Good morning. I will be your conference operator today. Welcome to the UnitedHealth Group Third Quarter 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 filed 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 in our Form 8 ks dated October 17, 2017, 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 Wittmann. Please go ahead, sir.
Thank you. Good morning and thank you for joining us. This quarter, we are pleased to report continued broad based growth and forward momentum for our diverse healthcare enterprise. In our sessions with you each quarter, it is both humbling and an honor, particularly from this chair, to represent the dedication, energy and work of the 260,000 women and men who comprise this company today. I have the privilege of witnessing their efforts up close as I work with our people across the globe and it is inspiring.
Each day our people leverage clinical insights, data and information, advanced technologies and a service minded culture to help people live healthier lives and to help make the health system work better for everyone. Having the opportunity to live this mission and witness its impact drives all of us. Over the past 2 decades, we have evolved as we have grown to serve more people and expanded our capabilities. But to us, it often feels like we are just getting started. We see more opportunities to serve and to grow further in the next 10 years than ever before.
We are focused on diversifying our business, applying analytics and advanced technology to improve the use of information and better engage people and to improve the effectiveness of our businesses and ultimately the broad health system. We are raising our quality through rigorous net promoter disciplines, leading to greater trust and loyalty. We are reducing healthcare costs to make healthcare more affordable, advancing market leading innovations and simplifying the healthcare experience for consumers and care providers. The pace of growth of our organization that it achieves will be determined by how well we work with, perform for and serve others. The more we effectively serve the healthcare market's true needs, the more we will realize our full potential, leading to predictable and consistent growth in revenues, earnings, cash flows and enterprise value.
To that end, this morning we reported strong performance in the Q3 of 2017. We grew revenues by 9% to $50,300,000,000 and grew adjusted earnings by 23% to $2.66 per share. And we reported $7,500,000,000 in cash flows from operations and annualized return on shareholders' equity of 22.5 percent and a debt to total capital ratio of 38.2 percent, down nearly 900 basis points over last year. We now expect full year 2017 adjusted earnings to approach $10 per share. We expect this strong business momentum and performance to continue into 2018, 2019 and beyond, driven by growth and service to our customers.
In that light, we will walk you through recent business trends in more detail, beginning with Larry Rempro, our UnitedHealth Group Vice Chairman and Chief Executive Officer of Optum.
Thank you, Dave. Optum's Q3 included continued growth, strong margin and earnings and further strategic advances. 3rd quarter revenues grew nearly $2,000,000,000 to approach $23,000,000,000 an 8.4% advance over last year. Optum's earnings from operations of $1,700,000,000 were again well balanced with each segment producing double digit percentage growth in operating earnings. The nearly 16% increase in Optum's earnings was driven by the combination of strong revenue growth, business expansion and strengthened operating margins for both OptumHealth and OptumRx and a steady 20% operating margin at OptumInsight.
Overall, Optum's operating margin of 7.4% increased 70 basis points sequentially and 50 basis points from last year's Q3. OptumHealth grew revenues over 21% year over year. As it expanded to serve approximately 9,000,000 more consumers over the past year. OptumHealth has among the broadest reaches in healthcare, directly serving 90,000,000 consumers. Per capita revenue growth was again strong in the 3rd quarter, rising more than 9% versus last year as earnings from operations increased 27%.
OptumHealth is supporting the U. S. Departments of Defense and Veteran Affairs by providing healthcare services and expertise. Earlier this year, the Defense Health Agency awarded Optum a 5 year agreement to support military health systems global Advice Service. Beginning in March 2018, our registered nursing staff will provide triage services, self care advice, care coordination and general health advice to active members of military and their families, 20 fourseven via secure phone, video conference or web chat.
In August, the Advisory Board and OptumInsight agreed to merge in a transaction we expect to close by the end of 2017. The Advisory Board has long been a distinctive leading provider of research, consulting and technology, serving about 4,000 hospitals and health systems across the nation. We believe their outstanding team of independent healthcare experts can extend their work into payer services, life sciences and other healthcare arenas leveraging Optum's data and analytics capabilities and the breadth of Optum's product offerings for our combined client base. We look forward to their team led by their Chief Executive, Robert Musselwhite joining Optum Insight. We were pleased this quarter to receive a multi year award to serve the Triple S Cross Blue Shield Puerto Rico Health Plan, managing its administrative and operational infrastructure.
We expect our technology and capabilities in core operations, transaction processing and connectivity will help Triple S achieve its quality, satisfaction and cost ambitions. Optum Insights revenue backlog has grown more than $1,000,000,000 so far this year, reaching nearly $14,000,000,000 at 3rd quarter's end, and earnings from operations grew 11.6 over last year's Q3. At OptumRx, we fulfilled over $320,000,000 in adjusted scripts in the 3rd quarter, growth of 12,000,000 scripts over last year and consistent with our above market growth rate in 2017. Earnings from operations grew 11.3% over last year, while revenues grew 4.7%. As we deliver substantial value and supply chain economics to our customers.
OptumRx has positioned itself to compete as a market leader. We serve the generic brand and specialty pharmacy needs of consumers in retail, mail and home infused delivery models. We have high customer retention and we have been awarded meaningful new pharmacy carrier service contracts, including the State of New Jersey beginning this January, as well as a leading state Medicaid program beginning mid-twenty 18 and ramping up through the course of the year. These complement growth from our health plan partners and from medium sized and large employers in the commercial carve out pharmacy market. We have strong momentum in specialty pharmacy, but we expect full year 2017 revenues to increase 20% over last year and growth momentum to continue into 2018.
Our synchronized data driven approach to specialty pharmacy integrates pharmacy and medical engagement. We then drive customer satisfaction by delivering strong service and personalizing the patient's experience across the breadth of information channels they choose to use. Through these and other ways, Optum brings insights to help make health systems perform better. We recently formalized the way we present our distinctive data and analytics capabilities under the Optum IQ brand. The Optum IQ name sharpens our narrative by capturing the rich data and deep distinctive analytic capabilities embedded in the products and services we deliver to customers.
Overall at Optum, we remain relentless in pursuing organic growth, strong execution, raising NPS, innovating and seeding and growing relationships. Now let me turn it over to Steve Nelson, the CEO of UnitedHealthcare. Steve?
Thank you, Larry. Like the Optum team, UnitedHealthcare is pleased to report strong performance across the business this quarter. At UnitedHealthcare, we continue to focus on a few critical priorities. The first is quality, which includes both clinical quality and the experience consumers and care providers have with us. We are gratified to see our NPS scores advancing with consumers and clients across our product lines and with providers.
Next is our relentless focus on managing costs, as customers expect us to be good stewards of their financial resources. One example, 2017 is tracking to be the 9th consecutive year UnitedHealthcare's customers will experience fewer inpatient hospital admissions for 1,000 people. 3rd is our partnership with Optum. We're further leveraging capabilities to improve performance and innovate for our customers and care providers. Nowhere does our clinical engagement perform better than where it combines with the clinical delivery capabilities of OptumCare's local market ambulatory care practices.
Consumers regularly give OptumCare practices NPS scores in the 70 to 90 range and for 2018, 100% of OptumCare Medicare Advantage patients will be in plans rated 4 stars or higher. Together, we are able to better serve the clinical needs of UnitedHealthcare patients with a higher quality, lower cost and improved consumer experience. In turn, we strengthen Optum's practices through market leading growth, innovation and clinical insights, all aimed at better serving people 1 at a time every day. The 4th priority is what we refer to internally as distinction. It is how we describe the truly compelling experience we are creating for people across a variety of dimensions.
This includes creating distinctive relationships with care delivery system partners and driving simplicity for consumers. On Rally, our consumer digital platform, we added additional private health insurance plan selection capabilities this past quarter to help pick the best benefit plan for their needs, taking into account their age, family status, health background and economics. Doing these things well leads to the final priority I will discuss today, growth. Where our innovative commercial benefits have grown with remarkable and we have considerable long term opportunities for substantial growth in the public and senior sectors. Nationally, there are about 85,000,000 people representing $1,000,000,000,000 in annual spending who do not benefit from managed care offerings.
The majority of these people are served by unmanaged, higher cost, fee for service programs operated by federal and state authorities. These people will benefit from the insights and the progressive tools that effectively support coordinated patient treatment across all access points in the healthcare system. Seniors and Medicaid beneficiaries served through our more progressive care models see higher quality care, lower costs and improved value. We expect to grow for years to come as the market continues its steady shift from costly, outdated programs to innovative approaches like those offered by UnitedHealthcare. In Medicare, our revenues of $16,300,000,000 grew more than 17% over last year.
Over the past year, we added nearly 1,000,000 people, 100,000 of them in just the last 3 months, split evenly between market and our unique value proposition, which offers stable products, a simple and personal experience and a distinctive culture. In 2018, our quality star scores advance again. Approximately 85% of the seniors we serve will be enrolled in plans rated 4 stars or higher. The initial stars data for 2019 payment year once again show strong organic improvement because our underlying plans are performing consistently at higher levels. We expect our final star ratings in 2019 payment year to approximate or exceed the high performing levels of 2018, supporting benefit value and better health outcomes for the seniors we serve and growth for our business in this important market.
In community and state, 3rd quarter revenues grew 12.8% over last year. 3rd quarter membership levels remained stable, representing a year over year advance of nearly 600,000 people with a continuing favorable mix shift toward more complex health conditions and higher acuity programs, which is our strength. During the quarter, we went live with programs in Virginia. And in October, the 1st Californians joined UnitedHealthcare under new medical contracts in 2 counties. In addition, we are excited by our active pipeline of renewal and new business opportunities as states expand and diversify the populations they serve through managed Medicaid.
Turning to UnitedHealthcare Employer and Individual. Our commercial group full risk offerings sustained momentum in a consistently competitive environment, growing to serve 40,000 more people this quarter, more than 500,000 in the past 12 months and $1,100,000 over the past 3 years. These results reflect improved experiences for consumers and predictable cost trend management for employers, driven by a combination of innovative benefit designs and locally tailored networks, all of which lead to rising retention and strong new business generation. We recently decided to enter the Northern Plains health insurance markets, including Minnesota, beginning in the second half of twenty eighteen. Our team in Minnesota is looking forward to serving our neighbors more fully in coming years.
Taken as a whole, UnitedHealthcare grew revenues this quarter by 3 $600,000,000 to $40,700,000,000 nearly 10% growth and earnings from operations of $2,400,000,000 in the quarter grew over 13% year over year. Now I'll turn the call over to John Rex for a financial review.
Thank you, Steve. Across UnitedHealth Group in the Q3, we delivered strong, well balanced performance with most principal businesses again posting revenue growth rates of 10% or higher. Consolidated revenues of 50 point $3,000,000,000 for the quarter grew 8.7 percent over last year despite the ACA effects at UnitedHealthcare. Our consolidated earnings from operations exceeded $4,000,000,000 and our net earnings to shareholders of nearly 2,500,000,000 dollars rose 26% year over year. 3rd quarter adjusted EPS rose nearly 23% to $2.66 per share.
Medical costs have been well managed within our established outlook range while trending modestly lower. The 3rd quarter medical care ratio of 81.4 percent brought the year to date ratio to 82%, which suggests we will be closer to the lower side of our full year 2017 outlook of 82.5 percent plus or minus 50 basis points. The operating cost ratio tipped up 10 basis points sequentially to 14.7% in the 3rd quarter due to the typical seasonally higher levels of operating expense as we prepare for onboarding new growth in January. Overall operating costs remain within the range of our expectations even as we see meaningful opportunities to improve our performance in this area. Cash flows from operations were $7,500,000,000 in the 3rd quarter or 2.9 times net income, bringing the year to date adjusted figure to 1.6 times net income.
3rd quarter cash flow was driven by strong underlying business performance, working capital management, the absence of an annual insurance tax payment in the quarter and the annual receipt of payments from CMS that adjust rates to reflect members' medical conditions. Our strong performance enabled us to reduce our debt to total capital ratio to 38.2% at September 30. Since we acquired Catamaran 2 years ago, we have reduced this ratio by 11 percentage points, even as we continue to expand our business portfolio and enhance shareholder value. Over that time, we created a unique, diverse and fully capable pharmacy care service business, continue to build on our OptumCare platform through the acquisition of urgent care, ambulatory surgical and local market physician practices and distributed nearly $5,000,000,000 in dividends while repurchasing $2,500,000,000 in stock. We have increased our outlook for 2017 adjusted net earnings and now expect to approach $10 per share.
This would be a full year growth
of 24% and strongly ahead of the original range of $9.30 to $9.60 per share as we communicated at last year's investor conference. Dave? Thank you, John. Before I give a first look at 2018, let me touch briefly on the federal executive order from last week. We have a great deal of experience in the area covered in the order, short term policies, association plans and expanded use of HRAs.
We will be engaging with policymakers as the regulatory frameworks in these areas are developed over the next 60 to 120 days and hope to elaborate once the process has concluded. With regard to cost sharing reductions, you will recall that we have a very limited exchange presence, about 30,000 people in 4 states who are CSR eligible. And we submitted plans for 2018 both with and without the CSR payments. Thus, we expect any impact to be extremely small. Now to 2018.
As you look at next year, it is important to keep several tailwinds and headwinds front of mind, themes we have been consistent about over the last several quarters, continued growth, momentum and performance, particularly with customer retention as our NPS disciplines improve increasingly effective capacities to manage and contain both medical and operating costs The improving performance and capabilities of our modern operating technology and data analytics infrastructure and ongoing efforts to be strategic investors and thoughtful stewards of the capital you have entrusted to us. With regard to the headwinds, these remain largely around externalities, centering on government programs, funding trends and taxes. On the latter, the return of the health insurance tax is the most meaningful. We and others have advocated strongly for the repeal or continued deferral of this tax. It ultimately increases cost to consumers through either increased premiums or benefit reductions and thus affects Medicare beneficiaries, individual policyholders, large and small businesses and Medicaid recipients.
Absent the insurance tax reinstatement, we see our $2,008 per share earnings squarely in our long standing 13% to 16% long term growth range. In 2018, the insurance tax would represent for us roughly $0.75 per share of comparative year over year earnings headwind. That figure is composed of the rate increase in the tax itself, the effect of our market share gains in commercial and Medicare Advantage since 2016 and the accounting convention that creates a timing gap as it applies to commercial businesses. So as we look toward 2018, we see our per share adjusted earnings within a typically sized range, with the top side of that range in line with the current market consensus for 2018. And we see an enterprise with strong momentum and a commitment to performing to its highest potential in 2018 and beyond.
Before opening up for questions, there are a couple of things we would hope you take away from today's report. 1st, our businesses are performing well at all levels and particularly for those we serve. We expect to continue to do so in 2018. That performance continues to produce distinctive growth. 2nd, we have focused initiatives in numerous areas such as innovation, digital health, artificial intelligence, data analytics, individual health record custodianship, MPS and advancing a consumer culture.
The breadth of these initiatives reflects a restless and ambitious team, one determined to make a difference in healthcare, serving 1 person at a time. Finally, we are a healthcare company rooted in our core competencies and delivered in benefits and services. Together, UnitedHealthcare and Optum offer distinctive competencies in clinical insight, technology and data and information. As we bring these key capabilities and distinctive value to clients, we are privileged to serve more people and we expect to continue strong growth for a long time. Our goal remains realizing the remarkable growth, service and social potential of this enterprise.
We look forward to discussing all of this more with you in more detail at our Investor Conference in November. Thank you for your interest today. We will now open the floor to your questions. One question per person, please.
We'll take our first question from Peter Costa with Wells Fargo. Please go ahead.
Good morning. I'd like to ask you about 2019 Medicare Advantage plans. We've seen good growth in your earnings for Medicare over the last few years. Looks like going into 2019, there's a lot more plans pricing a little more competitively as well as growing geographically. You had great growth in 2018.
Can you talk a little more specifically about what you're thinking having seen everybody else's plans now for growth in 2019?
Thank you, Peter, and I appreciate you acknowledging our past growth. I think our team has done a very nice job in building this business and really setting the stage for our continued success in that area. Obviously, we're not commenting on
question is about 20 18 benefits, right? Yes. Probably. Peter, you said 2019.
2018, sorry
about that. Making sure. Okay.
A lot of work to do between now and 2019 benefit planning, but we're about 2 days into the selling season for Medicare Advantage and yet tremendous growth. We've been really focused at UnitedHealthcare across all the businesses to really advance the idea that I mentioned earlier in my comments around distinction and with very key focus on some fundamental areas, substantial growth, advances in quality, leveraging our Optum capabilities, managing our costs, both administrative and clinical. And no work has that, I think, shine through more brightly than our Medicare Advantage. So I think it's great to have Brian Thompson, our CEO of Medicare shed some light on 2017 and
kind of outlook for 2018 as you kind of see things shaping up? Sure. Thanks, Steve. Peter, good morning. As far as 2017 goes, our performance continues to be very strong.
What we're seeing aligns to our expectations. And that really sets the foundation for a robust, optimistic outlook, both to the industry at large as well as our performance inside 2018. I think what we're seeing as we look at the marketplace for 2018 is very stable benefits broadly, very few exits, very few closures, really great for the senior. I think that will enable continued
advances in both popularity as well as the penetration for Medicare
Advantage at popularity as well as the penetration for Medicare Advantage at large. Competitively, no big changes, generally speaking, with respect to the competitive in line with our expectations. Our offerings, in particular, remain very strong, very stable, well positioned for continued growth inside 2018, and we do expect to outpace the industry in growth in 2018.
I was hoping you'd give a little color on the group business versus the retail business as well as how you're getting past the health insurance fee?
Brian? Sure. Peter, with respect to group, obviously, 2017 was one of our strongest years ever, both in terms of retention and strong growth. I think it can be considered a bit of an anomaly, but certainly don't want to diminish what is setting up to be a very strong year inside 2018 as well. Great growth again in terms of new customers as well as strong retention.
Thank you, Peter. Next question please.
And we'll take our next question from Justin Lake with Wolfe Research. Please go ahead.
Thanks. Good morning. First, Dave, congrats on the new role. Secondly, just appreciate the
commentary on 2018,
very helpful. I 2017 when the HIF went away, you talked about it. I think 2017 when the HIF went away, you talked about it, I think at your Investor Day slot, it's been a $0.25 tailwind. This year, you're talking about it coming back as being a $0.75 headwind. I'm just curious if there was a change in the way you passed it through in 2017 versus as it came back in 2018?
And if you did, for instance, take lower net income target margins in any of your businesses, can you kind of flush that out for us a little bit and a little color as to the background there? Thanks.
Thanks for the question, Justin. And I appreciate your acknowledgment of the new role and our guidance on 2018. I'll ask John Rex to respond to your question.
Good morning, Justin. Maybe let me give a little more color on that. So first, when we talk about the $0.75 that's the sizing of the year over year earnings growth headwind that's created from the tax coming back in. I'd say somewhat over 2 thirds of that is the explicit 2018 earnings reduction impact that we feel from that, while really the remainder of that, so that's somewhat under 1 third derives from really the tail impact that we saw from our 2017 earnings. If you think about kind of the composition of that and how that breaks down, on the 2018 end year, I'd say more than half of that derives from Medicare Advantage and the non deductibility of the fee and the rest from commercial risk products.
And then as you mentioned, really the other part of that $75,000,000 is just the other side of the tail of the 2017 tailwind. So that's really the way it breaks down and overview as we think about the 'eighteen impact.
So hopefully that's helpful, Justin. We'll break this down greater at our upcoming investor conference, but we did recognize you would like to get some visibility on its components.
Thank you.
Next question please.
We'll take the next question from Dave Windley with Jefferies. Please go ahead.
Hi, good morning.
Thanks for taking my question. I wanted to flip over to Optum. On Optum Insight, backlog grew nicely. I think previously, the target there had been in the $15,000,000,000 to $16,000,000,000 range to end the year. You'll need a pretty strong Q4 to get there.
Wondered if that's still the view. And then OptumInsight has also been running at very attractive margins above the long term target. Is that sustainable? Or maybe asked a different way, are we looking for a kind of higher target range? Are you revising the range up?
Or is there some reason why that might moderate back down into the 16% to 20% range? Thanks. Thanks, Dave. Larry Rempeau?
Dave, it's Larry. A couple of comments and then I'm going to ask Tim Wicks to talk a little bit about this from a financial standpoint and how he sees it in the CFO role and I'll ask Eric Murphy to talk about it as the business lead on Optimum Insight. But as I know you know, the Q3 finished slightly ahead. And I would say going into the 4th quarter, this is historical for us in terms of what we expect OptumInsight to actually how they will perform in the Q4 and they're right in line with our expectations. I think Tim will probably talk a little bit about that we had a pretty large account that came in at the end of the Q3 last year that may have a little bit of impact on the number the way that you're looking at it.
But overall, I would say that the momentum is very strong and we feel confident in our expectations. But Tim?
Great. Thanks, Larry. Dave, thanks for the question. It's Tim Wicks. Good to talk to you.
The question around backlog, I think it's really important to know that as we hit $13,900,000,000 this year, it was a really great strong quarter of sequential growth of $500,000,000 It was led by revenue cycle management, BPO and government businesses. And also just noting that number has grown $1,300,000,000 year to date. I'd also want to note that it's important to understand that late in Q3 of 2016, we had a very large end to end sale that's now in implementation. So a portion of that's rolled off. But since that time, as I mentioned earlier, we've also added $1,300,000,000 of new sales into that number and the backlog number is now up 11% year over year.
And I will turn it to Eric to talk about the pipeline.
Yes. Thanks, Tim. Good morning, Dave. Eric Murphy with Optum Insights. In terms of the specific question you asked about our backlog and our expectations regarding Q4 and for the year, first, I'll start with Q3 was absolutely in line with our expectations relative to our contribution to backlog.
We come into Q4 with a very strong pipeline of active pursuits. So we're very bullish on our ability to be able to achieve our objective, as you stated, of $15,000,000,000 to $16,000,000,000 of total backlog for 2017. We anticipate the contributions of that backlog in Q4 being concentrated around our ambulatory and acute revenue cycle management where our pipeline is up 60 percent year on year. So we anticipate a strong finish to Q4 into 2017.
So Dave, it's Larry. I'm going to kick us back to Tim because I don't believe he answered the margin question.
Thank you.
Great. Dave, first, just to note, you had mentioned the margin of 20.7% for Q3. I think it's important to note, it's up 40 basis points from Q3 of 2016. So year over year a 40 basis point margin expansion and the same amount September year to date. Sequential margin expansion over just the last quarter has been 200 basis points.
But as you think about that margin expansion, just consistent with prior years, we anticipate seeing continued sequential margin expansion in Q4. And that's really driven by seasonality in the business, whether it's perpetual sales or additional performance and incentive fee payments that we expect to see at the end of the year as well as Optum 360 content sales and other technology and data and software sales. So we expect this seasonality and we see it each year as we roll through the year and would expect the kind of Q4 seasonality that we have had previously, but not a real expectation to change our overall outlook to anything higher than what it is right now.
Okay. Thank
you. Thank you. Next question please.
The next question comes from Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.
Great, thanks. Just wanted to hear your comments around trend so far this year, how it's coming in, what's been leading you to think that it's coming in towards the lower end of what you're looking for and if there is any impact of the hurricanes in Q3 and potentially in Q4?
Thank you, Kevin. As in our prepared remarks, we said that our trend is expected to be less than 6%. So within the lower end of the 6% plus or minus 50 basis point range that we had provided at the Investor Conference last year. Overall, it's looking strong. Our team does a very nice job of containing healthcare costs.
But let me ask Jeff Putnam, our Chief Financial Officer of UnitedHealthcare to add some details and then maybe I'll make a few comments on the hurricanes.
Thanks, Dave. Good morning, Kevin. I'd start, our medical cost trend reflects our efforts every day that we do to manage costs and improve clinical quality on the behalf of our customers. And we're driving this in several ways, through traditional focus on medical cost management initiatives, getting at the right level of care at the right place of service. We're also increasing the effectiveness of our clinical model with additional focus on those with the greatest need and getting them connected to the right care.
And we are increasing the alignment of our provider partnerships, leveraging data and aligning incentives. As Dave mentioned, we're talking about our looking at our 2017 trend to be below 6%, but that's still within the lower half of our original range from a year ago. And you asked for a little color on where we're seeing it. Overall unit cost continues to be the primary driver. And when we look at it by category, it's really broad based.
We're seeing trends shift slightly downward across all categories and then there isn't anything specific that I'd call out around that.
And then Kevin, as for the hurricanes, obviously, it's been an unprecedented time period. It's been a really powerful and inspiring time to see how our employees have pulled together to help people that we serve and frankly their fellow employees as well in the communities broadly. I just wanted to take this opportunity to thank the countless women and men of our organization that gave so selflessly during this timeframe and continue to do so today. We invested heavily in the aftermath of these storms. We provided financial relief for our employees.
We helped our customers get back on their feet. We worked with state leadership and we provided all kinds of financial assistance and in kind services for the relief efforts in Texas, Florida and Puerto Rico. So there is typically some level of utilization offset, but I want to remind you that in the case of Optum, there is also lost revenue from reduced utilization. These are significant markets for our OptumCare businesses. And then we had, of course, a fair amount of direct damage to our business as well as the financial effects of all these relief efforts.
So in the end, we didn't really pay a whole lot of attention to the financial impacts, if you will, but because that wasn't what was most important at the time, but in the end, it ended up being not material to our overall performance.
I guess regarding the Q4 potential implications, I mean, to your point, there's a lot of disruption going on and I think a lot of people are expecting high deductible plans, etcetera, to cause Q4 volumes just to be seasonally stronger every year. Do you feel like you've got good visibility into that trend in Q4 that there's any disruption as far as claims processing or anything like that that might create an issue for you one way or the other?
We believe we have good visibility to our business and we don't see disruption as affecting our Q4 results.
Okay. Thanks.
Thank you, Kevin. Next question please.
We'll go next to Matt Borsch with BMO Capital Markets. Please go ahead.
Yes. Thank you. Could you just talk to I'm not necessarily looking for more numbers here on the question from Justin earlier regarding the health
Matt, it's very difficult to hear you.
You're breaking up. Are you on a I'm sorry. How about that? Is that better?
Much. Thank you very much.
Thank you. So my question was picking up on the health insurer fee resumption. I'm not necessarily looking for more numbers, but just sort of qualitatively, you talked about more than sorry, more than half from MA and the 2 thirds of the $0.75 So the rest of it presumably on the commercial side. Is that getting to the fact that in the small group market or where is it that commercial is not entirely a pass through at least with respect perhaps to the tax gross up? And has there been any change in the pricing environment that you're reflecting in the way that you're handling the health insurer fee relative to what you've done in the last few years?
I'll ask John to respond.
Yes. Matt, on the commercial side of that, that has to do just with the accounting convention on the commercial business in terms of the periods that one collects the tax and recognizes that and the period that one expenses it. So for any piece of business that's other than the January 1 renewal date, there's going to be some gap in the timing that occurs. So we had called out that one of the tailwinds in 2017 was a result of that.
Right.
And likewise, that flips into a headwind for us in 2018 because we get the full expense recognition in 2018. So that smooths out over a few years, but it creates this thing or this 2 year variability.
Got it. Thank you. If I could just sneak in one other question here. Is there anything to read into the or maybe you can just talk to any circumstances around the loss of that the 500,000 public sector account? And does it reflect anything in the competitive environment for a self funded business?
No. I'll ask Jeff Alder to touch on it. It was a single account. There's nothing particularly unique about it other than we happen to lose this one and unfortunately But Jeff?
Good morning, Matt. As Dave said, I think you have to think of this account as a very unique circumstances, extremely large account. We were honored to serve them well through a number of renewals. We stayed very disciplined in our pricing on both admin and the projection of that client's healthcare costs during this renewal. And unfortunately, we weren't chosen to continue to work with that client.
I would say we are we remain focused in serving that client and their members really well during this run out period and we hope to be in position to compete again the next time that client puts their business out to bid.
All right. Thank you.
Thank you, Matt. Next question please.
The next question comes from Michael Baker with Raymond James. Please go ahead.
Yes, thanks. Just want to get some your perspective on the potential opportunity for more active management of state Medicaid formularies in light of the Massachusetts waiver that was filed?
I hope to ask John Prince to comment.
Good morning. This is John Prince, CEO of OptumRx. Michael, in terms of the question around state Medicaid formularies, I'm probably not going to get a detailed specific Medicaid plan overall. We're very pleased to be very involved with states. It's a very large business for us.
We actually support states from fee for service Medicaid plan in terms of their design and plan. We also support a variety of managed care Medicaid plans and their design. I think most states are looking at different strategies to create more affordability for their customers. We've been very successful in that market working with states around designs that get at affordability for their underlying plant beneficiaries as well as trying to become more consumer oriented. I'm not going to get into specifics on a given state, but overall it's a very solid market where people are very focused on value and experience.
Good question, Michael. Thank you. Next question, please.
The next question comes from Gary Taylor with JPMorgan. Please go ahead.
Actually, at this point, my important questions have been answered. So I'll
just let you proceed. Thanks.
Thank you, Gary. Next question, please.
And we can go next to Chris Rigg with Deutsche Bank. Please go ahead.
Good morning. I was just hoping to get
a little more color on the increase in the favorable reserve development year to year. And then if you could give us any color on the relative performance in the business lines, commercial Medicare and Medicaid, that would be great. Thanks.
Great. Well, I think our developments indicative of the cost containment efforts across our enterprise and we've I'll ask Jeff Putnam to comment on its components.
Yes, thanks for the question, Chris. Yes, as Dave mentioned, we're working to control medical costs and improve quality. And our development this quarter reflects that as well as a modest change in claims processing timelines. And both these, they take some time to mature and get their way into our claims data and reserving, as we maintain a very consistent and tightly controlled process. And with this, when you look at when we step up and look at this, we're pleased with the overall accuracy and consistency of our reserving over time, especially when you look at 100 and $17,000,000,000 in medical spend last year and approaching $130,000,000,000 this year.
You asked by business, as you know, we don't break that out specifically, but I would offer that both our commercial and government businesses recorded favorable development this quarter.
And then maybe Steve Nelson can touch on overall performance.
Sure. Hi, Chris. So as I mentioned in my earlier comments, really excited about the performance across all of our businesses, really well positioned and we see a lot of opportunity. So maybe I'll just ask Dan Schumacher to comment broadly on, I think particularly of note is the strong
Chris, to Chris, to your question around performance, in each of our businesses, we're performing from an earnings perspective in line with or better than our expectations and probably within that I'd highlight to Steve Nelson's point, our commercial business is standing out a little bit. And that really is built on very strong growth foundation. So we're doing well on the fully insured side. We've grown that over the last 3 years, as we mentioned in the prepared remarks, by 1,100,000 lives. And inside the year, we're doing better than what we had expected when we got together a year ago at the Investor Conference.
So really strong growth and underpinning that is some real intentional efforts that we've made over the last several years to broaden our product portfolio, so that we could pair that with highest performing physicians and be able to create price points in our offering that can appeal to a broader spectrum all the way from our largest clients down to our smallest clients. And then I think also worth mentioning is some of the advances we've made in not only our clinical model and medical management, but our innovations around the consumer, both our advocates on the phone as well as in our digital experiences. And a lot of that's in partnership with very strong partnership with Optum. So those are just some of the things that are contributing to the strong commercial performance.
Thanks, Dan. I'll just comment on the Medicaid market overall. It continues to be a very strong marketplace, very active. We're honored with recent new market wins in Virginia as well as in Missouri. We've had important renewals recently with Louisiana and Colorado, Arizona LTSS.
So again, really strong performance across the board, I think, in recognition of the value that we're bringing to our state partners. Because we look forward, we've got a very strong pipeline, over 20 RFPs in house. That pipeline is shaping up pretty heavily with a turn towards populations with very complex needs, which really plays to the strength of Optum and UnitedHealthcare. We've carved out a very distinctive capability in serving those populations. So, again, it's a strong marketplace.
I think states continue to look to manage Medicaid to deliver value and predictability and cost, as well as importantly increasing the quality to the individuals that we serve. So we're very, very bullish about the future of that marketplace.
So hopefully you're getting a good sense of the consistency of the performance of the business across the board that we were referring to in our prepared remarks. I might add to that that our international business, our global business has performed nicely year over year as well, nice progression and particular coming from our colleagues down at Emile.
Thanks a lot.
Yes, thanks. Next question please.
And we'll go next to Sarah James with Piper Jaffray. Please go ahead.
Thank you. The theme of consumerism and high deductible plans has been having an increasing impact on the industry and cost trends. And I think United has done most work here understanding the dynamics between
Sarah, we're struggling to hear your question as well.
Sure. So the theme of consumerism and high deductible plans has been having an increasing impact on the industry and cost trends. And I think United's done the most work in understanding the dynamics of consumer behavior, deductibles and HSA balances. So can you talk big picture, where do you see high deductible plans going as a percent of the commercial market? What's the growth profile there?
And can you give us an idea of the cost trend differential or initial headwind to cost trends experienced when a consumer moves to high deductible plans from a traditional commercial plan?
So these plan designs have been heavily sought after and have been a key contributor to our growth in part because of the, our ability to offer an account like an HSA alongside them or an HRA as well. So it's been a considerable growth category for us and it's expected to continue to rise, but evolve and become more modern with greater focus on tailoring products and networks to individual consumer needs, whether they be individual policies or in the case of group based policies, the individuals inside those groups. But maybe I'll have Jeff Alter provide some additional color on or Dan Schumacher.
Sure. Thanks, Dave. Good morning, Sarah. Just for context, as you look at our portfolio across our self funded and fully insured clients, just a shade under 30% of our enrollment base is in consumer direct offerings, a little less so in our fully insured offerings and a little more so inside of our self funded offerings. And so we've seen some very nice take up in that over time as employers increasingly look to that as a vehicle to help continue to offer high value benefits at a more reasonable price.
In terms of sizing the delta as people step into initially into consumer directed and then what it does over time, I think obviously that varies considerably based on where people set those attachment points and deductibles. But needless to say that there is a very, very meaningful 1st year benefit depending on how you structure it and we have seen improved performance on a trend basis relatively speaking over time in our high deductible offerings.
Thank you for your question, Sarah. Next question please.
And we'll go next to Cheryl Skolnick with Mizuho. Please go ahead.
Thank you very much. So, forgive me, but I'm going to make an observation here. It is both comforting and remarkable in a positive way to note the consistency not only of the very strong results across the enterprise, but also the presentation and commentary and guidance and a brilliant debut, David. And I don't say that for any reason other than it must not be easy to come in front of all of us asking nasty questions on your first earnings call, and this is certainly a good way to start. But that consistency is important in the way I look at this company, both in terms of the growth and in terms of the deleveraging and the capital deployment, which is where my question is going here.
So you've now returned to stellar ROE performance 22 plus percent. You've got your debt to total capital under at 38%, presumably with the kind of growth you're talking about this year and next year, there's more room. And you have, from what I see, a multitude of opportunities. David, as the keeper of the keys has been involved in so many of the acquisitions that the company has made and you're now sitting on top of the organization, What's the next strategic direction in terms of capital deployment? I know the basic formula, but where are the interesting things that United needs to go and do whether it's internally or externally to take the company beyond where it is today?
Thank you for your kind remarks, Cheryl. I appreciate that. As you might suspect, this transition was architected by Steve Hemsley and our Board and they have done a fantastic job. And I guess that should be no surprise to anyone. And thank you for your acknowledgment of the performance of business.
It does continue to advance quite nicely. All that said, we are not yet performing at our full potential and there's a lot of opportunity for this organization to continue to improve, to better serve people, to grow organically as well as deploy capital in ways that it has in the past with maybe a slight tilt in direction overall. As you know, we haven't invested in a significant health plan in nearly 8 years. We have we do do some small plug in acquisitions here and there, and largely for the purpose to enter into a new market and or to gain some kind of competency Healthcare front has been to drive an healthcare front has been to drive an organic growth agenda and then to push more globally. And when I talk about globally, I mean selectively globally.
We entered into Brazil. We felt that that was a good market. It is turning out to as it continues to evolve to in fact be a good market and we look forward to the day when the political climate and regulatory and economic climates of Brazil shape up. We think that that will be a nice growth category for the middle class and as a result will lead to nice growth in our business. You probably saw that we extended that into some initial activities in Chile, Colombia and Peru through the preannounced acquisition that's underway with Bemedica.
That is the combination of those 2 give us the type of South American presence that we believe we can leverage to serve the people of South America in a broader way, recognizing fully that not all markets are investable. So global will be part of it, but I would say measured global investments. The more significant investments that we'll make going forward, particularly on the growth front, will be through Optum as we have in the past. As John articulated in the prepared remarks, we have formed a pharmacy care services business, which frankly allowed us to have a foundation from which to reinvent that business, if you will, meaning bringing greater technological capacities, bringing our synchronization story and capacities there, as well as also addressing some of the transparency issues that exist in that market overall. We believe we can add considerable innovative value to evolving that.
2nd to that would be really where a lot of our investments are today is really in the healthcare delivery space, particularly in the ambulatory context across certain major markets in the United States. You've seen us move out on those. Obviously, they're smaller acquisitions. They may not show up as much, but the OptumCare business is one of which we have grown nicely through local care practices, establishing a foundation in urgent care, continuing to leverage our nurse at home capacities that came from the Xcel Health acquisition dating back to 2,007, I believe, and or 12, excuse me, and then also the recent addition of our surgical capacities. So, Andrew Hayek and his team are continuing to build that business on an organic de novo as well as through the deployment of capital.
So it's and then I think you'll see us also move heavily in this area around technology and taking advantage of the vast assets that this company has in information and data, leveraging that more distinctly like you've seen us with Rally, which is a pre revenue company 3 years ago now, it's a distinctive consumer digital health capacity in the industry. We will continue to do the same on the healthcare delivery front, as well as find ways to create greater value out of the data assets to better serve healthcare communities broadly. So I'd say those are the directions that we're headed with so biased towards investing in Optum. But I would like to just underscore that our capital deployment philosophies will be consistent with what you've seen in the past. It's important for us to drive strong returns and liquidity for our shareholders.
You'll continue to see our dividend move to a market rate and we'll be balanced about how we manage our debt positions as well. Perfect.
Thank you so much.
Thank you
for your question. Next question, please.
We'll go next to Ana Gupte with Leerink Partners. Please go ahead.
Yes. Thanks for squeezing me in. I wanted to ask you about OptumRx and the clinical synchronization model that you have tied to medical membership up sale and margins relative to what you're seeing now with the standalone providers like Express having pressure, retail front store sales down and your thoughts about potential 3 and your response to maybe Amazon coming in, which is being speculated? Okay.
There's a lot there, Anna. I'll ask John Prince to respond and maybe I'll give you a few comments on Amazon at the end.
Sure. Thank you, Anna. It's John Prince, CEO of OptumRx. I'll cover a couple of parts. So I think the first part was around sync, and the second one is just sort of the broader market.
And then lastly is the entrance to Amazon and others. So in terms of sync, our strategy hasn't changed. Our focus is around how you solve 2 fundamental issues in healthcare. 1 is drive the best net cost in pharmacy costs for our customers. The second one is how we improve the total cost of healthcare.
And I think that is where we're differentiated in the market where
with our capabilities of Optum,
we're able to actually solve that total cost of healthcare. We had a earlier version of that in the market the last 2 years. We've done that with UnitedHealthcare, with other health plans, direct player market. It's actually created great value in the market. We're now pivoting that to a broader solution.
So we have a new version of sync, which we're out in the market selling. It actually not only leverages the touch points of the phone call and how you actually solve broader issues in healthcare, We're actually very focused on what happens with the prescribing physician, what happens in the doctor's office and how we can influence that. We're focused on our digital assets, which is where a lot of transactions happen in healthcare. And we're very focused on what happens in retail setting and have a lot of partnerships in that retail setting. So we're taking the same to the next level.
In terms of the second question, which is on market pressures,
if I
use sort of at a broader level, I think the market is very active. I think it is very interested in new solutions. We've actually had a really good selling season. We actually have had a lot of good wins in the market, and I think that shows that people are very interested in new story around what drives value as well as what drives experience. And so I'd say, timeframe in the market is very robust, very interested in value and that's actually played to our hands.
So we're going to end the season with a potential in the high 90s as well as a very strong selling season. So I think we're in a very good position in terms of looking at the broader market. The last piece is let me cover Amazon and other entrants in the market. And I'll frame that discussion from a broader context. So as you look at what we're focused on from an OptumRx standpoint, we're focused on creating the next generation of pharmacy care model.
And as part of that, as I mentioned before, we're focused on total cost of healthcare leverage and whole person SameView. And that model is also very focused on achieving a member's health and wellness goals on behalf of our clients. So it's a very different model that really leverages clinical expertise and that's at the heart of what differentiates us in the market. As it relates to partners in the market, we're channel agnostic. So our perspective is that we will meet a consumer where and how they want to be served.
So as we look at various retail partners, we're open to new distribution partners. We're willing to partner with anybody that drives value, decrease costs and also improves the consumer experience. So we're open to any partner out there that actually addressed that. Our history has been very effective. So today, we have deep relationships with Cevia, with Walgreens and with other partners in the market and we're open to continue to build back the partnerships.
I think you addressed any commentary I might say. I was really just going to talk broadly about partnerships. The business has done a nice job of partnering with the marketplace broadly in the past and in no time will that become more important than the future as well. So we will continue to engage with innovative and thought leading organizations and seek to serve consumers better managing their healthcare needs and helping make health systems work better for everyone. Next question please.
The next question comes from Ralph Giacobbe with Citigroup. Please go ahead.
Thanks. I wanted to go back to MA. Can you help us think about typical margin profile in year 1 of MA versus ramping improvement you've historically seen kind of into year 2? Maybe when do you get that to sort of full mature margins? And then help us think about any difference between that ramp for individual versus group?
Thanks.
Brian? Hi, Ralph. Yes, this is
Brian Thompson. I won't get into the specifics. Obviously, as we approach 2018, the return of the tax is the biggest headwind. The good news for us is our own internal advancements are really meaningfully helping us reduce that tax impact to those that we serve. 1st and foremost is our quality advance.
Secondarily is the productivity and scale that we get from that growth. And then to your point, perhaps the biggest tailwind for us is that strong clinical engagement that we get in year 1 that we see come to fruition in year 2. So it's certainly the biggest momentum driver for us as we prepare for the return of the tax in 2018. Great.
And what about group versus individual?
Very comparable.
Okay.
Thank you. Thank you, Ralph. Next question, please.
And we'll go next to Zach Sopcak with Morgan Stanley. Please go ahead.
Thanks for the question. So Dave, in your opening comments, you touched briefly on the types of plans covered in the executive order. I was just wondering if you could give a little bit of color on the experience you had with those. Were they meaningful? And maybe it's hard to say at this point, but how margins may have historically been in those businesses versus those we're typically accustomed to?
Yes. Thank you, Zach. Good question. I'm going to ask, we do have considerable experience with short term plans. I'm going to ask Dan Schumacher to comment.
Sure. Thanks, Zach. Good morning. So I'll probably address the association as well as the short duration plan. So on the association front, the reality is we've got decades long experience in that.
Actually, our individual business was founded on an association and we likewise support associations in our group business. All told, we've got about 300,000 numbers in association plans today. So we've got a lot of experience. The performance is strong and I would say generally in keeping with our broader portfolio. And so we will look forward to engaging in the dialogue around how that gets shaped going forward.
On the short duration policies, obviously the regulation that came in on April 1 that reduced the amount of length of the plans has been challenging for the marketplace. And so we're excited to see that extended to the full year because the reality is it provides a bridge for people in between coverage. It's a lot more affordable option. It provides very strong access and value to consumers. And the reality is before that regulation, we saw incredible increase in the growth as the cost of exchange offerings have grown and it's been a bridge for people.
So we look to continue to support people as hopefully the duration of those plans gets extended.
Thank you for your questions. Zach, we have time for one more
question. We'll take that question from Christine Arnold with Cowen. Please go ahead. Your line is open.
Good morning. Thanks I think the one thing we really haven't delved in as much detail as some of the other things is OptumHealth. And recognizing that SCA is a tailwind to your 10% to percent top line target as well as your 8% to 10% margin target, how should we think about that business performing over the next couple of years in the context of that top line and margin assumption putting SCA aside? I know you're still investing a lot in that business. So was that 8% to 10% margin something we should be thinking about near term or should we think about that as a longer term target?
Thanks.
Maybe I'll ask Tim to comment on the margin and then maybe Andrew can provide some comments about where we're headed with the business as it flows.
Sure. Great. Thanks, Christine. So as we think about the year to date, reported margin grew basis points year over year and 160 basis points sequentially, driven by SCA. In addition, there was margin expansion from our care delivery businesses, house calls and financial services as well.
And overall, OptumHealth earnings grew 27%, while we made strategic investments in the platform much as you represented. I think, as you look at those investments, it's really important to think about that we make those investments in businesses that we have an intent to grow and those investments are designed to further improve that ability to grow. And that's really evidenced even in this most recent reporting period around the revenue growth at OptumHealth of 21% year over year for the Q3. Why don't I turn it over to Andrew to talk specifically about the areas of investment and market areas where we're making those investments across the platform.
Thanks, Tim. And thanks for the question, Christine. So we were pleased to
be at the higher end of our range of 8% to 10% margins in the 3rd quarter. And as Tim mentioned, we continue to balance current profitability with making investments in future growth. And some examples of those are investing to help transition physician groups from fee for service to value based contracts, which does require an investment period. 2nd is investing to ramp up new contracts. And as Larry mentioned in his prepared remarks in our military and veterans segment as an example for contracts commencing in 2018.
And thirdly is opening new MedExpress locations. And as you would imagine, that requires an investment as each location ramps up to profitability. So given this, we expect our margin to continue to fluctuate over time and be in that range of 8% to 10%. We'll continue to balance current profitability with investing. And we were pleased with the 27% growth year over year in the quarter.
There was strong performance across most of our businesses, local care delivery, house calls, behavioral, financial services, consumer engagement. And so we're bullish on the business and we'll continue to balance investing with current profitability.
Great. And Larry? Yes.
So Christine, it's Larry Renfro. I just want to make a couple of comments that one is kind of a commercial here. On the military side, we have a new senior executive leader here by the name of General Patty Horoho. She's joined us about 5 months ago and she's leading the effort in the Optum Health side of the military programs. And I might ask just ask her in a second to comment on a couple of the programs that are coming through on the military side.
The other piece that I would add into this is that we have Optum 360 that is part of our Optum Insight organization that utilizes Optum Health as well in a lot of its programs, especially when we do those programs with major organizations that we have worked with on the West Coast and the East Coast. So that's tying in as well when you get to the physician groups and the surgery centers and so forth. So to keep this short, so Patty, would you mind just talking a little
about what you're working on and give everybody a
little prolong here?
Thank you, Larry, and good morning. I had the honor to join Optum about 6 months ago after 30 3 years of experience culminating as the 43rd U. S. Army Surgeon General. And what we've been able to do is really leverage and find ways to transform our healthcare system from one that treats disease to one that promotes to health.
And so 2 of our newest 5 year contracts kicked in the September of this year. We began performing the medical disability exams for military veterans on behalf of the Veterans Benefit Administration. And through this contract, we provide exams in 44 states in the District of Columbia. The 2nd 5 year contract is the TRICARE Global Nurse Advice Line, where we'll operate the Military Health System's Global Nurse Advice Line starting in 2018. And this is a frontline nurse advised care coordination line offered 24 hours a day, utilizing telehealth capability to military service members, retirees and their families worldwide.
And what I would just say is that this is just the beginning of our ability to serve our military, their families and our veterans and we're just getting started. So thank you.
Great. So I think you could take from that that our bench is deep and continues to get deeper. Welcome General Horjo and thank you Christine for your comments. I'll wrap briefly with this. UnitedHealth Group, Optum and UnitedHealthcare are intently focused on fulfilling the healthcare needs of the people and customers we serve.
As we add distinct tangible value to healthcare, we continue to grow at a sustainable market leading pace. We expect to continue this trajectory through the remainder of 2017 into 2018 and for the decade ahead. We look forward to sharing more detail with you at our Investor Conference in New York on November 28. Thank you for joining us and for your continuing interest in our enterprise.