Good morning, welcome to UnitedHealth Group Fourth Quarter and Full Year 2018 Earnings Conference Call. A question-and-answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded. Here is some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical, differential, or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings.
This call will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amounts is available on the Financial Reports and SEC Filings section of the company's Investors page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning in our Form 8-K, dated January 15th, 2019, which may be accessed from the Investors page on the company's website. I will now turn the conference over to Chief Executive Officer of UnitedHealth Group, Mr. David Wichmann. Please go ahead.
Good morning, everyone, thank you for joining us today. At our investor conference just a few weeks ago, we provided an extensive and positive review of our business and expectations for 2019 and beyond. Our outlook today remains consistent with that view. We are strongly confident in the fundamentals of our business as we enter 2019, in our ability to invest, innovate, and grow, and in the breadth of opportunities across healthcare available to a company with the unique capabilities we have built over time to deliver ever more value to society and consistent results for our shareholders. The results we reported this morning bear that out. Full-year revenues exceeded $226 billion, growing 12% or $25 billion over 2017. Fourth quarter and full year 2018 adjusted earnings per share were stronger than our investor conference outlook. The full-year adjusted earnings per share growing 28% to $12.88 per share.
Revenues, operating earnings, and cash flows were in line with or ahead of the expectations in 2018 we discussed with you at that time. Optum's earnings were ahead, and UnitedHealthcare's earnings were in line, and virtually all businesses closed out the year with strong momentum. Overall medical costs remained well controlled, our positive forecast for 2019 remains consistent across all lines of business. We continue to address performance pressures in a handful of Medicaid markets in the fourth quarter as we executed actions on both structural costs and rate recovery to ensure 2019 will see a return to stronger margin levels for this business. Our nation is early in an exciting healthcare innovation wave, one we expect to help lead, which will drive growth at UnitedHealth Group for years to come. Our approach to this wave has several characteristics.
Flowing critical health information to all healthcare participants by linking physical interactions to digital channels, supported by embedded proprietary clinical ontology and sophisticated data analytics designed to align and optimize performance. Engaging people in their healthcare, both individually and at scale, a difficult but essential step in improving people's health and finances. A step supported by our consumer digital platform, Rally, now with 22 million registered users on a multi-payer platform and offering an expanded suite of services for UnitedHealthcare's Medicaid members as of January 1. Applying high-touch human interactions, again, seemingly at high volumes, to improve the consumer experience and drive better medical care outcomes. This is supported by our rapidly growing team of clinicians, like the physicians of The Polyclinic in Seattle, who joined us at the end of 2018.
Introducing innovative, lower-cost, consumer-centric health benefit designs and services such as Bind, Colorado Doctors Plan, Motion, and NexusACO. This healthcare system will increasingly operate in a multi-payer and value-based context with aligned incentives for care providers and consumers to make better healthcare decisions, leveraging deeply personalized information and clinical science. This modern approach produces measurable value and looks and feels refreshingly different than traditional healthcare today. I hope you can see that we are energized by the opportunities ahead of us. With that, let me turn it to Optum's CEO, Andrew Witty, to discuss Optum's results and its unique market position and momentum heading into 2019. Andrew?
Thank you, Dave. Our focus is to accelerate the access to and integration of the individual strengths of Optum to deliver better healthcare and more affordability across the whole of the health system. Leveraging our data analytics capabilities to increase care pathways with local care delivery and pharmacy care services has a unique potential to improve patient wellbeing and health while bringing healthcare costs under better control. Our ability to use data to better understand the next best action or better option for treatment allows us to significantly affect both the outcome as well as the cost per member for our clients and patients. With adoption of Rx, the increasing impact of PreCheck MyScript and the growth of our infusion services illustrate how our expanded breadth of services are gaining significant market acceptance, growing share, and diversifying our earnings stream.
Our momentum in Optum Care services was excellent in 2018, with retained business rates in excess of 98% and several major new business awards from health plans and employer plan sponsors. We expect this to continue given the early positive signs in this year's selling season for 2020 business. In care delivery, our clinical leaders are applying clinical decision support based on evidence-based guidelines which promote better health and ensure the right care at the right time in the right setting. Today, 99% of Optum Care patients in our advanced form of Medicare value arrangement are in four-star plans or better, and Optum Care's average Net Promoter Score is nearly 80, evidence of outstanding clinical outcomes and patient experiences.
We achieve significantly lower total medical costs by keeping people healthier and avoiding unnecessary hospital use, which translates to up to 30% lower costs for our Medicare Advantage patients relative to original Medicare. An increased number of our groups are being recognized for achieving lower costs for commercial customers as well. For example, our Reliant Medical Group was recognized as having the lowest total cost of care by the state of Massachusetts. We complement our medical groups with high-value ambulatory care services like our ASC surgery centers, MedExpress neighborhood care clinics, BriovaRx infusion capability, and Optum HouseCalls, all of which will help in improving the quality, cost, and experience of health care. As we move forward, we will continue to build out our comprehensive portfolio of care delivery services in key markets, including through our pending combination with the Physician National Group.
By 2030, there will be over 18 million people in the U.S. with three or more chronic conditions, up from 13 million in 2015. More fully leveraging data analytics across all of Optum through digital and physical engagement with patients and physicians will be key to reducing costs and improving the value and experience for people in this increasingly resource-intensive market segment. We are building platforms that are convenient for providers, ensuring the very best and most contemporary information is available to support each patient management decision. Initiatives including the rollout of individual health records, adoption of emerging genetic knowledge, and full understanding of the integration of the data Optum manages are key building blocks over the next year or two. Turning to Optum's financial results, full year 2018 revenues surpassed $100 billion for the first time.
Revenue growth of over $10 billion per year accelerated to 11% from 9% in 2017. Likewise, our operating margins once again strengthened across segments and portfolios, with our overall operating earnings growing more than $1.5 billion or 23% to $8.2 billion, reflecting the leverage of Optum's scale businesses and putting them in a strong baseline earnings position entering 2019. Looking ahead, the 150,000 people at Optum are incredibly enthusiastic about 2019 and our opportunities for longer-term growth and performance. We will continuously modernize our ways of working, seek solutions to improve value delivery for clients and the patients we serve, and explore ways of aligning with others who strive in an accountable way to deliver quality care at lower cost.
We are seeing the fruit of two decades' worth of strategic investments with strong business wins and pipelines and the many platform expansion opportunities we have in the U.S. alone, not to mention the global potential. As we continue to grow, invest, and diversify, we are just beginning to realize the potential that exists when we deploy Optum's cross-platform capabilities more fully on behalf of our customers and all of those we serve. I'll turn the call over to Steve Nelson, UnitedHealthcare CEO.
Thank you, Andrew. UnitedHealthcare is growing through the relentless pursuit of better health outcomes, lower total cost of care, and a better consumer experience for clients and consumers as measured through NPS. We achieve this triple aim through the breadth and innovative nature of our capabilities, as Dave described at the outset, and by translating those capabilities into innovative products, services, and enabling technologies which advance our mission as an enterprise. In 2018, together with our care provider partners and through digital and physical interactions with consumers, we helped close over 70 million gaps in care. That was 75% more than the 40 million gaps we closed in 2017. Contracts with value-based care features reached $74 billion in run rate spending, with about one-quarter of that in risk arrangements. Consumers who took healthy actions earned a remarkable one-half billion dollars in incentives through their benefit plans.
We provided 1.5 million in-home health assessments through the Optum HouseCalls program, and our community health workers referred people to social services nearly 600,000x , linking them to needed services with a total value of one quarter of a billion dollars. Collectively, the value of these and other distinctive services helps us to grow. In 2018, UnitedHealthcare grew to serve 2.4 million more people, with revenues advancing by more than $20 billion to $183.5 billion. UnitedHealthcare earnings from operations were $9.1 billion, consistent with the outlook we provided in November. Overall, medical cost trends remain well managed, predictable, and consistent with expectations. We continue to manage operating costs diligently through a combination of service simplification, automation, and operating efficiency. As we noted at our investor conference, the performance of our Community and State business in 2018 was mixed.
We saw strength in serving individuals with the highest health needs, such as the dually eligible, while performance in the traditional TANF Medicaid business was pressured, particularly in a handful of states. Our performance improves in the back half of 2018, with more work to be done, continued advocacy for strong rates, while reducing core medical and operating costs. The Community and State team is fully focused and will deliver improved performance in 2019. We completed a strong Medicare Advantage enrollment season last month and are on track to achieve 2019 growth within the 400,000 to 450,000 range of expectations. We are thoughtfully advancing in areas like digital therapeutics, real-time health information, and artificial intelligence to drive an even more distinctive consumer experience, all at lower cost.
We're early in a wave of fresh product innovation for the commercial market, with new on-demand health benefits for large employers and new patient-centered care resources organized around high-quality local health systems, such as the program we launched on the Front Range in Colorado. We expect strength in the association health plan market and have an unprecedented focus on developing and cross-selling specialty benefits. To summarize, our expectations for UnitedHealth's performance in 2019 are unchanged with what we outlined for you at the end of November. As we look at 2019, 2020, and beyond, we're strengthening our capabilities for customers across UnitedHealthcare and UnitedHealth Group. We have a multi-billion dollar, multi-year effort well underway to address medical and operating costs on a structural basis and improve value for customers.
We're deploying new technologies to provide information to doctors at the point of care, are leaning into consumer-centric services like the individual health record and Rally, and the innovative benefit designs and value-based incentives they can power. We believe UnitedHealth Group, supported by Optum, is uniquely positioned to serve high-growth, higher acuity markets like Medicare, duals, and patients with complex and chronic conditions. Now I'll turn the call over to John Rex, UnitedHealth Group's Chief Financial Officer.
Thank you, Steve. This morning, we reported full-year revenues of $226.2 billion, with double-digit percentage growth in support revenues for all reporting business segments. For full-year 2018, Optum revenues from customers unaffiliated with UnitedHealthcare were nearly 13%, a faster pace than affiliated revenues. This reflects the market's response as we position Optum and UnitedHealth Group to serve more people independent of payer affiliation, even as we offer greater customer and consumer value through UnitedHealthcare. Balance and diversification can also be seen in our operating earnings performance, where Optum contributed 47% of full-year 2018 earnings from operations of $17.3 billion, including 50% of the earnings in the fourth quarter. To put that mix in perspective, only five years ago, Optum contributed about a quarter of full-year affiliated operating earnings. Fourth quarter adjusted net earnings per share of $3.28, full-year earnings of $12.88 per share, 28% growth over 2017.
Full-year cash flows were $15.7 billion or 1.3 times net income, growing 15% over 2017. Fourth quarter and full-year cash flows reflect the $2.6 billion payment to the U.S. Treasury on October 1 for our customers' portion of the federal Health Insurance Tax. Our full-year medical care ratio of 81.6% is consistent with the outlook we provided last January of 81.5%, ± 50 basis points, and reflects well-managed cost trends, despite some margin pressures in parts of our Medicaid business, as Steve just discussed. Medical reserves developed favorably in the quarter by $280 million. We continue to expect a 2019 medical care ratio of 82.5%, ± 50 basis points, which reflects the impact of the Health Insurance Tax deferral this year.
The 2018 operating cost ratio of 15.1% was driven by effective cost management and strong growth in lower operating cost businesses, partially offset by ongoing investments to develop and deploy modern technologies and capabilities that advance the value we deliver to people. Turning to our balance sheet, our full-year return on equity was strong at 24.4%, and our debt to total capital ratio was 40% at year-end, after placing $2 billion of debt in December. We repurchased $4.5 billion of stock last year, and we raised our dividend by 20% back in June to an annual rate of $3.56 per share. Looking forward, we enter this year with strength, flexibility, and momentum, and we continue to expect strong growth in adjusted net earnings to a range of $14.40-$14.70 per share. One last observation on quarterly earnings progression for 2019.
The current first half, second half street consensus view appears to reflect our seasonal earnings pattern, which over time we've described as roughly 48% weighted to the first half. Inside of that, our sense is that we expect to perform modestly stronger than the current first quarter consensus estimates would suggest. Dave?
Thank you, John. 2018 was a strong year, with advances in our businesses, improvements in service and net promoter scores, and compelling financial performance. There is much yet to be done to fully realize the potential to reimagine healthcare for the benefit of society in the U.S. and globally. Inside this morning's business review, we touched on a number of initiatives, all forward-leaning, all indicative of a restless, ambitious character of this team and our efforts to advance performance in healthcare for those we serve. With plans firmly in place, we are looking to perform strongly in 2019 and lay the foundation for continued growth in 2020 and the decade ahead.
We have significant opportunities to diversify and strengthen the offerings we bring to people and to drive engagement, trust, and loyalty across our broad customer base. We will continue to advance personalized interactions with the people we serve and lean into clinical quality in healthcare delivery and our leadership in digital technology. Let me close now and open up to all of your questions. One question per person, please.
At this time, if you have a question or comment, please press star one on your touch-tone phone. You may remove yourself from the queue by pressing the pound key. Again, we ask you to limit yourself to one question. If you ask multiple questions, we will only be answering the first question so we can respond to everyone in the queue this morning. Thank you. We'll take our first question from Justin Lake with Wolfe Research. Please go ahead.
Thanks. Good morning. I appreciate all the color on the medical cost side. I wanted to go back to the Investor Day, and ask you about the HIP. It was the first time in probably five years that you didn't spike out the HIP at all as a moving part, either positive or negative. I wanted to ask you whether this is indicative of just the size, scale, diversification of the company, kind of now being able to hit a 13%-16% long-term trend without worrying about whether the HIP is coming or going or flat year-over-year as you look out to 2020 and beyond. Thanks.
Thank you, Justin. As you know, that 13%-16% growth rate is an average long-term growth rate, and we are committed to it. I do think there's merit of the scale and size of the company that lets us maybe just spend a little bit less time on those reconciliations than maybe what you would have seen in the past. John Rex, would you like to comment?
Thanks, Justin. John. I have to start by saying that I'd be remiss to diminish the $2.6 billion of our customers' funds just sitting in unpaid for the Health Insurance Tax. That's still a very significant number for any company, I would say, and a burden for our customers. You are correct in thinking that the non-insurance component of our enterprise continues to grow at a reasonable pace. As that pace increases and as the mix continues to shift, as a percentage of our earnings mix, in terms of the volatility with the HIPs coming in and out, in any particular starts to diminish as a percentage of the earnings mix. Again, I would be remiss to say that it's still a very significant burden for Americans.
On that score, the Health Insurance Tax is expected to come back in 2020, and I think all recognize that it'll increase the cost of healthcare by $20 billion for 122 million Americans. That causes the average senior couple to see their premiums raised by $500 per year, and for families with small business coverage by about the same amount, around $480 or so per year. Our view is that outcome is unacceptable, and because healthcare already costs too much. We're going to continue to advocate for a repeal or deferral of this unnecessary tax. We can't comment or speculate on the outcome, but we would take this opportunity to also applaud the bipartisan actions that have occurred across Congress, both the Senate and the House in this past year or so. Hopefully we'll get this taken off the books in this regard soon. Next question, please.
Our next question comes from Matthew Borsch with BMO Capital Markets. Please go ahead.
I was hoping that you could talk about the factors that drove the medical care ratio to be a little bit higher than what we and, I think, the street analysts had modeled. Is that purely the result of Medicaid? I noticed in the press release that you had talked about that trend moderating, but in terms of impact on MCR, it seemed particularly noticeable this quarter.
Yeah. Thank you, Matthew. The MCR impact in the quarter is almost to Medicaid performance. We touched on this in the investor conference. I recognize it was in response to a question. Throughout 2018, we have seen a pullback in our performance in our Medicaid business, in particular the TANF portion of it, and in particular in a handful of states. Those issues were, as we discussed in the script, it's really around both the funding in a handful of states, some of which you probably recognize, or corrected throughout the year, and then also with respect to some of the costs, both medical as well as operating costs in those handful of states. The rest of our Medicaid business, both the dually eligible and the LTSS population, are performing quite nicely.
Of course, as you could tell, our Optum businesses are performing well, as well as the remainder part of our UnitedHealth businesses, both the employer and the Medicare markets. We did make considerable progress through 2018. I'd say the last half of our Medicaid performance was substantially better than the first half. It just isn't quite at the par yet as we look into Q4. We have seen, again, nice progress throughout the balance of the year. We expect 2019 to show considerable additional improvements as we move that business back to its target margin range of 3%- 5%.
Thank you.
We'll take our next question from Charles Rhyee with Cowen. Please go ahead.
I don't recall that you guys discussed it earlier. I think in a report earlier that you guys had won a large VA contract, and maybe if you can kind of give us some details around that. The headline numbers look very big, but I can't imagine that you'd be necessarily booking all that. Can you give us maybe some color around how we should be thinking about that? I believe it's in the OptumHealth. Maybe give some sense on how to think about that and when that'll ramp up, and any color on that would be helpful. Thank you.
What you're referring to is the VA Community Care Network contract, which was awarded at the end of last year. Andrew, hi.
Thanks, Charles and Dave. Yes, we were pleased with the award of the VA Community Care Network program to Optum Serve in the regions in which we bid, which were three regions. It's an honor to serve our veterans, and I was really glad in a way to recognize the dedicated talent of the Optum Serve team that is ready to deliver on this contract. With the award, Optum can now serve the VA's capability to provide timely and quality healthcare to more than 6 million veterans in 36 states, 2 U.S. territories, and the District of Columbia. These contracts administer regional networks of high-performing licensed healthcare providers who will work together with the VA to provide medical, mental, and pharmacy services to veterans who are unable to receive care at their local VA medical center.
We look forward to completing the government review process, which of course is underway, the normal review process, and ultimately getting to work serving our military veterans. This is a really important step, as you indicated. It's an important step forward for Optum Serve, which really has the potential to bring the full depth and breadth of Optum capabilities to both current and former members of the armed services and the government.
I think it's also another, to be remiss to not underscore the fact that it's just another example of when there's tension in healthcare, particularly the government, as they seek a public-private partnership. In this case, the VA sought a partnership with the private sector so that they can provide better care to the veterans, and we are honored and pleased to be able to win the award and to serve them.
Excuse me. Is that included in the guidance?
Yes, it is. The contract will begin in implementation in 2019, so it actually is a drag to earnings. It is a seven-year contract, so it'll provide its returns on that investment through that seven-year contract.
Okay. Thank you.
Thank you.
Our next question comes from Sarah James with Piper Jaffray. Please go ahead.
Thank you. At Investor Day , one of the things that you talked about was the potential to double commercial specialty revenue. Can you give us an update on how that's tracking so far in 2019 and provide some more details on the drivers?
Sure. Thank you. Dan Sumacher, please.
Thanks. Good morning, Sarah. I appreciate the question. Yes, we do and are very focused on deepening our penetration of our specialty blocks within our broader medical because we think when we bring together vision, dental, hearing, and other assets, you take more of a holistic approach to the person and drive better overall health outcomes. We make nice progress in the one-one selling cycle to drive deeper penetration, but I would tell you that we're in the early innings in the context of doubling it. Dental and vision in particular are going to be the foundational parts of that, but we expect nicer contributions from hearing as we move forward as well.
Thank you. Next question, please.
We'll go next to Zach Sopcak with Morgan Stanley. Please go ahead.
Hi. Good morning. Thanks for the question. I appreciate the early selling season comments for the PBM for 2020. Just wanted to get a little more color, in particular, pockets of strength that you are seeing in the 2020 selling season, especially as I think I mentioned last year, you won about three health plan clients on your future call. Thank you.
As I think you noted, OptumRx has considerable momentum on the top line and is getting really strong market response. John?
Thanks, Zach. It's John Prince of OptumRx. I'd say overall, our differentiated value story is really resonating in the market. We've had good uptake in this past selling season. We were very successful in selling over 12 new large relationships. That's a mixture of both state health plans, Medicaid, and a couple large employers. We've also had good retention. Again, we've had retention of 98% for the third year in a row, which we are very pleased to have. And that links back to our strong story around Net Promoter Score for our clients as well as our consumers. In terms of 2020, we've already sold a couple large deals and added a couple of large relationships for 2021.
We have a very healthy pipeline as we go into the new selling season. As you know, for the 2020 selling season, this time of year is focused more on the health plans. We are focused on that, and then the large employers, as well as the states, as for 2020, are just in the middle of their process. We're optimistic, and also we're really pleased that our story around value and stability is really resonating in the market. Thank you.
Next question, please.
We'll go next to Kevin Fischbeck with Bank of America from Merrill Lynch. Please go ahead.
Kevin, you may be on mute.
Yep. Do you hear me now?
Yeah, we can. Yep.
Okay. I just want to go back to the MLR question, I guess specifically on the Medicaid side. Wanted to understand two things. One is your commentary about the MLR and Medicaid today, is it the same as it was back in November? Do you highlight anything you've gotten from it, going better or worse from there? Two, systematically, specifically, feel free to talk to the variance to MLR in the quarter, given its relative size. I don't know if there's anything else that you would highlight on medical costs.
You're talking about variance to [three days]?
Yeah, exactly.
Okay. Well, maybe what I'll do is I'll comment on the Medicaid, then maybe just ask John Rex to comment on the MLR paper, to make sure that we're full seminar if he wants to on that. We're in exactly the same position or pretty close to the same position we were with Medicaid, when we discussed this with you in November. Part of what you told me to bring it up was the commentary or I believe the question that was asked, I believe you asked it actually was.
Yes.
Where we may not be performing to our fullest potential, I gave you a few examples, this one being on how our business is performing, it is isolated to TANF. It is pretty much isolated to five markets. I should tell you what these five markets were as of late 2018. The only thing I'd suggest is that over the last 45 days or 60 days, our teams have continued to make very nice progress, they're remediating these issues on plan as we look to 2019 for improved results. We do in fact see nice progress with respect to those. It is a leading contributor to the MLR view. John, do you have anything further to add?
Sure. Kevin, it's John. Good morning. Maybe just start with, as you kind of teed up the question, the full response there. The share price results are highly consistent with what we laid out at the end of November. UnitedHealthcare's full-year operating earnings of $9.1 billion was just slightly ahead of the point estimate we provided at that time. I put the 81.6% full year consistent with what you'd approximate 81.5% we provided at that time also. I'd say it is consistent with the outlook that we had as we were set to visit with you at the end of November. In that light. Beyond C&S, as we've discussed, the benefits business is performing well, at least in line with our expectations. Medical costs well contained overall. I would suggest that $280 million in favorable development in the 4 Q also is a reasonable indicator of that.
Thanks.
Great. Thank you, Kevin. Next question, please.
We'll go next to Steve Tanal with Goldman Sachs. Please go ahead.
Thanks a lot, guys. I appreciate another call on the MCR. I'm sorry to beat this one, but I just use my question to follow up here. Maybe could you comment specifically on sort of the put some dates on the commercial side and then Medicare, both sort of really on the trend and specifically maybe commercial medical cost trends sort of tracked within the 2018 full year guidance range in the fourth quarter, and then if Medicare MCR was sort of right in line with your expectations as well, or if there's anything worth calling out there, that'd be great.
Dan Schumacher?
Yep, good morning, Steve. With regard to the commercial cost trend, a year ago, we had guided to a range which we narrowed at the investor conference in November to 5.5%-6%. I would tell you that on the year, we landed squarely within that. Very pleased with where our costs came in from a commercial perspective, as well as then how that translated through to in line with our earnings expectations. I would just point out that within our commercial block, we obviously have a seasonal diet for this fourth quarter.
That's a shift that's really driven by the type of products as the market's buying, as well as the pace at which we got them over increasing year in and year out. That also contributes to how you look at the performance and its progression over the course of the year. That's something new, Medicare had a very strong quarter in the fourth quarter and came in line with expectations, if not a little bit ahead.
Thank you.
We'll go next to Ana Gupte with Leerink Partners. Please go ahead.
Thanks. Good morning. My question was about the vertical consolidation with the deals closing, Cigna is moving their book onto Express. As you're looking forward into the new competitive landscape, can you talk to my idea about OptumRx with the frequency of $300 in savings up for share on base per thousand. How are you preparing for share gains, maintaining loss ratios and margins going forward in a possibly bundled commercial and PBM environment?
We're just running our business, Ana, and doing it very well. As John pointed out, he's seeing strong performance in growth. I think if you track back the last two years and then leading into 2019 and now leading into 2020, we continue to see a nice response to OptumRx offerings, in part because it goes well beyond the traditional PBM and operates as a pharmacy care services business. The collaboration between it and UnitedHealthcare is long and well established, so it's not new, meaning that the two of them work very collaboratively together on a wide range of opportunities.
Of course, that pharmacy care services business is available on a multi-payer basis as well. We have a strong competitive offering. We work with, and deeply respect, the new and emerging competition. We're not going to underestimate it, we also remain highly confident in our own capacities to compete and continue to grow and manage our business.
Thank you.
Next, we'll go to Scott Fidel with Stephens. Please go ahead.
Hi, thanks. Just interested as the market continues to debate the overall trajectory of the economy exiting 2018 into 2019. You've got a lot of key points on that in terms of how the overall economy is progressing in both the UnitedHealthcare and in the Optum businesses. Just interested maybe in some of the more economically sensitive areas, what you're seeing in terms of trends in the fourth quarter, particularly later in the fourth quarter related to this report.
It's a good question, Scott. I was thinking a little bit about this, seeing a lot of economic sentiment, if you will, but also political sentiment in healthcare. I was evaluating that over the course of the last time frame here, which has been nearing about 21 years or so. All the way back when we've grown our revenue base from $12 billion at the time to $226 billion, which we just reported today. What I find is, particularly in healthcare as well as economic cycles, is that sentiment tends to drive private sector expansion. We've seen that through Medicare Advantage. We see that with the introduction of Part D, managed Medicaid, dual, Medicaid expansion, exchanges, the ACA broadly.
Also what we discussed this morning was access to the VA and how they have sought a public-private partnership and to respond to the needs of veterans. One thing that's true through these political shifts and economic shifts is that healthcare products are always in demand. Whether it's an economic expansion or a recession or whether there's a liberal or conservative administration, UnitedHealth Group positioning tends to be unique and very well regarded. We manage a portfolio of diverse healthcare businesses, and they serve large and diverse end markets. We tend to grow regardless of economic cycle or administration. We have a unique portfolio of competencies in data technology as well as clinical insights and actually our ability to manage clinical interactions, which continues to advance across the business, which is reinforcing that capability in our business.
Our aligned services have never been positioned to produce greater value for society, for clients, consumers. You can hear us talking a lot more around societal return and the triple aim and then also, becoming more of a consumer-oriented company, which is really what NPS signifies. Just to wrap up, this is a very scaled, improving model. It has a deep management team with strong continuity that's largely 95% domestic. We really don't have tariff hikes or other global concerns, and it has a long runway for growth. It has five well-defined, high-performing growth pillars that are going to meet an 11 trillion global market in 2025. We like the opportunity that is presented, and we believe that whether it's political sentiment or economic sentiment, that UnitedHealthcare will continue to provide distinctive results and returns for both society as well as our shareholders.
Thanks.
That's helpful.
We'll go next to A.J. Rice with Credit Suisse. Please go ahead.
Hi. I was just going to ask, I know at Investor Day, you guys talked quite a bit about the initiative around specialty pharmacy and the acquisitions, as well as putting infusion into your MedExpress and into community centers. Can you just update us on where you're at today in rolling all of that out and a timeframe over where you might look at next year or so, and what does that mean for you financially?
Andrew Witty ?
Yeah, A.J. Thanks very much for the question. Then I'll ask John Prince to give you a little bit more detail. I'm thrilled with the progression of the businesses that you've described. I think within the pharmacy care services business that John runs, as well as vision, optical, and health, that Andrew runs, we're seeing these high-quality ambulatory care services that John Prince described really being embraced strongly in the marketplace. We continue to expect to roll out and extend those networks over the next couple of years. I will just say, one other point, though, I think it's really important to think about Optum really as a portfolio of provider networks.
If you think about it's not just about these ambulatory care services like FPA, like the infusion centers, like MedExpress, but those being complemented by such a strong medical provider network and team offered across the U.S. What you're going to see over the next few years is our determination to bring to life the value of that network, that really comprehensive presence that we're now beginning to establish in a series of important markets. We think that that can really deliver substantial convenience, quality, lower cost, better service for the patients we serve, as well as the plan sponsors that we serve. With that, let me just hand over to give more specificity to John.
Okay. Thanks, Andrew, and thanks for your question, John Prince. In terms of those businesses around specialty infusion, we really like that space. We have a really differentiated offering in the market, focused on decreasing the total cost of care and also improving the consumer health. We've got focused programs clinically that handle a patient through their whole course of treatment. We've done a great job of transforming the consumer experience as well as the provider experience. There's a close partnership between the consumer and the provider as you manage through the course of treatment. We continue to grow extensively in the external market, taking business both contracted with plan sponsors, but also competing in the open market.
More than a quarter of our business comes from the open market, people selecting our services as their preferred offering because of our NPS and our health outcome. We're now over 50 sites in terms of those businesses. As we look ahead, we have a significant expansion. We're looking at more of 12 this coming year and 12 in the future, all in from our portfolio of pharmacy care services at over 500 sites as we add in one or other component. Strong performance and strong opportunity.
Thank you, Andrew. Next question. I'm sorry. Thank you, Andrew. Next question, please.[crosstalk]
We'll go next to Frank Morgan with RBC Capital Markets. Please go ahead.
Good morning. I think you actually commented on this a little bit at the investor day with regard to the loss of the Cigna book of business. I think you commented it would be a revenue hit, but really not a profit hit. Just any additional color on why that is, and does that also assume any type of operational de-leveraging with that lost revenue? Thanks.
John Rex.
Frank, good morning. John Rex here. Yeah, you're absolutely correct. I did comment at Investor Conference in terms of the potential for that business to transition over the next two years. Indeed, that clearly is the expectation here. As I commented, that would have impact on revenue and strip count as that transitions, That really depends on the timing, That timing isn't completely certain yet in terms of the pacing of that, We're going to work with our customer in terms of meeting their needs on that piece. I did also comment it wouldn't have any impact on our earnings outlook for 2019, and that continues to be the case. It doesn't have any impact on our earnings outlook. That's to be determined in terms of how it impacts our revenue and strip count as we work with our customer, Cigna, on that.
Thank you, Frank. Next question, please.
We'll go next to Joshua Raskin with Nephron Research. Please go ahead.
Hi, thanks. Good morning. Here with Eric as well, a question on Optum. Rewind two and a half years ago, you guys had a couple of really big wins, summer 2016 with Chalmers and Patrick's Boys, GE, et cetera. I know a lot of that all kicked off on one month 2017 and multi-year deals on all of those. You probably have close to two years of data on it at this point. I'm curious what that data is showing in terms of the impact of synchronization.
There were some financial targets within those contracts of how you're tracking on those. When do you think you kind of come to market with a little bit more of a definitive study on, "Here's what the world looked like in these accounts prior to the synchronization, and here's what the impact is looking like under the OptumRx contract.
John Prince.
Thanks, Joshua Raskin. It's John Prince with OptumRx. I'd say, not to get into details on specific customers, I'd say overall, we're continuing to execute very well with our customers. That story around synchronization, which we sold to those customers a couple years ago, is part of our broader story to market today. Today, when we talk about going to market, we talk about how we're negotiating lower cost of care for drugs. We're focused on lowering the total cost of care, including the health outcome, as well as transforming the consumer experience. That is our core value story.
When we talk about the 24 point hours of value that we deliver for our highest performing clients, that is part of our overall book of business in terms of how we serve our customers. We actually have a lot of the data that is then leveraging to our story in the market today. We actually are coming with strong confidence in our ability to execute. We're in the market now with things around drug trends and how we can actually reduce drug trends. We're actually out there with prescription care guarantees to market. That's because we've done the kinds of things. We've been in the market for five years with this inventory. We're executing well, and we're on the next generation of it. We're confident in how we're performing.
Thank you for the question, Joshua Raskin. Next question, please.
We'll go next to Ralph Giacobbe with Citi. Please go ahead.
Good morning. Your MLR higher by about 90 basis points in the fourth quarter year-over-year, normalizing for this shift. Is that all Medicaid? Is it a pretty robust book for a company this size? We just haven't seen this magnitude of pressure from others in the space. I guess I'm just trying to get a sense if it's unique to specific markets you're in that others aren't, if it's unique to you in terms of adverse risk within those populations. Just trying to get a sense of reconciling that and maybe if you could help, just with where your [target] margins are within Medicaid at this point and what kind of improvement you'd expect in 2019.
Thanks, Ralph. We're not seeing the same that you are on the MLR count. Why don't we just circle back with you separately on that? As it relates to the Medicaid business, it is profitable. It's not at our target margin range of 3%-5%. I'd like to see us get into the bottom end of that range in 2019. We'll definitely be within that range probably the 2020 time period, we can say with confidence that that's the case based upon the great actions that we've taken so far, as well as a number of the engagements and operating cost initiatives that we've put in place. Also want to let you know this business functions very effectively and has mid-sixties NPS scores for a traditional Medicaid population. Even the duals, it's in the 70s.
It's oftentimes number one in terms of quality scoring in its local markets. It's referenceable by all the states. Not going to overplay Medicaid here. We have a short-term issue that will take us a little bit of time to work our way out of. Again, we've been working on this most of 2018. It became more acute in the first half and really in the second quarter. We've been working hard on it since. You've probably seen some of those reactions flow through.
You can probably see that in some of the stats we're filing, some of the improvements that we've faced, I think you'd probably be able to recognize where they are and how isolated it is in our capacity and as a company to be able to turn that around. We have a lot of confidence in where we're at, led by Heather Cianfrocco, who's a fantastic leader, her team will continue to make good progress on this through 2019.
Thank you, Ralph. Next question, please.
We'll go next to Gary Taylor with JP Morgan. Please go ahead.
Hey, good morning. I guess MLR will be the theme of the day. I apologize. Maybe you could give a little help just thinking about seasonality in your MLR and if that's changed. When we look at third quarter to fourth quarter in 2016, MLR was pretty flat and 2017, up 50 basis points in this quarter, up 110, but more like 170 if you exclude the prior year development. It does seem like there's been a trend where you're seeing more of an increase quarter to even as the year has come in line. Would you attribute most of that to just some of the seasonality in the commercial business that you've talked to with higher copays and deductibles over the years? Or something else in the line of business mix that might be contributing to higher MLRs quarter to?
Yeah. Thanks, Gary. That's Dan Schumacher. Maybe provide a little bit of context on the commercial seasonality. As you look sort of first quarter to fourth quarter, the change in that medical care ratio generally is somewhere in that 6%, 7%, 8% zone as you move from the first to fourth quarter. When I tell you, as you look 2017 versus 2018, there's probably been somewhere around a one-point shift in that as you look at greater concentration in offerings that drive consumption towards the fourth quarter, as well as the increases in the average deductible. If you look inside of our average deductible increases over the last two years or so has been in the 8%-9% zone. Those are the contributing factors that push the consumption and the realization of that towards the fourth quarter, and I think that's what you're seeing out of it.
Thank you, Gary. Next question, please.
We'll go next to Lance Wilkes with Sanford C. Bernstein. Please go ahead.
I wanted to ask a question on the cross-sells and the specialized benefits focus you have. Related to that, you spoke about dental, vision, and kind of additional coverages being an area of focus. Wanted to understand how much of the focus was cross-sells with PBM, stop loss, and other care management solutions as well.
Dan, you want to take that?
Thank you, Lance. Obviously, our ambition is to serve the needs of our clients. We know that when we have the opportunity to really combine the full capability of our enterprise, taking our knowledge and know-how with respect to the medical offering, underpinned by high-performing care delivery assets, both Optum Care as well as third party, bring in our advocacy, navigation competencies from OptumHealth, the know-how and intelligence from Optum Insight, then have a chance to take on the ancillary offerings that really contribute to the overall health and well-being of a person, then we have our best results and outcomes.
We are no doubt very focused on trying to combine both our medical and our pharmacy, take on stop-loss, add in care management, advocacy, navigation, in support of people along with the ancillary coverages. We're making some nice progress in that regard. We've got a lot of upside, frankly. As you look our penetration rates, particularly up market in pharmacy, we've got a lot of room to be able to serve our clients in a more wholesome way.
Thank you, Lance. Next question, please.
Going next to Steve Willoughby with Cleveland Research. Please go ahead.
Good morning. Thanks for taking my question. Moving off the MLR for a bit, my question just revolves around some of the new commercial initiatives you've talked about, such as buying Colorado Doctors with NexusACO. I was wondering if you can give us any perspective on potential membership gains from these programs either in 2018 or 2020.
Great. Dan?
Sure. Thank you, Steve. Maybe just to step back a little bit, from our perspective we are, and as you caught it, we're excited about our efforts to deliver greater value for people. I think as Dave mentioned, we really think that we're on the forefront of a wave of innovation, and you named some of those. We see some modest contributions from those efforts in 2019 and increasing efforts in 2020 and beyond. NexusACO has been around a little longer and more evolved. We had about 75,000 folks in 2018. As we turn into the year, we will increase that nicely, and by the end of the year, we expect to more than double that.
As it relates to Colorado Doctors Plan and Bind as an example, I would say they're on the early end of it. Again, smaller contributions to our enrollment table in 2019 and growing contributions, in 2020. Again, like the suite of offerings that we're bringing to market as well as the interest from clients' perspective.
Great. Thank you, Steve. Next question, please.
Going next to Steve Valiquette Barclays. Please go ahead.
Great. Thanks. Thanks for taking the question. From the January 2019 Medicare Advantage membership data that just came out overnight, I know some investors look at the sequential trends versus December, others might look at the year-over-year growth trends. I know it's early, but we're calculating that as of the first of January of 2018, UnitedHealth Group's total Medicare Advantage membership almost 10%, and the individual MA membership was up almost 11%. I guess the key is that one could hypothetically suggest that this is trending slightly above the mid-point of the growth you kind of suggest of 2019 back in November, which is actually positive. I guess I'm just curious if you could temper it, if there could be a bias to the upside for your MA membership growth in 2019.
Brian Thompson.
Sure, Steve. Hi, Brian Thompson. Thanks for the question. 2019 is off to the start that we had expected. A strong start from our advantage point, I'd say what AEP suggests is about performance remaining in line with our full year range. I'm sure our growth does suggest a share gain again, which would be the fifth year for us, from a competitive way, which we're certainly very pleased with. I think as we've talked about in the past, the regulatory environment really provided an opportunistic opportunity to really grow meaningfully.
I think we took advantage of improving our benefits, but I would also suggest that we were very cautious and very disciplined in that regard and established our benefit positioning and our capabilities for 2019 and beyond for long-term stability. Certainly cognizant of the potential return of the Health Insurance Tax in 2019. Really pleased with our positioning. Again, I think it aligns really nicely with what we had expected. Really a strong start to 2019.
In the second half of 2020, yeah.
Okay, thank you, Steve. Next question, please.
Going next to Michael Newshel with Evercore ISI. Please go ahead.
Thanks. John, can you just talk on the favorable reserve development intra-year versus anything prior year? I think prior year was lower negative in past quarters, is that pattern consistent and this reserve development is all underlying 2018 performance?
Sure, Michael, Dan Schumacher here. Yes, we had $280 million of total favorable reserve development for Q. That breaks down $170 million current year, $110 million prior year. I'd call it favorable development because it's really indicative of the cost-containment efforts across our businesses, across the enterprise. I don't know how to materialize, put it in the context of $175 billion in medical spend overall. It continues to be our objective to manage that well, to improve accuracy. We have increasing level of electronic data exchange, early detection of outputs, and really more ability to intervene.
So we should have increasing accuracy with that. Related to kind of our cost-containment effort, some of those, they roll across in different forms. Some of them very near term, some of them take a little bit longer to achieve. Sometimes you see a little different mix in terms of prior year and current year.
Thank you, Michael. Next question, please.
We'll go next to David Windley with Jefferies. Please go ahead.
Hi, thanks for letting me in. A question on John Rex's EPS cadence commentary. I understood you to say the 48% as has been in the past, but more in the first quarter. I just wanted to clarify that you are comfortable or you are guiding us to the 48% in the first half, but more than in the first quarter. Is that how we are to interpret your comments?
Okay, thanks for the question. Here's how we view it. From year to year, individual quarters can often be impacted by several factors. I call those out as the pacing of when weekends and holidays fall. As we all know, the year of the calendar is fairly stable. It's just typically a matter of differences in quarters. As you would realize, those variations are most impactful to UHC benefits businesses. In 2019, the first quarter had slightly fewer work days than the first quarter of 2018. In addition, given the timing of share-based compensation awards and how that impacts our tax rate, we generally also see the first quarter to have the lowest effective tax rate of the year.
Perhaps without being overly prescriptive, and you're right, that kind of 48% mix in terms of how we see the first half playing out, and that is still consistent. Without getting overly prescriptive and without knowing all your models, I'd suggest something roughly in the range of a 1% shift of your full-year earnings outlook would be more appropriately recognized in the first quarter.
Again, thank you.
All right. Thank you, David. Are there any other questions?
It appears we have no further questions. I'll just turn the floor to you, Mr. Wichmann, for final comments.
Okay. Well, thank you. Appreciate all the questions today. To sum up, the company delivered strong performance in the fourth quarter and full year 2018. To creating genuine value to the people we're privileged to serve and to society at large, I'd like to take this opportunity to thank the 300,000 people of UnitedHealth Group Optum and UnitedHealthcare for their good work. We are confident in the fundamentals of our businesses and expect to deliver solid operating and earnings performance in 2019. The opportunities ahead in 2020 and beyond are exciting. There is a remarkable potential for us to serve more people in more ways every day, growing our businesses in the U.S. and worldwide and continuing to provide consistent, reliable results for you, our shareholders. Thank you.
This will conclude today's conference. Thanks for your participation. You may now disconnect.