fact that we I think we had a very solid Q1 and that the businesses are performing at very strong consistent levels and our enrollment trends are tracking somewhat above our initial expectations. But I think if you recall from our investor conference and our call in January, there are meaningful headwinds in 2010 that have really not disappeared. It is just the Q1. And the Q1 was affected by strong reserve development.
So we think our performance outlook for 2010, which has been meaningfully advanced, is really a pretty fair reflection and trying to strike an appropriate balance recognizing that we still have a very troubled economic environment. Employment levels are roughly 10%, 16%, if you really get to the true level of unemployment. We are still seeing high levels of attrition. The 2010 Medicare rates were quite a challenge to address and we have to address them over the course of the year. There are state budgets across the Medicaid landscape that are under pressure.
As we mentioned earlier, the Part D drug pricing changes have occurred and as you mentioned the taxes. So there are a number of things to be considered. You have to recognize it is the Q1. And we think our new guidance range is a pretty fair representation of kind of where we are in the year. We might hope to do better if in fact the employment outlook were to change.
But I think where we've set guidance is a pretty measured spot.
Okay, thanks.
Our next question comes from the line of Justin Lake with UBS.
Thanks. Good morning. Just a follow-up first quickly on the commercial side. You took down the MLR guidance by about 50 basis points consolidated, but I didn't see anything on the commercial's MLR. Do you have a spot number there or should we think about it similar to the consolidated?
We did take down the commercial MLR from we were at 83.8 percent plus or minus 50 basis points at Investor Day and we took it to 83.5 percent plus or minus 50 basis points.
Okay. That's just wanted to confirm that. So essentially, you're saying that the other businesses such as Medicare Advantage, Medicaid are doing better than commercial even though commercial was down 400 basis points or so year over year. Is that a way to read this?
Justin, can you clarify, are you talking about full year outlook?
Yes.
I don't think there's a 400 basis
point delta in full year outlook.
No, I'm sorry. I'm just thinking about the commercial markets MLR. I mean, this year versus last year, I guess it was actually about 2 50 basis points better year over year. So, I guess I'm really just trying to think about the Medicare margin expectation. It seems like it was a little bit better than what you expected.
It's actually running better than commercial.
Question is the commercial outlook has improved by 30 basis points and the consolidated outlook has improved by 30 basis
points.
Appreciate the help.
Well, I wouldn't say it's running some some time afterwards trying to understand your analytics around that. I would say that we are seeing, as evidenced by the favorable development initiatives for the Medicare, the performance that Larry Renfro went through the focus on the initiatives for the Medicare, the senior business, we are performing 2 or better than our expectations. So you are seeing improved performance across the health benefits and Steve laid all that out in the script.
So if I were to jump in, Justin, I'd say that, yes, you're seeing improvement on basically all the benefits. And if you and I know you have been attentive to kind of our dialogue over the last several quarters increasingly, we are looking at our businesses from a benefits point of view and a health services point of view. And on the benefits side, we have been taking, I think, very positive and measured steps to further integrate and harmonize our businesses across all the benefits landscape. And so that they are all benefiting from better and more effective clinical care management. They're all benefiting from consistent operating cost experience.
Our integration efforts have been moving forward on a quarter by quarter basis, very nice progress being made there. It's reflected itself in really positive results with respect to the constituents we serve, customers, care providers, etcetera, strengthening our reputation, market response and absolutely improving our experience with respect to medical cost management, which is arguably one of the core responsibilities we have. But it is across all those and we look at it as a more uniform business.
And Justin, if you're doing math on that, if you're just doing the math on it, why the full year consolidated medical care ratio was lower than the full year UnitedHealthcare medical care ratio. And if you're attributing that to government business, I would only note as I've seen the financial models out there appropriately. So we have services businesses that have that impact that as well and you need to make sure you take that into consideration.
Right. I guess my point is just that commercial is improving by 30 bps, the overall is improving by 50. If commercial is half, that means the overall the ex commercial has got to be something like 75 to 100. So, I'm just trying to figure out where the other businesses are doing much better. Is it Medicare Advantage?
Is it Part D? Is it just across the board?
It's across the board. Okay.
That's what we said, including Medicaid.
Of course. And then just a quick follow-up on the commission side?
That would be about the 4th question, if I'm not mistaken.
Go ahead, anyway. Okay. The commissions on individual and small group, I know they vary. Can you just tell us what an average commission structure looks like for individual and small group right now?
Justin, I'd say one is, I think it varies widely. It does change in terms of the United States market is far from homogeneous. It varies market by market. And I also think it's pretty competitively sensitive. So if you all I prefer not to respond to that.
Great. Thanks.
Thank you.
Next
question comes from Doug Simpson with Morgan Stanley.
Hi, thanks. Good morning. Steve, if we look out over the next 3 to 5 years, there's obviously a challenging fiscal backdrop the U. S. We've got this continued cost shift onto the employers.
With reform implementation moving forward, how do you the relationship between payers and providers evolving? And just be curious if you could maybe touch on potential move from a product standpoint to maybe more network based offerings to help bring down costs, but also should we be looking for payer provider partnerships or alliances? Just how do you see that evolving again looking at a couple of years?
So, I would say I come back to some themes that we have struck in these conversations before and that is the fundamental issues underneath reform or if there had not been reform remain the same. There is tension around fair and appropriate access across the U. S. Population. There is significant cost pressures relative to market dynamics and those cost pressures vary.
As I said earlier, it's not a homogeneous market, it's more of an archipelago of linked health markets in this country, they do vary significantly. But those pressures are real. And I think you're going to see the payers and care providers work more closely together in different kinds of venues and arrangements to be able to respond to the needs of the marketplace more effectively and to get at a more appropriate, more efficient use of our overall resources to serve more people in the country. And so you're seeing and have been seeing efforts being made in more modern kind of capitation arrangements. You're seeing efforts made in medical home initiatives.
You're seeing efforts made in pilots around much tighter, more integrated kind of relationships and networks. You're seeing network variations going on in terms of the breadth of broad networks and narrow networks and variable networks, etcetera. So I think you're seeing all of the above as we all search for kind of a solution, but increasingly those are happening more and more together in a more collaborative context. And I might ask Gail who sees this every day if she can respond
to it.
Sure. In addition to what Steve just outlined, I think the basic theme is we're going to continue to need affordable consumer focused products. And driving that are two themes. We have a number of things in the market already. So when you talk about physician or hospital partnerships, Steve already talked about patient centered medical home.
We have practice rewards for our physicians where we're paying for quality versus just volume and I think that's going to be a significant theme going forward. We're working on game sharing arrangements with our specialists to try to drive appropriate behavior around certain lines in specialty like cardiac. So there are a number of things in terms of the contracting methodologies in addition to the work that Optum is doing in integrating the clinical in network care, which is also a really important part of this important part of what we are doing. The last piece that I'd add to this transparency. We think that transparency will become a very important piece and we're working very hard to make sure that consumers have access to the right information to make the right decisions about their care.
So those would be the emerging themes. And I'd say,
I think it's a great question. I think it also plays itself out when I think about federally qualified health centers in the Medicaid business, etcetera. And Reed, maybe you have a perspective to offer?
I think that one of the things that's very important here is that the delivery system and our company have one thing in common and that's the focus on the patient. The patient is where we intersect together. And increasingly now whatever happens on this day forward will intensify the positive opportunities for that relationship. I would also add to Gail's comment that we are also increasingly now in this Liberty System focused on science and the ability to take science and translate it into better quality. So much of what Steve emphasized in his opening remarks were on our capabilities to reach people and also to engage the delivery system based on science and recommendations.
If we have any hope to be able to prevent disease and to be able to treat it cost effectively, it will ultimately be in our investment in the opportunity to have the data, the analytics, the information, the people necessary to engage not only the consumer, but also the delivery system in an integrated way. So for us, those themes that we've been founding are the fundamental themes going forward. And ultimately, those are themes of collaboration and cooperation, not of tension.
Thanks. We'll take 2 more questions, please.
Our next question comes from the line of Carl MacDonald with Oppenheimer.
Thanks. I think this
is still a pretty sensitive time politically for the industry. I mean, reform has passed, but as you've pointed out the administration still has a lot of discretion in terms of how the law is implemented. So how concerned are you that this earnings report, the higher guidance, the combination is going to reignite some of the negative sentiment against the group and result in some tougher implementation of the new regulations?
Well, I think 1st and foremost, you have to reflect what the business is actually performing. So, I think we have a responsibility on that level and have to meet that responsibility. So I also think that if you take a look at the performance of our business, it is driven more by organic revenue growth and membership growth and market responses, the things that we offer, the innovations that we advance, etcetera. Those are the same kinds of things we think this administration also has an appetite for in trying to advance and modernize the health system. Our interests are actually quite aligned on those levels.
And we have said for some time that we are going to dedicate ourselves to be an enabler of modernizing and reforming the health system so that it works better and more effectively for all Americans and do it as the best we can. And we have a very thoughtfully diversified, I think, model that serves across the markets. And I think that they want capable organizations trying to advance that agenda and we are going to be committed to that. So that's where we have worked with them over the course of the last year. That's where we will continue to focus our efforts and work with them.
And I think our interests are more aligned than they are separate. And I also have to say that our results are what they are and that's what we have to report. Next question please.
The next question comes from the line of Ana Gupte with Sanford C. Bernstein.
Hi, thanks. Good morning. My question is on the near and long term outlook for Medicare Advantage. The first part of it is on for 20 10 relative to 2,009 as you've implemented your premiums and buy downs, can you give us a sense of what you expect the margin compression to be once you take into account the loss ratio and any G and A improvements? And secondly, is there anything you're learning from this short term experience now that you have all the detail on quartiles and quality bonus and so on for what the sustainable margin preservation would be?
And then finally, I had a question on relative positioning, if you will, for the various products in the senior market. You've got MA, I believe you and AARP perhaps have introduced this new Med supp offering. And if you could comment on the Humana Cigna alliance in the employee market?
Well, we're just about out of time with that question. Ono, we will try. So Larry, would you? Okay.
So I know you might have to it's Larry Winpro, you might have to help me with some of those questions, but I'll start and then we can kind of get into it. Last summer, when we found out about the what we'll call the largest single rate cut in MA history, we started putting together a group of initiatives to help us maintain our 20 10 operating earnings. At the December Investor Conference, we talked about 4 distinct areas of focus. We talked about benefit design, growth, medical cost management and administrative cost reduction. During AEP and the Q1 of the year, we believe that we have executed extremely well according to that plan.
Result would be really where we are with our guidance versus our new membership. We also put together a lot of cost cutting programs and really initiatives that we instituted or implemented in the Q1. And at this point in time, most of those programs are on target. I should say they're all on target. But we won't see the full benefit of those until the really the last 6 months of the year.
So if we had to make a comment on 2010 and our performance, we would say that we're still extremely confident in where we're going to be. 2nd question, I might not get these in order, but let's talk about the Humana Cigna partnership. We obviously been operating internally with a partnership very similar to that for a few years here. And that's how we line up our group retiree business with our commercial side. So Gail Budrell and myself, we have our own competitive way of going after that.
And we won't comment in terms of our strategy because a lot of things go into that, but it was an interesting piece of news last week. As far as I think you asked a question about product mix and what we think in terms of the overall performance for 2010. So let me do it in a couple of ways. If you look at our metrics in terms of claims utilization, unit costs, really the metrics that we look at in terms of how the business is running, we would tell you that they're all in line with our expectations. In terms of member mix and product mix, member mix is very broad based.
And the product mix today is favorable over last year and it's 72% of our new members are network based products versus private fee for service. And as far as the MET supp, I mean, obviously, we work very closely with AARP on all products. And we have a common goal of trying to offer a variety of products to the senior population. So we believe that post reform that Med supp and supplemental programs are going to be very, very much in want and needed by the seniors. Did I get everything?
Yes. Thanks. So I guess, overarchingly, just one final sort of wrap up. Should we take it that Med Advantage is one piece of your senior business, but you're positioning yourself in multiple products and perhaps in multiple channels and customer basis to sort of have a rounded out senior business, so it's not all about MA?
Absolutely. If you look at post reform, one of our main goals is to outperform fee for service, as Steve has stated. And part of that process is looking at adjacencies or products that could fit alongside the senior marketplace.
Okay. Thank you.
With that, we'll just wrap it up by saying our Q1 results did exceed expectations in membership growth and revenue and cash flows and earnings. We're seeing organic membership growth in Medicare offerings in Medicaid and self funded employers and we're seeing meaningfully smaller declines in fully insured offerings. We're seeing increasing demand for our products and services across our health services businesses and we're consistently managing medical costs across our benefit businesses and operating costs across our entire enterprise. I would point out that health care reform is really just in the beginning stages. It is only a beginning.
It will present challenges and will present significant opportunities and we are preparing to meet both at exceptional levels. So thank you very much this morning. That's it.