Good morning. I'll be your conference operator today. Welcome to the UnitedHealth Group 4th Quarter and Full Year 2017 Earnings Conference Call. A question and answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded.
Here are
some important introductory information. This call contains forward looking statements under U. S. Federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.
A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. 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 and on our Form 8 ks dated January 16, 2018, which may be accessed from the Investors page of the company's website. I would now like to turn the conference over to the Chief Executive Officer of UnitedHealth Group, Mr.
David Wichtman. Please go ahead.
Good morning, and thank you for joining us today. This morning, we reported 2017 results that are ahead of the outlook we shared with you at our Investor Conference at the end of November. Full year 2017 revenues exceeded $201,000,000,000 increasing more than $16,000,000,000 year over year. Operating cash flows grew to $13,600,000,000 and adjusted earnings per share grew 25 percent to $10.07 per share with operating earnings from both UnitedHealthcare and Optum ahead of the forecast we provided at our conference. We had an active December on the growth front.
We wrapped up the 4th quarter serving the benefit needs of nearly 1,500,000 more consumers, completing another successful sales season in individual group MA and dual special needs plans as we turn into 2018 and advancing our strategic positions in 2 of 5 growth categories by signing both BanMedica and DaVita Medical Group, while maintaining our operating focus to both close 2017 strongly and we expect to carry that momentum into a healthy start to 2018. We know the effects of tax changes for 2018 are top of mind for many, so we will begin there today with corporate tax reform. Our starting point for determining our approach was with our mission, helping people live healthier lives and helping make the health system work better for everyone and our recognition of the enormous gap between where healthcare is today and where it could and should be. We concluded that our ambitions for a better health and for a better health system are best achieved through investment in ways that will make healthcare far more affordable and of far higher quality. More specifically, corporate tax reform is expected to improve earnings and cash flows by $1,700,000,000 in 2018.
That's after an estimated $400,000,000 to $500,000,000 reduction in premium revenues due to minimum loss ratio and lower net health insurance fee recapture effects and a $200,000,000 to $300,000,000 additional investment in operating costs as we accelerate existing initiatives in artificial intelligence, data analytics, individual health record custodianship, digital health, net promoter score improvements and health related initiatives in local communities. We expect to invest the remaining increased cash flows to better fulfill our mission and in turn to grow and diversify our enterprise for the long term, all aligned to the ambitious agenda we discuss with you on Investor Day. We now expect adjusted 2018 earnings of $12.30 to $12.60 per share and cash flows from operations in the range of $15,000,000,000 to $15,500,000,000 John Rex will offer more details later in this call and as usual, we will be available by phone throughout the day. Before leaving taxes, I would note that we continue to advocate strongly for a multiyear deferral and ultimately the repeal of the health insurance tax, given its high cost to consumers and society. If a deferral for 2018 occurs, we plan to return the value to those impacted by the tax.
As highlighted in our investor conference, we are pursuing growth and diversification in 5 key areas: healthcare delivery, pharmacy care services, consumer centric benefits, digital healthcare and global. Our busy December helped us to advance these goals. The combination of OptumCare with DaVita Medical Group establishes primary and ambulatory healthcare delivery in several new local care markets for OptumCare. Through BEMEDICA and with EMEAL and Americas Medical Services in Brazil, we are establishing a foundation for growth in South America for decades to come. And as Steve Nelson will discuss, UnitedHealthcare's 2018 growth in individual and group Medicare Advantage and dual special needs plans should again lead the market.
Now let's turn to the businesses starting with Optum's Chief Executive, Lair Renfro.
Thank you, Dave. Delivering strong results for Optum customers in 2017 enabled us to drive strong revenue and earnings growth and to create opportunities for further growth in 2018. Full year 2017 Optum revenues increased 9%, exceeding $91,000,000,000 2017 earnings from operations grew by nearly $1,100,000,000 or 19 percent, with individual businesses earnings growth rates ranging from 16% to 28%. We again balanced innovation investments in our businesses and strategic acquisitions with business simplification and focused cost management. The result is improved margin performance.
Our full year operating margin expanded by 70 basis points to 7.4%, including 9.1% in the 4th quarter. 4th quarter earnings from operations grew by more than 20% for every reporting business. We entered 2018 with positive indicators for our business outlook. OptumHealth served 91,000,000 people at year end, strong 10% growth on a large and growing base. In the Q4, OptumRx fulfilled 333,000,000 adjusted scripts and Optum Insight advanced its backlog, producing full year backlog growth of 19% to $15,000,000,000 Our strategic relationships continued to advance as we became more deeply involved with an increasing number of sophisticated customers.
Let me give you a few highlights. In state government services, West Virginia became the 1st state to engage Optum to integrate program eligibility across all state sponsored health benefit programs. Over half the state population or about 900,000 people will access Medicaid as well as other human surface benefits through Optum's new integrated eligibility platform. We expect to build on our strong and differentiating capabilities serving health plans. Our health plan customers' members, our patients, receive quality care from our physicians at local clinics and ambulatory sites of service.
We had strong growth in data analytic work related to risk and quality, and we received a multiyear award to manage the technology platform modernization for Triple S, Blue Cross Blue Shield Puerto Rico. The Healthcare Transformation Alliance relationship is off to an excellent start with 10 companies selecting OptumRx driven by their interest in quality, cost transparency and total cost management. Finally, with the full implementation for Quest Diagnostics completed at accessible performance levels. We now manage more than $65,000,000,000 in annual billings on behalf of our diverse revenue management customers and the new client pipeline is vibrant. Acquisitions this past year added market leading platforms, strengthening our capabilities and depth of resources.
Surgical Care Affiliates, with its leading ambulatory surgical care practice grew revenue 7% on a same store basis, driven by ever more complex surgical procedures shifting to non hospital settings. We plan to accelerate center development in 2018 2019. We expanded OptumCare primary care driven practices into 10 new major metropolitan areas. This includes our pending acquisition of DaVita Medical Group with more than 2,000 employed or affiliated physicians serving 2,000,000 patients annually. Like our OptumCare doctors, DMG physicians are well known for delivering high quality care to their patients and are seasoned in working in a value based care context on behalf of a diverse group of the most respected payers.
Combined with DMG, OptumCare will be in 35 local care delivery markets, nearly one half of the 75 markets targeted for engagement or development. And these market operations be. And we combined with the Advisory Board, the market leader in healthcare research, consulting and technology, We expect Ocim to bring further resources, capabilities and value serving the 4,000 hospitals and health systems that comprise the advisory board's membership, and we look forward to accelerating their engagement in the next 6 months. Finally, we continue to innovate to better serve market needs. We doubled the number of people with Rally IDs in 2017, now more than 15,000,000 while administering more than $400,000,000 in consumer incentives.
Market interest for this type of scale tested solution is growing. A large local health plan selected Rally as its consumer technology platform. And several renowned hospitals are now using Rally for everything from searching for a physician to pricing the appointment and appointment scheduling. We launched PreCheck MyScript connecting patients, physicians and health plans with useful information at the point of prescribing right in the physician's workflow. Pre Check My Script has already been used by tens of thousands of prescribers for nearly 1,500,000 transactions.
We will offer it to all OptumRx members expecting to reach 80% of active prescribers by the end of 2019. And we unified our unique data science and analytics capabilities under the OptumIQ brand. We are optimistic about our current progress and our long term opportunities to continue to advance MPS, to raise quality, to innovate and develop and grow relationships, making the healthcare system work better for everyone. Optum was built over 20 years, but we are only just beginning to get a glimpse of its potential. Now let me turn it over to Steve Nelson, the CEO of UnitedHealthcare.
Thank you, Larry.
Like Optum, we're pleased to report strong growth and performance across our businesses on behalf of those that we serve. UnitedHealthcare's 2017 revenues exceeded $163,000,000,000 and grew 10% year over year. 3 of our 4 businesses posted percentage growth rates in the mid teens or higher, and employer and individual offerings performed exceptionally well, growing 9% absent the $5,300,000,000 negative impact of reduced participation in ACA individual insurance products and the 2017 health insurance tax moratorium. Medical costs were well managed for the year and our full year medical care ratio was near the lower end of our original forecast. The full year 2017 commercial medical cost trend was about 5.5% and we continue to forecast a trend of 6% plus or minus 50 basis points for 2018.
Operating costs were well controlled in 2017 as operating margins strengthened 30 basis points to 5.2% with 4th quarter operating margin seasonally lower as expected. We improved our positioning for 2018 and for the long term. Together with Optum, we renewed early the AARP relationship, a key long term positive for growth serving the seniors community. We also strengthened our ability to address the social determinants of healthcare to better serve people with complex needs. And we're seeing strong interest from multi site employers in the NexSys ACO product, the 1st national ACO product targeted to large self funded customers looking for higher quality and cost performance.
Nexus ACO leverages UnitedHealth premium physicians to achieve cost savings of up to 15% as customers see reductions in readmissions, ER visits, inpatient lengths of stay and hospital admissions. We expanded into several new markets, including the Western Slope of Colorado and Upstate New York, and we'll enter Minnesota and the Northern Plains in the second half of twenty eighteen. And we began to advance the next generation of digital health and wellness management, which is available for seniors based on connected wearable devices and wireless technology. Participants in the UnitedHealthcare Motion Wellness Program have used activity trackers to walk 65,000,000 miles, earning nearly $20,000,000 in incentives to cover out of pocket medical expenses. In 2017, we served 2,000,000 more people in the U.
S. Employer group, Medicare and Medicaid market segments, including almost 1,500,000 more people in the 4th quarter. In Medicaid, we grew by more than 800,000 people in 2017, reflecting entries into new states, support for 110,000 more Dual Special Needs Plan members and a significant late year expansion in Iowa. In 2018, we expect further growth from our 2017 entries into California and Virginia from further acceleration in serving dual needs special plans and from continued end market organic growth. The Medicaid pipeline for 2019 and beyond continues to be robust as states increasingly look to manage care for innovation, effective service and cost containment.
In Medicare, we served nearly 1,000,000 more seniors in 2017 and we again expect strong growth in 2018 consistent with our expectations. Based on performance in the annual enrollment period, high customer retention and continued success serving employer group retirees through our national four star quality plan. In UnitedHealthcare Employer and Individual, Commercial Group Full Risk Offerings Group served 130,000 more people this quarter and 465,000 over the past year. We expect some modest pullback in membership in the Q1, followed by sequential quarterly growth over the balance of the year led by strength in small group fully in line with our investor conference growth projections. In Global, our Brazil businesses had strong positive 2017 performance and carry that momentum into 2018.
We expect to add BanMEDICA in the Q1 2018. Banmedica is a provider of healthcare services and health benefits in Chile, Colombia and Peru, serving 2,100,000 people and operating 13 hospitals with 1900 beds and 143 medical centers. In many ways, the growth opportunities apparent in these South American markets are reminiscent of the opportunities in healthcare markets in the U. S. 2 decades ago, when consumers and benefit sponsors were seeking better managed benefits and access at lower costs, Medicare Advantage Plans and Managed Medicaid were nascent and Part D did not exist.
We expect opportunities for growth in these markets to advance as they have in the past 2 decades or more in the U. S. Our 2017 growth and our 2018 outlook demonstrate the competitive value our offerings bring to consumers and the market. Rising rates of customer retention and strong new business generation reflect the sustaining value of innovative benefit in network designs, improved service, rising NPS, distinguished clinical engagement and effective cost control. Now I'll turn the call over to John Rex, UnitedHealth Group's Chief Financial Officer.
Thank you, Steve. We delivered strong, well balanced performance again in 2017. Consolidated revenues exceeded $201,000,000,000 cash flow from operations were $13,600,000,000 and adjusted earnings per share of $10.07 increased 25% on top of 25 percent earnings growth in 2016. We revalued our U. S.
Deferred tax liabilities to reflect the newly enacted federal statutory rate of 21%, which added $1,200,000,000 in non cash earnings in 2017. We have excluded this from adjusted earnings per share. Our expectations for 2018 have been revised solely to reflect the lower expected tax rate, now approximately 24%, the incremental investments Dave referred to and items such as rebate obligations related to loss ratio requirements triggered by the lower tax rate. The change affects several line items, which I will step through. We now expect adjusted net earnings per share of $12.30 to $12.60 in 2018, with cash flows from operations rising $1,700,000,000 from our prior outlook to a range of $15,000,000,000 to 15,500,000,000 dollars Dave referenced the $400,000,000 to $500,000,000 impact on premium revenues, which we expect to accommodate within the existing $223,000,000,000 to $225,000,000,000 revenue range we set at our November investor conference.
We now expect UnitedHealth Group earnings from operations to be in the range of $16,700,000,000 to $17,300,000,000 in 2018. This is reduced by $700,000,000 from the prior range, roughly $400,000,000 to $500,000,000 of which is driven by the premium effects of the new lower tax rate, with greater than half attributed to a lower insurer's fee gross up. The other factor within the $700,000,000 reflects the in year P and L impact from the investments Dave noted to better serve people and improve the healthcare system while strengthening our growth and innovation value. We expect these accelerated investments will result $200,000,000 to $300,000,000 in incremental operating expense. Our current plans, while still maturing, allocate these investments to both businesses, leaning towards Optum.
We now expect our 2018 medical care ratio to run-in a range of 81.5 percent plus or minus 50 basis points, with the midpoint increasing as much as 30 basis points from our prior outlook, again driven solely by mechanics related to the tax rate change. In addition, with these impacts, we expect our 2018 operating cost ratio to run-in a range of 15.3%, plus or minus 30 basis points, with the midpoint 10 basis points above our prior outlook. With respect to our overall capital position and outlook, we expect to continue to follow our long standing approach to capital allocation. This includes maintaining a consistent approach of investing in the business and returning capital to shareholders, steadily pacing toward a market rate dividend, while targeting a debt to total capital ratio in the 40% range over the long term. All of the above is contained in a revised 2018 guidance table included in our supplemental information package this morning.
The takeaways are that we entered 2018 with growth and earnings momentum and strong financial flexibility, a significantly improved cash flow outlook and a debt to total capital ratio below 39% at year end 2017 with clear opportunities to put capital to work. Dave?
Thank you, John. 2017 was a strong year for UnitedHealth Group by virtually every measure. Top line growth, rising NPS, strengthening culture and service, strategic advances, operational execution, and as a result, strong financial performance. We are entering 2018 with solid momentum and a clear direction and much to get done. We plan to sustain this ambitious pace, most importantly because our mission and culture and those we serve require it.
Our goal remains realizing the full growth, service and social potential of this remarkable enterprise. Thank you for your investment and interest in support of that goal. We will now open the call for questions asking you to limit to one question apiece, so we can get to as many as possible.
Thank you. We'll take our first question from Justin Lake with Wolfe Research. Please go ahead. Your line is open.
Thanks. Good morning. I appreciate some of the detail on tax reform. Just wanted to drill down here a little bit more. First, you talked about the $400,000,000 to $500,000,000 and most of that or the more than half of that being from the health insurer fee impact.
I think it's pretty clear that the gross up that the Medicaid plan Medicaid, the states would require to give you back needs to be smaller because taxes go down. But beyond that, can you help us understand how much of that is of the half or more of the 400 to 500? How much is commercial and how much is Medicare that you might have passed through, which I assume is 0 on Medicare? And then more importantly for 2019, would love to hear your thoughts on the sustainability of the tax reform benefit that you're seeing here in 2018, including any differentiation on that sustainability by business would be really helpful? Thanks.
Good question, Justin. I appreciate it. We'll have John Rex talk about the give you a little bit more details on the impact of the $400,000,000 to $500,000,000 on premiums. As it relates to 2019, we're not really in a position to give elemental guidance at this stage. I understand the question, but hopefully you can also appreciate that as is always the case with respect to market dynamics, particularly in the commercial market.
With respect to pricing, it's subject to a number of variables, including negotiation and then also attribution of costs. So it's not as not to belittle it at all, but it's not as simple as applying math. This is something though that as the year progresses and we see what happens with the health insurance tax, we will be very deliberate in making sure that we quantify the effects of that and do so in the context of giving you guidance for 2019. John, do you want to discuss the 4% to 5% please?
Good morning, Justin. Let me just give a little more kind of background on how that works just for the benefit of everyone on the call here. So just recall, so when we look through how this works through our P and L, the larger component, as I mentioned in my prepared comments, is the impact of the lower premium gross ups that federal tax rate declines. So remember the health insurance tax, of course, non deductible, that results in a gross up on the premium line and that flows through the P and L and that impacts a number of ratios as you saw as you heard me describe this morning across the P and L. So as a result of the gross up, the pre tax operating earnings of course were impacted.
As that requirement declines, it's neutral on the after tax earnings lines, but it impacts pretax. So that's really what we were attempting to go through here. I think you spotlighted one of kind of the easiest to understand ones in terms of some of our state program arrangements here, where really when we went into this, the arrangements with the states were explicitly around being made whole for the tax grossed up because of the non deductibility. So, that has an explicit impact that declines. And so some of those state arrangements are explicitly that way.
And so when we go to collect that, we'll be collecting a gross strip rate of 21%. There are other businesses where some of where that has some impact contractual arrangements. I won't I'm not going to parse them out in terms of specific amounts for each one, as Dave described. But you're right about kind of how that impact flows through. Thank you, Joseph.
And just Sorry?
I'm sorry, I just wanted to confirm here. In Medicare, I think you guys have talked about the gross up not having the you'd never pass it through to consumers via lower benefits. So that doesn't need to be given back. Is that correct? And then on commercial, how much of commercial do you expect to give back over time and how much is already in this number?
Thank you.
Well, Justin, we're as it relates to Medicare in particular, obviously that's all subject to a discussion with CMS and a negotiation that occurs in connection with the offering of the annual benefits. Our goals are always to maintain as much consistency as possible in benefit offerings, network access, pharmacy offerings, formularies as much as possible to keep those benefits as stable as can be. That's one of the leading contributors to our very strong net promoter scores with that population. So again, our goals there are to maintain as much stability as possible. As it relates to the market, if you think about what we have here, we have got 2 businesses, 1, which is regulated and 1 unregulated.
The regulated business taxes, if you will, we have the tax value of that, if you will, piece of that, a good chunk of it goes back to the market through these recapture mechanisms that we've outlined here this morning. That's the $400,000,000 to $500,000,000 that John described. In addition to that, we thought it'd be best that we then invest in things that we know, that we then invest in things that we know happen to be through our P and L in this case, areas we know where we can improve healthcare quality and reduce healthcare costs in the future. That's the $300,000,000 to $300,000,000 that John described as well. The vast majority of the residual is either attributed to the Optum business and or we felt was best and most appropriate for us to invest in continuing to advance healthcare quality and reduce healthcare costs, really aimed at trying to achieve this mission around helping people and helping to improve health systems.
So that's where we're at today. We think it's a fair balance. We think that that balance is something that's sustainable over the long haul.
Thanks.
Thank you. Next question please.
And we'll take our next question from Dave Windley with Jefferies. Please go ahead.
Hi, good morning. I figured there'll be a lot of questions on the tax pass through. I'm going to avoid that one. In your OptumHealth build out, I'm curious to what extent or how far along are we in the process of your benefit designs on the UnitedHealthcare side, including some type of favorability for your OptumHealth networks. Is that something you can do now?
Is it something that you plan to do? Is it something that you need to build more helps the healthcare system to work better, I would think you would want to favor that and wondering how much you're doing that?
It's a great question, Dave. And it's one of those things that's often misunderstood about our OptumCare platform. That is a multi payer platform.
It serves
80 plus payers broadly. Health dynamics in a marketplace. And so our intention is to not is to provide a broad offering and engage the ambitions of all payers so that we can serve more patients. But Andrew, do you want to touch on maybe some of our strategies there and how we're advancing that business?
Yes. Thanks, Dave. And to Dave's comments, we are very much committed at Optum and in OptumCare to a multi payer strategy and serving multiple payers in the markets we serve is integral to our business models, including our medical groups, our IPAs, our ambulatory surgery centers and our neighborhood care centers. So we work to earn and maintain the trust and confidence of our payer partners around the country. And we do that by providing outstanding value to their members and the communities we serve in terms of quality, patient experience and impacting the total cost of care.
And I think as you look at the track record that we have as we add IPAs, medical groups, as we added SCA, as we added MedExpress, we have continued the multi payer strategy of those entities. And in fact, we've worked very carefully with each of those payer partners to expand those relationships, continue to serve them and help their success.
So, Dave, it's fair to say that those that get kind of closest to OptumCare, the payers that do, are the ones that get the best value out of it. And certainly UnitedHealthcare works very collaboratively with OptumCare, but several of our payer customers do as well. Next question please.
Thank you.
And we will go next to Matt Borsch with BMO Capital Markets.
Thank you. I was hoping that you could just talk about medical trend and just from a couple of different dimensions. Number 1, to understand is your outlook for going back up to the 6% range versus 5.5% that you experienced this year. Is that just the conservatism that we've seen from UNH over the last several years? Or is there something specific?
And I guess related to that is what you think the impact of the economy is here? And if you're surprised at all by the 2017, if anything, it seems like a softening of trend relative to the prior year? And sorry, if I could just put this one in, then that begs the question of the pace of benefits change in the high deductible plan impact in this mix.
Okay. That's a lot, Matt. We'll try to get all those answered. As it relates to medical trend in 2017, our teams worked very hard to control healthcare Usually our forward view of trend is comprehensive and it also reflects a deep respect for the healthcare economy and the ways trends develop over time. So, but I think our teams did a really nice job of continuing to mitigate trend for 2017 and have done taken a prudent approach for 2018 beyond.
Do you want to talk at all about the how trend has advanced year over year and maybe what some of the elemental items are?
Jeff Putnam?
Yes. Thanks for your question. As Steve Nelson mentioned in his commentary and as Dave touched on, we're now at 5.5%, so right at the low end of the range from a year ago that we laid out, but completely in line with our investor conference. Really reflects, as Dave mentioned, our efforts to manage costs and improve quality and we continue to do that through things like ensuring the right
level of care at the right place of
service, the effectiveness of our clinical model, alignment with our provider partnerships. And we've really seen the improvements really have been broad based across our categories. I wouldn't point to anything specific, wouldn't point to the economy, especially around that as well. And as Dave mentioned, as to 2018, we're always respectful of trend and there's nothing that we've seen as we've closed out 2017 that would view our change at this point for 2018.
Gene, what about the pace of benefit change and how that's obviously played a role as you've moved more employers to high deductible plans. Is that continuing at the same rate going into this year?
I'll let Dan Schumacher comment on that. Good morning, Matt. It's Dan.
Good morning.
If you look at the benefits, what a couple of dimensions to it, right? We have if you look at deductibles, deductibles are rising a little bit faster in 2018 as compared to the rate of increase in 2017. And in part, due to the reintroduction, I think, of the insurers' fee that's pushing pricing up and it's
putting some pressure on employers to make more adjustments to their benefits. If you look at aggregate buy downs, I
think those are relatively comparable year over year. But
if you just look at the proportion of people that are buying and choosing more progressive plan designs, I would say that
that has been a longstanding trend that continues in 2018 the same
as it was in 2017.
Thank you.
Good question, Matt. Thank you. Next question please.
We'll take our next question from Steven Kennel with Goldman Sachs. Please go ahead.
Thanks a lot for the question guys. I wanted to just touch on the $400,000,000 to $500,000,000 of minimum MLR rebates and sort of curious to understand whether that had anything to do with sort of pricing plans for the oil tax regime and what that could mean for 2019? And relatedly on the incremental investment side of things, these were described as accelerated programs in the release. And I'm wondering if you could sort of give us a flavor for how much flexibility that might enable for 2018 and then looking into 2019 as well?
Okay. Well, maybe we'll have John Rex address the 4 part of that question, then I'll wrap up on the investments.
Yes. Thanks for the question. Let me just get back to that. So just to be clear here on the $400,000,000 to $500,000,000 that's comprised of 2 components. And the minimum MLR rebate component of that is less than half of that component.
The greater component has to do with just really the lower premium gross up as the federal tax rate declines. So I just really want to be clear on that in terms of how that works. So minimum MLRs, less than half of that $400,000,000 to $500,000,000 It's really just the mechanical impact, the recapture impact on the lower premium gross up that is the majority of the $400,000,000 to $500,000,000 And I'll go Dave will address the investments.
Right. So, Stephen, it's a very good question. So what we've done here is we really have investment occurring on two fronts. One as it relates to this $200,000,000 to $300,000,000 as I described earlier is going through the P and L and that's the one you're picking up on. A lot of those investments through the P and L are in the application of technology, you will, across the business.
And in order to accomplish a number of things, it's to both improve the quality of our services to people, which includes the advancing of our NPS ambitions, which I think we've laid out pretty strongly, as well as to continue to find ways to improve cost structure thereby delivering greater value broadly to the health system and to individual consumers within it. You should look at that as an uptick
in the run rate expectations of our
level of
investments, partly in response to this tax, a rate change, if you will. Beyond that is the balance, which is the $1,700,000,000 or so in improved cash flows in the business. And that you'll see us align more quickly, strategically in the market to advance things like our care delivery platforms, which we just discussed. As you know, we are not quite midway through the establishment of the foundation of market presence in local markets in that business as an example. So that additional investments in technology related platforms to advance things like precision medicine, genomics, things of that nature, where we believe we can apply our capacities as an organization are some of the areas that you'll see us advance our investment portfolio.
Got it. Thank you. Next question please.
And the next question comes from Michael Baker with Raymond James.
Yes, thanks a lot. Just trying to get a sense of the size of the PBM pipeline of opportunities this year compared to last year? And if you could give a little bit of color on market segments that are more active, that would be helpful.
We see nice growth in the PBM both this year including the growth within our customer base and we have
a nice pipe for 2019. John? Great. Thank you, Michael. So, we just finished off a really strong year.
We hit our new business targets. We also had really good retention. As I talked about at Investor Day, we were at almost 98% in terms of our retention. We've seen solid growth, both with our existing client base, including health plans. So really broad based growth across all market segments for 2018.
In terms of 2019, I think it's still early. We have a really good pipeline, so I'd say our pipeline year over year is pretty similar, but it's actually still early. We have some wins for Oneonenineteen already, so we're seeing strong active growth in the market. And I'd say the big deals, we won't hear about until the end of Q1. So strong pipeline, good growth.
I don't see any changes in terms of what market segments are selling more than others right now. And I'd say the last summer comment is that our value story in the market is really resonating. We're seeing strong interest from sophisticated buyers that are attracted to our pharmacy care services model.
Thanks for the update.
Thank you, Michael. Next question please.
Our next question is from A. J. Rice with Credit Suisse. Please go ahead.
Thanks. Hi, everybody. Maybe I'll just ask about the acquisition pace. It seems like in 2017 it accelerated and it certainly as we went through the year, it seemed to accelerate as we got towards the end. I mean that could be a function of greater availability of deals.
It could be a function of particularly you build out the infrastructure, you feel more confidence you can integrate at a faster pace of deals. It could be the balance sheet is now it's your target. Can you give us a flavor for R and D? Are we in an environment where your acquisition pace is likely to accelerate? And maybe I'll just throw in there an update on the international outlook since I know both Optum and UHC have pointed to that as a growth area.
And with the Vamedica deal maybe that brings it back into focus a little bit.
Thank you, A. J. Very good question. There really is nothing we really didn't accelerate the pace of our acquisition. It's just coincidental that those two acquisitions happened to come at that time.
As indicated, they line up nicely with 2 of the 5 growth areas of our business. We've long indicated that we have an interest in measured investments in global, and Bemedica allowed us to get into 3 additional South American markets. We have been studying those markets for about 5 years and that allowed us to advance our position there. As you know, we're in an open process right now to close that transaction. And then the other one was the DMG acquisition, which again I would characterize as more coincidental, but highly strategic in terms of the our ambitions and interests in building the OptumCare platform overall.
So really no acceleration, you shouldn't infer anything with respect to how we're allocating capital broadly. I would like to just take a moment if I can to have Molly Joseph, who is our Chief Executive of our international business, UnitedHealthcare International, maybe just spend a moment on Vemedica and our positioning in South America broadly.
Good. Thanks for the question, A. J. Let me just offer my perspective on 3 things related to our global expansion. First is the business progression we've seen in Brazil.
2nd, the pending transaction with Venmedica. And then perhaps touching on how we view Latin America more broadly. Brazil, we started 2017 with pretty ambitious expectations for the business, particularly in the area of margin improvement. And that was across both our health benefits and our medical delivery businesses. I'm very pleased that we fully executed on that plan.
The improvements are really being driven by a combination of a very strong local management team that's focused on innovation and quality and increasingly the localized application of our enterprise capabilities and competencies in clinical, in technology, in data and analytics. So we enter 2018 in Brazil with really strong momentum for continued margin expansion and quality advancement, which brings me to, BenMedica. As Dave mentioned, BenMedica is an organization that we have known for a very long time and we have studied those markets for a long time. They are a market leader across Chile, Colombia and Peru in both healthcare benefits and medical delivery. And they have a really strong local management team with a proven track record in delivering very consistent high margin growth across both lines of their business and across all three of those countries.
So, similar to Brazil, we see an opportunity to create value by combining that strong local team and that strong platform with our enterprise capabilities, again across clinical, technology and data and analytics. Transaction is currently in an open tender process and we would expect to close that yet this quarter. So pivoting then to our view of Latin America more broadly, we see really attractive healthcare dynamics and characterized by a growing demand for affordable private healthcare. And our acquisition of the U. S, but perhaps more growth opportunity in these emerging private healthcare markets, as well as a broader longer term opportunity to serve the systems more holistically, by also serving public markets.
So we think we're really well positioned for value creation over the long horizon, and we are focused on bringing value to those markets.
So we took a little bit of time there because we hadn't had the chance to discuss this at our investor conference and of course, this came right on the heels of that as the DMG, which we've referred to earlier today. As it relates to the international markets, and in particular, I just want to stress again that our approaches to those markets will be measured, approach to deployment capital in those markets will be measured and deeply respectful of the volatility that's inherent in each one of those. And our expectations are that they provide returns that are reflective of those risks and risk profiles that exist in each of those markets. Not to belabor this, but there was one other acquisition that we had closed the advisory board that I might just ask Larry Renfro to make a few comments on as well. Thanks.
So A. J, I know this would be something important to you. The advisory board we closed, I think it was in the latter part of November. So we're in the process of kind of implementing the Optum playbook in terms of integration and alignment, but it's gone extremely well, well received in the marketplace and we really believe that this is going to enhance our sales pipeline as well as our sales for 2018. It's very, very complementary business and their management team is strong and it's so complementary to us.
We're looking for a lot of good things out of the advisory board.
Okay, great. Thanks.
Thank you, A. J. Next question, please.
Next question is from Chris Rigg with Deutsche Bank.
Hi, good morning. Actually, I just had a follow-up on the international global strategy. When we think about at least South America, do you think over time this becomes one sort of cross border enterprise under a unified brand name or is it sort of a portfolio approach where you'll continue to run both businesses separately for the long term? Thanks.
Just like North America, South America is an inherently local market. And so in this in that regard, at least for the time being, we have 2 very strong or 3 very strong brands now in Brazil, both Emile and Americas Medico Suricos and then in Chile, Colombia and Peru, predominantly Chile, the Medica is the holding company, but they also operate with a series of very recognizable local brand names, both in healthcare delivery as well as healthcare insurance. So I think you'll continue to see that posture. To the extent that we need to clarify that like we've been doing with some branding activity in Brazil this past year, we will do so. But for the most part, we're deeply respectful of the brand value that these folks have created over time.
Thank you, Chris. Next question please.
And the next question is from Josh Raskin with Nephron Research.
Hi, thanks. Excuse me, good morning. So wanted to talk a little bit about Med Sup and I'm curious, what percentage of your book today has first dollar coverage? And then maybe you could talk a little about sort of a migration strategy going to that one open enrollment period before the changes take effect for 2020. And I guess I'm just curious on the economics of that switch.
I assume the dollars are gross margin dollars are but I'd be curious if the returns are any better. And then I guess lastly, do you think this is a big impact on the I. E. Sort of a step function for MA in 2020 or do you think this is going to be more incremental? Thanks.
It's a great question, Josh. And as you might suspect, a lot of the growth we see in MA comes from our Medicare Supplement products overall. And but I'd ask Brian Thompson maybe to more specifically respond to your question.
Sure, Dave. Good morning, Josh. Thanks for the question. Maybe I'll start with the last point. I don't see this as a big transformative change.
We've seen this and been aware of this change for some years now. We have the vast majority of our business today in first dollar coverage, but have been very pleased with our introduction of what we call the Plan G in the middle of 2017, and we are certainly seeing that resonate in the marketplace. But actually in terms of the seniors' perspective, we like the continuation and really the collision of both the Medicare Advantage and the Medicare Supplement products in the marketplace really provides broad, good choice for those that are choosing. And again, as we're selling right now, very pleased with the margins on both plans. I don't think there's much to be differentiated in terms of economics of either, but certainly don't see this as a big move over the long term.
Thank you, Josh. Next question please.
And the next question is from Kevin Fischbeck with Bank of America Merrill Lynch.
Great. Thanks. I wanted to go back to tax reform and the long term sustainability of the benefit. I appreciate that things can change over the next year, so you have to kind of watch and wait. But I guess, I kind of thought that United actually almost literally wrote the book on pricing for membership.
And although I guess competitors might decide to put that back into benefits, you obviously don't have to follow suit. And so I would think that would
be largely up to you
as to how much of the benefit you decided to keep versus not keep. So maybe if you could give some perspective on that. And then if there's any thoughts initially about where you think competition wise there might be more pressure within the business? I would think that most of the Optum businesses actually will probably have less pressure than the health plan businesses, but I want to get your perspective on that.
Sure, Kevin. As it relates to the $400,000,000 to $500,000,000 just again to reiterate, most of that is a combination of 2 things. 1 is the minimum MLR amount that we would need to return to policyholders, if you will. And then the second relates to the lower tax rate on the health insurance tax. So that is what I would characterize as more of a I hate to say it, but more of a kind of a mechanical element, if you will, in returning those premium values to consumers.
As it relates to sustainability, again, I would urge you to think about the tax reform affecting our cash flows and earnings in a bifurcated way. 1 is, as it relates to the services business, which and as well as all the unregulated aspects of UnitedHealthcare, which are sub SNF, those components are the ones that we're retaining and investing, if you will. And then think about the other half or the other portion is being that which relates to the regulated entity of which you can see a substantial dollar amount is being returned to the market. On top of that, we invest in managing healthcare costs better as well as applying better services. And then on top of that, invest more fully in what I'll characterize as more substantive and or transformative change to improve the health system and improve our offerings broadly to the marketplace.
So in our view, we believe it to be sustainable because of the fact that we have such a substantive amount that's already been reverted back in premium values plus the other changes that we've outlined. So, our intention is at this stage from this distance, which is it's pretty early on that we've kind of made the right allocations, if you will, in determining how to best utilize this tax reform value.
Okay, great. That's helpful.
Thanks. Next question please.
And we'll take that question from Gary Taylor with JPMorgan. Please go ahead.
Hi, good morning. Just want to ask a little bit about OptumRx and it looked like the revenue growth accelerated year to year revenue growth accelerated sequentially and the OI accelerated pretty meaningfully the growth there sequentially and anything you wanted to call out for us there?
Gary, I'm not sure we got your question. It was fairly broken. So if you could rephrase it, please?
Sure.
Can you hear, I'm sorry, I was asking about OptumRx.
Okay, thank you. Much better.
Okay, sorry. And the question was, it looks like the revenue growth, year to year revenue growth accelerated sequentially a fair amount and then the OI growth accelerated pretty sequentially as well. Just wondered if you could give us a little more color on that performance.
Sure. I'd ask John Prince, please.
Sure, Gary. It's John Prince. In terms of the acceleration, I think the key driver of that is our strong increase in adjusted scripts. So if you look at our volume, which is driving our business, our adjusted scripts is up 5%. Our Our scripts are actually been accelerating all year long.
So, our script growth was the highest in Q4 versus any other quarter in the year. So, that is really driven by the success we've had in the market in terms of taking on new clients, winning new business and keeping our existing clients. And so that is the key driver from it. One other driver from it has also been the specialty pharmacy business. So we highlighted at Investor Day that we've been very successful in the specialty market.
That's a market where you both win with existing business and also compete in the open market. Our value story has been resonating. Our experience has been very solid, both for its members and physicians. And so we've been getting a lot of uptake in our specialty pharmacy business. That all has been driving our overall revenue growth.
So very solid from the business standpoint.
Thank you for your question, Gary. We're going to pick up the pace here a little bit to try to get into as many questions as possible. Next question please.
And we'll take that question from Ralph Giacobbe with Citi. Please go ahead.
Thanks. Good morning. There's a little bit of time has passed and you've had more time to think about the executive order and lack of individual mandate. Any update thoughts on how disruptive you think that will or won't be? Maybe have you had dialogue with small group book?
What's your sense for their appetite to maybe change their approach? And does that at all relate to your commentary on your call around sort of enrollment being pulling back, I guess, in 1Q and coming back due to small group, I think if you could flush that out as well? Thanks.
Thank you, Ralph. So I'll address the executive order and then I'll have Jeff Alter talk about the market dynamics here in just a moment. So the executive order had 3 components to it. The one I think that has the most momentum or at least initial momentum is around the association health plans, but we also have HRA and short term limited duration policy considerations as well. So what I think is happening across all of these is that the administration is pursuing an expansion of products that are available to consumers and within in an effort to lead to more participation and I think that that also lead to more insurance market stability broadly.
So we're supportive of that, of expanding the choice of the offerings that consumer has and consumers have. And I think each and every one of these regulations are really geared in that way. So we are supportive of these efforts to improve choice and frankly provide access to lower cost alternatives because as you well know healthcare costs too much and consumers are seeking more affordable options. We're still reviewing the association health plan rules at this time and we're not going to speculate on the potential outcomes of regulatory matters, but I would remind you that we have significant experience and do offer association health plans today, primarily in our individual business and or operate in markets like PEOs and others that have similar characteristics. What's important about these is they must be designed carefully in order to enhance coverage options and to ensure that they don't destabilize other aspects of the insurance market like the small group market.
So that's largely where our commentary will be aimed is making sure that there's no unintended consequences of these. And then with respect to enrollment in the Q1, Jeff, can you touch on that please?
Good morning, Ralph. Thanks for the question. It's Jeff Alter. As you saw, we had another strong quarter of growth at the end of 2017 and that makes a run of 13 consecutive quarters of strong fully insured group growth. When you look at 2018, our outlook that is unchanged from our investor conference has a market dynamic that has the introduction full introduction of the health insurer tax and that's resulting in much higher premiums and quite frankly much higher year over year increases for our clients.
So with that in mind, we look at our very large oneone enrollment our larger business. We continue to see small group growth and we believe that as the year paces, we will return to growth in that the remaining three quarters and continue our run of strong growth.
Thank you, Ralph. Next question please.
And we'll go next to Zach Zlopcak with Morgan Stanley. Please go ahead.
Hey, good morning. Thanks. Just wanted to ask quickly about your MedExpress Walgreens colocation pilot. I think you're at about 15 sites at your Investor Day. Curious how that's going and how you think about from your perspective what kind of metrics you have to see to think about a broader rollout for United and Optum?
Thanks.
Good question, Zach. Thank you. I know this has gotten a lot of attention here in particular over the course of the last week or so, with some activity at the JPMorgan conference. I want to keep this into context. We have about a dozen or so locations that we brought online throughout 2017 and that was really to see whether or not a retail site of service in this case with Walgreens would be an attractive venue for care delivery.
The results are not near final, but we're hoping that our MedExpress urgent care model with an adjunct pharmacy performs as good or better than without, meaning that we can provide more convenient service to consumers at a lower cost and with very, very high levels of quality as MedExpress has had as reflected in their NPS scores from consumers. I also want to put into context in that, this is just part of developing an overall higher performing local health system. So it would just be one component that may be nested inside a local care delivery market with ambulatory surgical capacities and house calls and things of that nature. This is the future health system that we see delivering considerable value to people. The other thing I just want to emphasize is that we will evaluate other venues and partners as well.
If this isn't exclusive to anyone in particular. Our interests are being able to align as productively as possible with others in these local communities to see if we can deliver additional value to people. Thank you for your questions, Zach. Next question, please.
We'll go next to Ana Gupte with Leerink Partners.
So on the provider side of the house, I wanted to see what your thoughts are on your organic strategy and M and A. And firstly, on the build out of the OptumCare into 35 and then into your target 75 markets, what type of competition are you facing with either other plans or private equity or other health systems? And how do you become the acquirer of choice? Obviously, you did get the DaVita asset.
Thank you, Ana. This is a great question. I think we're nicely positioned initially here, but we've got a long ways to go. But why don't we over read that for Andrew, Andrew Hayek? Yes.
Thanks, Dave. So
1st and foremost, we started the strategy to build out OptumCare and high value ambulatory care networks several years ago. And so we're several years into the strategy. The addition of DMG is another step forward in that process. We're excited about the opportunity to combine with DMG. And I would also remind you that we're in the midst of an approval process that's underway.
And this step forward for us allows us to combine DMG's outstanding clinicians, local leadership and national leadership. They've achieved very strong results in STARZ clinical outcomes and patient experience and our capabilities and our strategies are very complementary. We anticipate that many of DMG's capabilities will make OptumCare stronger. Reciprocally, we believe we can add a lot of value to DMG. And by doing this, we enhance the value we provide in the markets we serve.
More broadly, the markets that we are targeting and entering have been and remain competitive. We earn the right to partner with medical groups and IPAs, surgery centers, neighborhood care centers through value. We need to demonstrate our ability to enhance clinical outcomes, the patient experience and reduce the overall cost of care. And that is true across OptumCare in each component part. So we earn that right to partner.
And we think as we continue to grow and enhance our capabilities, we become a more and more attractive partner. And now that we have the ability to combine various ambulatory care assets with the medical group and the IPA, we can address a broader swath of healthcare needs in the marketplace and become an even more attractive partner over time.
So, Ana, very good question. One of our 5 key areas for growth in the future, this one very early stages. Again, it feels like we are assembling relatively quickly, but it's one thing to enter into markets, another thing to apply information technology and really enable these health systems to be strong performers and make a difference on the cost and quality consumers receive in those markets. So more to come over the coming years on this strategy as we continue to roll it out. Next question please.
We'll go
next to Frank Morgan with RBC Capital Markets. Please go ahead.
Good morning. For several quarters now you've called out the growth in the behavioral health services as one of your drivers of growth inside of OptumHealth. I was curious, could you give us any additional color on that growth area? What specific services inpatient, outpatient? And what particular markets?
Is it more of a government or Medicaid product? And then one is just a clarification. I think you said on surgical carefully, it's 7% growth and I wanted to confirm is that organic? And then also could you break out price versus volume? Thanks.
Frank, thank you. That is the same store growth rate as we described, but Andrew oversees all those businesses. Andrew Hayek? Sure. Frank, thanks for the question.
I'll start with SCA. So the 7% is our same site net patient revenue growth. So that's how we've measured organic growth at SCA for several years. And so that's the combination of volume and rate, Keeping in mind that a total joint replacement could take a couple of hours and reimburse $20,000 a pain injection could take 10 or 12 minutes and reimburse less than $1,000 So we use the same site revenue as the organic growth measure. And 7% is a very strong number.
That's the high end of the range that we have grown over the past several years, and as a reflection of the cumulative impact of the strategy we pursued, partnering with health plans, medical groups and health systems, being very disciplined in shaping our portfolio, the right M and A as well as some strategic dispositions to make
sure we're in the right markets, focusing
on high acuity procedures, ramping up total joints, cardiovascular, complex spine, etcetera. So we're very pleased with the 7% same site growth rate. And as Dave was mentioned in the script, we continue to grow our FDA portfolio. On behavioral health, we've had strong performance across the board, and that's including our medical expense, our ability to serve our consumers, including the growing needs in autism and substance abuse disorder. And so really, we feel very good about our product and our presence, and we continue to ramp up and add external customers and grow in virtually each of the segments that we serve.
So we feel very good about behavioral, the trajectory we're on and the prospects for 2018.
Thank you, Frank. Next question please.
And we'll go next to Sarah James with Piper Jaffray.
Thank you. Can you speak to the OptumCare ASC surgical trend environment? So how is the trajectory going this year versus in the past? Are you seeing consumerism impact total annual surgical demand? Or is it just back end loading and changing the location of service?
Then taking that one step further, do your systems allow you to see the impact of inpatient diversion for non UHC members? In the past, you've said that you could track this on an individual member basis on the insurance side. But I'm wondering for the non using OptumCare ASC, can you tell how much of that volume was diverted from inpatient or does the data and technology not currently exist for that?
Andrew again? Sure. So thanks for
the question. I'd say from a wide lens, stepping back, the ASC environment certainly fits into consumerism. And so over the past several years with rising membership and high deductible plans, consumers being more aware various alternative sites of care and having more financial responsibility for the cost of their care. We've studied this. We hear it anecdotally.
Patients are asking more questions. They're asking questions of their physician, and they are searching more. And when they do, the ASC environment, for clinically appropriate procedures is a very attractive site based on quality outcomes, based on the patient experience. We have a net promoter score of 91, same procedure in a hospital environment. So we do fit very well into consumerism and we have some data as well as many, many anecdotes that affirm that consumerism does drive increasing interest in our sites.
In terms of back ended nature, the years have always been seasonal. That's due to members and patients when they're at the end of the year and they have a deductible that's spent. They would rather get the procedure done by the Q4 before the plan year resets. So there's nothing new or different about that trend. And then in terms of inpatient diversion or share of the market that we're receiving, we work with multiple plan partners to measure this in various ways.
We have a number of pilots underway with multiple health plan partners to track this and do a better job of capturing the right clinically appropriate procedures. We're making progress. We feel very good about it. And we're still in the very early days. There's still a lot of opportunity.
If you think about higher acuity procedures like total joint replacements, complex spine, cardiovascular procedures. So we're very optimistic about what the future holds.
Thank you very much. Sarah, we have capacity for 2 more questions. So next question please.
We'll go next to Christine Arnold with Cowen.
Hi there. Optum Insight backlog 15,000,000,000 dollars kind of uptick nicely in the quarter. And could you talk about the specific areas where you're really seeing traction in OptumInsight and where that backlog is really building?
Eric Murphy?
Yes. Thank you, Christine. Eric Murphy with OptumInsight. To your point, we added $2,400,000,000 to our backlog during 2017. In Larry's opening comments, he shared that's a 19% year on year growth.
So we're pleased with that performance. We had a strong Q4 in terms of sales, which enabled us to achieve the $15,000,000,000 objective. For Q4 sales, the primary contributors to that backlog came through our state government business as well as our ambulatory rev cycle business. In terms of the path forward, we take a very robust pipeline into 2018, which should help us achieve our $17,000,000,000 to $18,000,000,000 guidance that we provided to you during the investor conference.
Great. Thank you. Next question please.
We'll go next to Peter Costa with Wells Fargo Securities.
Thank you very much for slipping me in at the end here. I appreciate it. My question gets to your guidance. Well, I appreciate very much that your guidance change only includes tax reform items and so that makes things easier for us. But the Q4 looks like it was running ahead of your guidance and the fact you even called out that the UHC was ahead of your own expectations in the Q4.
So why aren't there other changes to guidance going forward? Or does that imply that you're more comfortable at the top end of the range now? Or were there some negative things that we should be thinking about that came into play during the quarter?
Well, Peter, I think really what it's reflective of is we're maybe 45 days from the time that we had our investor conference and first laid out the depth of our initial guidance overall. We're quite pleased with the performance of the company and how it's advanced to the balance of 2017 and how it's established itself nicely for 2018 and beyond. At this distance, we didn't think it was appropriate or necessary to reflect any additional guidance changes based upon the core performance of the business. Let us get through a quarter or 2 here and we'll reevaluate what our expectations are for 2018.
What was the prior period development in the Q4, if you don't mind?
John? It was $200,000,000 Thank you.
17, UnitedHealth Group, Optum and UnitedHealthcare delivered quality products and services, practical innovation, a better consumer experience and increasing customer satisfaction. Financial performance was strong marked 1st and foremost by distinguished and diversified growth, meeting or exceeding our outlook by virtually every measure, including revenue, cash flows and earnings. We have carried this momentum into 2018 and expect to continue to improve quality and NPS scores and build greater trust and loyalty enabling continued growth for many years to come. Thank you for your interest today.
And this will conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.