Morning. I'll be your conference operator today. Welcome to the UnitedHealth Group Second 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 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 in our Form 8 ks dated July 18, 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.
Stephen Hemsley.
Good morning and thank you for joining us today. As we reach the halfway point of 2017, UnitedHealth Group, Optum and UnitedHealthcare continue to grow and perform strongly. And we expect our performance momentum to carry forward through the balance of this year into 2018 beyond. UnitedHealthcare has been a distinctive organic growth leader over the last 7 years. During that same time, Optum has emerged as a leading force for broadly enabling the healthcare industry with market leading data analytics and practical and innovative approaches to long standing market challenges.
These businesses are strong, stable and exceptionally complementary to each other, growing and operating effectively while continuing to diversify naturally into adjacent healthcare markets. With the socially sensitive global healthcare markets constantly challenged and changing, we see UnitedHealth Group, Optum and UnitedHealthcare built for that environment, adaptable and creative, focused on the people and customers we serve, working with others and playing our role in leading and supporting progressive change across health systems. One important constant is our commitment to mission and the quality of our work, to the positive experience and value we drive on behalf of consumers and customers and the cultural bonds of integrity, compassion, relationships, innovation and accountable performance we seek to bring to everything we do. We are at home in the current environment. UnitedHealth Group is a different organization than we were just 10 years ago, and you should expect us to be different still a decade from now.
Society will continue to need and drive change in health care. We will continue to adapt and evolve with it and on behalf of it. We are committed to reaching the full potential UnitedHealth Group has to offer, knowing the next 10 years hold more opportunity than the last 10, those who are committed to keep evolving, perform consistently and deliver value. To guide our progress, we have a strong, deep and restless leadership team in place, which will continue to positively evolve and change as well. I'll turn to 3 of those leaders, Dave Wittmann, Larry Renfro and John Rex to take us through our Q2 earnings report.
Dave?
Thank you, Steve. We entered the second half of twenty seventeen in a strong position. UnitedHealth Group is serving more people, more consistently with greater levels of measurable satisfaction than ever. We are reaching, helping and staying connected to the people we are privileged to serve in more ways and through more channels, both digitally and physically in the communities where we work. We are caring for more people, closing more gaps in care and producing more savings and value for consumers and sponsors.
We are partnering more deeply and impactfully with care providers, in part because our nearly 25,000 OptumCare doctors are dedicated to serving patients affiliated with more than 80 payers across the nation, including UnitedHealthcare. That experience helps us to think more broadly than most about topics like the application of technology to enhance the consumer experience, the use of data, analytics and data exchange, effective management of healthcare resources and evidence based protocols and healthcare quality, consistency and payment models that better serve people and plan sponsors. Today, we serve 139,000,000 people globally, including 126,000,000 people in the United States. And we see UnitedHealth Group's U. S.
And global market potential as without practical limit at this early stage in the evolution of our company. 2nd quarter results followed themes from our Q1 performance. In the Q2, the company produced strong and balanced revenue growth pacing to exceed the $200,000,000,000 mark this year. Medical costs were in line with expectations. Operating costs continued to be well contained.
The company generated strong cash flows, up 29% year over year as adjusted net earnings grew 26% over last year's 2nd quarter to $2.46 per share. For the first half of twenty seventeen, adjusted net earnings grew 28% year over year to $4.83 per share. UnitedHealthcare continued to deliver exceptional results in the 2nd quarter. Excluding the individual market, UnitedHealthcare grew to serve 2,500,000 more people year over year, including 1,700,000 more in the first half of twenty seventeen. This continues our consistent multi year organic growth performance across all three major businesses.
This growth has been fueled by a long history of restless product and service innovation, responding to and even sometimes driving market evolution. This focus towards innovation has advanced the data, information and tools to support both individual efforts to achieve better health and system wide efforts to deliver better health care. Our business model increasingly centered on serving the unique health care needs of consumers. We are performing and serving new populations such as group Medicare Advantage, people with complex conditions served by Medicaid programs and in emerging markets like Brazil, as well as in long standing well established markets. Healthcare is essential to everyone, individually and to the quality and productivity of societies and we aim to serve it all in one way or another, one person at a time to the best of our abilities.
A dedicated compassionate workforce of 260,000 people serving in local communities built on UnitedHealth Group values and singularly aimed at helping people live healthier lives and helping make our health system work better for everyone. They are led by a deep and stable UnitedHealthcare leadership team that has worked together for more than a decade. And finally, our commitment to quality in everything we do in advancing Net Promoter Scores, both strengthening customer and consumer retention and care provider relationships across all of our businesses. In many ways, we are still just getting started, but you can see the momentum in our results. In the employer market, our local group commercial business continues to grow organically month in and month out, virtually every month for almost 3 years.
In the past 12 months, we have grown to serve nearly 600,000 more people through full risk products in the employer group market. We are growing by consistently serving the health needs of this population at more affordable levels and with greater consistency in the quality of their experiences and the cost of their coverages. Across Medicare Advantage and Supplement, UnitedHealthcare has grown to serve 935,000 more people in the past year, with balanced growth in the individual senior market and the corporate retiree market. Our Medicare Advantage business continues to benefit from strong consumer retention, reflecting seniors' positive experience and the clear economic value of our offerings. In 2018, our distinctive product value and consumer experience should allow us to continue to grow as we expect to increase our overall Medicare Advantage market share
in
We discussed dual special needs plans with you in our first quarter call. We discussed dual special needs plans with you in our Q1 call and our revenues serving people through these plans grew 33% year over year in the Q2. In total, our community and safe business served over 700,000 more people at June 30. Taken as a whole, the UnitedHealthcare businesses grew revenues this quarter by 3 point 9% to $40,800,000,000 despite foregoing over $1,800,000,000 in revenues from the ACA individual insurance market withdrawals and the health insurance tax moratorium. Earnings from operations exceeded $2,200,000,000 in the quarter, growing 13.9%, consistent with our top line growth rate in the quarter after considering the ACA items.
Let me now turn to Larry for his perspective on UnitedHealth Group's enterprise growth and an update on OpEx. Larry?
Thank you, Dave. Yesterday evening, UnitedHealth Group was honored to announce the early renewal and extension of our distinctive and long standing relationship serving seniors together with AARP. Our 2 organizations have a 20 year history of working together to serve seniors' greatest needs and to advance health and healthcare in practical ways. Each of us believes there is no better collaborator for the work we do on behalf of those we serve. We expect the value of this relationship to grow further in the years ahead as we continue to implement shared ideas and innovations to better serve Americans over age 50 as the growth of that population accelerates meaningfully.
The AARP relationship is a good example of our leaders working at the enterprise level to develop broader, deeper relationships, strengthen customer experience through MPS disciplines and drive strong sustained multiyear growth. Other examples abound, receiving new awards as well as contract renewals and expansions serving state Medicaid programs, corporate Medicare Advantage Awards, new and renewing pharmacy care services awards and the Department of Defense engaging us to provide nurse line and digital clinical support services to military health system beneficiaries. For the work, we are now doing for Merck and others in the life sciences domain to help understand the impact of their medicines in a value based contracting world. The breadth of that list should give you a sense of why this team shares a high level of optimism as we look ahead to the next decade. We serve deep end markets with significant unmet needs and we are working to better serve these customers by improving the economic value of our services, consistently raising quality and innovating in ways that solve problems.
These efforts are steadily driving Net Promoter Scores higher. Turning specifically to Optum. 2nd quarter revenues increased by $2,000,000,000 or 10% to $22,700,000,000 driven by strong organic growth even as OptumRx revenue growth rate was affected by its delivery of significant channel savings to customers and consumers. Optum's earnings from operations grew 20.5 percent to $1,500,000,000 as operating margins expanded 60 basis points over last year to 6.7%. All segments grew earnings by double digit percentage rates in the Q2.
At OptumHealth, we grew to serve 9,000,000 more people in the past 12 months with per capita revenues growing about 13%. This is an important metric as we look towards future deepening our relationships with the consumer. Growth continues to be led by our OptumCare business, which grew revenues by more than 40% through the combination of strong organic growth and strategic business expansion. At OptumCare, our goal is to create and operate the leading high value ambulatory care delivery system in the nation, offering high quality, cost effective care to a full spectrum of payers and patients. We do this by empowering clinicians with data, insights and workflow protocols that bring the best of Optum Analytics to bear in settings where strong analytics directly impact people's lives for the better.
By improving patient value and satisfaction at the best sites of service for care delivery, helping people access care that is convenient, high quality and affordable. And by serving physician employees and partners, giving them the tools and support they need to be great medical practitioners focused on the clinical needs of their patients and on growing their practices to serve more health plans and people. The Q2 was our 1st full quarter with surgical care affiliates included in OptumCare's results. SCA's performance is slightly ahead of our surgical outpatient facilities so far this year. We are working an accelerating pipeline of opportunities on aligning future development priorities with our overall OptumCare geographic market strategy and the needs of consumers and our health plan customers.
Like SCA, the MedExpress portion of OptumCare continues to grow steadily. MedExpress opened 20 new neighborhood care centers in the first half of twenty seventeen and is on pace to produce record growth, while experimenting with alternative formats and approaches that could deliver even greater convenience and value to consumers. In the local market primary care business, we were privileged this past quarter to expand with 2 exceptional market leading group practices in Indianapolis and Denver. We continue to align with the leading local medical groups who are committed to the idea that patients benefit significantly from deeper investment in proactive primary care services. Our doctors help patients achieve a healthier state and to do so with a favorable cost profile.
We are more than 5 years into the OptumCare build out, but we are still in the early stages. We remain focused on its steady development and see this business as a significant source of growth for the next 10 years and more. At OptumRx, the revenue growth rate of 5% was well in line with expectations for 2017. Revenue yield per script was flat as we effectively passed supply chain improvements on to our customers. We continue to experience strong customer retention as large sophisticated buyers who value transparency are attracted to our data driven clinically integrated approach.
These organizations are represented in a strong pipeline stemming from our Healthcare Transformation Alliance relationship discussed in our last earnings call and our recent award to provide pharmacy care services to the state of New Jersey beginning next year. OptumRx fulfilled $322,000,000 adjusted scripts in the 2nd quarter, an increase of 5% over last year. In 2018, we again expect to grow our adjusted script volume above the industry growth rate. OptumInsight continues a strong growth pace, particularly in the payer and care provider markets with recent awards or late stage RFPs in the areas of data analytics, payment integrity, business services, revenue management and clinical best practices. Optum Insights revenue backlog grew 18.6 percent or $2,100,000,000 in the past 12 months.
With $800,000,000 added in the first half of twenty seventeen, including $300,000,000 in the second quarter. Stepping back, Optum is positioned on the front edge of the major growth trends in the market, helping the health system perform better for everyone. We use advanced technology, market leading health analytics, modern care delivery, data driven population health approaches and distinctive pharmacy care services as a portfolio of capabilities that help our clients reduce costs and solve complex operational challenges on behalf of the people they serve. This unique position gives Optum a long runway for continued growth and we are further focusing our growth efforts to take advantage of the opportunities. Now let me turn it over to John Rex.
Thank you, Larry. The strength of our 2 business platforms drove strong, consistent, well balanced results in the quarter. 5 of the 7 reporting businesses had revenue growth rates above 10% as consolidated revenues grew 7.7 percent, surpassing $50,000,000,000 in a single quarter for the first time. Our consolidated earnings from operations exceeded $3,700,000,000 and our net earnings to shareholders grew 30% year over year to $2,300,000,000 in the quarter. 2nd quarter adjusted EPS rose 26% to $2.46 per share.
The 2nd quarter medical care ratio of 82.2 percent brought our year to date care ratio to 82.3%, putting us on track to be at or below the midpoint of our full year 2017 outlook of 82.5%, plus or minus 50 basis points. Medical costs have been well managed and continue within our established outlook, and market pricing across segments and products remains disciplined and rational. The operating cost ratio was 14.6% in the 2nd quarter and 14.5% through the 1st 6 months. For the full year, we expect to be at or slightly above the midpoint of our 2017 full year outlook of 14.5 percent plus or minus 30 basis points due to the mix impact of care provider expansion, which carry disproportionately higher operating costs and which added about 80 basis points year over year to our consolidated operating cost ratio in the quarter. These mix changes signal the continuing diversification of our revenues.
Touching on capital for a moment. Our Board increased our dividend payment rate by 20% to $3 per share annually at our June Board meeting. And we expect to achieve a debt to total capital ratio of approximately 40% by the end of this current quarter, 3 months sooner than our previous outlook. Cash flows from operations through the first half of twenty seventeen are solidly in line with our outlook, and we continue to expect approximately $12,000,000,000 for the full year, an increase of 22.5% over last year. This morning, we have increased our outlook for 2017 adjusted net earnings to a more narrow and higher range of $9.75 to $9.90 per share, prudently recognizing the strength in this quarter.
We remain comfortable with the existing Street consensus view of 3rd quarter adjusted net earnings per share. With full year 2017 adjusted EPS now expected to grow in the area of 22% at the midpoint, we feel this is an appropriate stance at this point of the year. Steve?
Thank you, John. We recognize at this point in the year, thoughts begin to shift to the year ahead. Consistent with our past practices, we are not going to discuss 2018 in any depth this morning. It's simply too soon and there is too much unknown at this point. What we can offer directionally suggests the fundamentals of our businesses remain strong and we feel positively about our ability to perform and grow in 2018.
Like any year, 2018 will have its share of headwinds and tailwinds. The tailwinds are largely organic and company specific. Among them, we would include continuing growth momentum and performance, particularly with customer retention as our focus on MPS improves increasingly effective capabilities to manage and contain medical costs the improving leverage of our operating infrastructure and our continuing efforts to optimize in capital management, investment income, tax costs and other areas. The headwinds are largely around externalities, national and state health care policies, funding trends and taxes, which we and you are all following closely. We respect the complexity of the social, political matters that are intertwined here.
And certainly at this stage in the national conversation, speculation about any outcome here would just be that. So we approach each year determined to overcome headwinds and grow to our best potential, given the diverse and complementary portfolio of businesses and capabilities we can deploy. For 2018 and beyond, themes for us will center around continued broad based and diverse organic growth across our portfolio. Steady, substantive advances in quality and NPS that will gain further momentum in 2018 and position us well for the future a fresh focus on costs to drive better product price points continued evolution of our products and services toward more consumer centric and market responsive designs, particularly in healthcare delivery and pharmacy care services deeper, larger relationships, market alliances and other channel partnerships advancements in the application of next generation technologies to drive better health outcomes, value and consumer experience at lower costs And with capital capacities at full strength and continued focus on thoughtful deployment of capital, including expansion repurchase. We will give you some initial direction on 2018 in our Q3 earnings call and the full review at our November 28 Investor Conference.
We remain positive and constructive with respect to our organization's potential to better serve the health and well-being of individuals and improve the health system overall. As we respond to these needs, we will realize the remarkable growth potential of this enterprise, and we thank you today for your interest. Our executive team is here in the room with us to answer your questions. And please, only one question per person. Thank
We'll take our first question from Justin Lake with Wolfe Research.
Wanted to ask about the OptumCare business. First, let me congratulate Andrew on the new role. And then given the optimism on future growth here that was discussed, I was hoping you could put some numbers around the opportunity. Maybe share with us the current revenue profile for 2017 that's expected here. And then where do you see the ultimate business opportunity in terms of the TAM as you continue to roll out your 75 target MSAs?
And then maybe share what you think is the sustainable growth rate for this segment of the business going forward? Thanks.
Well, Justin, you seem to have captured all the appropriate themes. Maybe we'll have Larry start and then Andrew pick that up.
Sure. Justin, that's a good question and it's an appropriate question. What I thought I might do since we're going to talk about growth and maybe give you kind of a general view of growth across Optum for a second and then we'll get to Andrew, but I'm going to ask some other people to talk about growth as well. I'm probably going to bring in Tim Wicks from a financial standpoint and John Prince from a PBM standpoint and Eric from Optum 360. But we'll lead off with Andrew in a second.
There's really, Justin, 3 areas of I'd call metrics that we pay attention to when we're looking at our growth across Optum. Number 1 is our sales pipeline and I think you hit that. And again, I'm talking about Optum in general. And our pipeline today is greater than $40,000,000,000 and it's a strong, strong pipeline and that's not including what I would call mega deals. This is excluding them, but we have a very robust pipeline of about $40,000,000,000 Our sales year to date is around $23,000,000,000 and that 20 $3,000,000,000 would compare to last year's sales in 2016 in total of about 30,000,000,000 dollars the year before at about $10,000,000,000 So you can see the growth that's taking place from our overall sales perspective.
The third area on the metrics would be how we look at our backlog and Eric Murphy will talk about that in a second, but it's up and I think I mentioned it in the script, 19% and year over year about $2,100,000,000 So as we have really kicked this year off and what we've done through the 1st 6 months has been very robust in all three of those areas. So let me switch over to Andrew and let Andrew talk specifically about what the question that you asked and then we're going to walk through some of the other growth areas as well. Andrew? Thanks, Larry. Good morning, Justin.
So as you know, we have
a belief that there's a significant opportunity to improve the quality, the experience and the cost of health care on a national basis, creating value for patients and the marketplace. And the experience over the past several years has been that physicians can achieve outstanding results when empowered with the right analytics, tools and support. And the market is asking for these kinds of models to improve the cost quality of care. So our approach is to tailor our market presence based on the local factors in each market that we serve. We're leveraging primary care, urgent care, surgery centers and house calls.
We're leveraging technology and tools from across Optum to create value for our patients and for our care providers. We're building this in a multi payer manner, serving all payers in the markets that we serve. And we believe to your question that the market potential is very significant. The depth of the issues we're solving, the value we can create for patients and for the marketplace is very significant. And we look forward to creating a business multiples of our current size.
Justin, it's Tim Wicks.
Let me jump in as well and talk about overall Optum revenue. So overall, total revenue and unaffiliated revenue growth were both in line with our OptumHealth and OptumInsight together had double digit unaffiliated revenue growth for the quarter as well. I'd point also then to OptumRx and just want to clarify that the work in the supply chain that we've been doing is translating into lower drug costs for consumers and customers. And that's really what translates then into lower external revenue for this quarter even though external scripts were up year over year. As you know, we never apologize for UHC's growth and UHC grew faster in the quarter, which is obviously a positive impact
to our revenue as well.
So as we look at the quarter, our revenue and product mix are on plan for the year, like total revenue and external revenue both in line with our expectations.
Justin, this is John Krenz, CEO of OptumRx. I just want to talk a little bit about OptumRx and how we're doing. We're halfway through the year. We're hitting our new business targets and remain very confident about hitting our full year target. Our retention is very strong.
We have renewal rates in the high 90s. As Larry mentioned in the script, we're very honored about the award from the State of New Jersey. That deal actually brings us more than 700,000 new members. We see a broad trend that large sophisticated buyers are very attracted to their pharmacy care services model. It's very differentiated in the market.
We've had some other notable wins. We have a health plan win and also we've renewed our health plan clients are out to this year. We have several new wins through the Healthcare Transformation Alliance, which we announced last quarter. I'd say overall, we're very optimistic about OptumRx's compelling value proposition. The market is resonating well, and we're seeing very good results.
Thanks, John. Justin, Eric Murphy with OptumInsight. To Larry's point around regarding Optum 360 as well as our backlog, Regarding Optum 360, we're in late stage assessments with 4 major delivery systems. Our qualified pipeline for Optum 360 is up 60% year over year. The sales cycles in this side of the market, as we've shared in the past, are elongated.
We're working diligently right now to improve the assessments that we do with our clients and prospects in this area to be able to get to value proposition discovery in a shorter period of time to generate results for these delivery systems. And then finally, I would share we're bullish on where we land for the year regarding backlog of between $15,000,000,000 $16,000,000,000 for 2017.
So that was more than you asked for, Justin, but a very fulsome answer. So next question, please.
We'll go next to David Windley with Jefferies. Please go ahead.
Hi, thanks for taking my question. I will switch over to OptumRx. Some recent comments that you made quantified the channel savings that you're making reference to this morning at savings, I think, on a PMPY basis of about $1300 also quantified $200 of medical, what I might call, knock on savings or what I believe to be your evidence of the value of synchronization. And I wondered if you could maybe elaborate on that and talk about where you think that $200 can
go? Sure. John, do you want
to respond to that?
Sure. David, this is John Prince. I'm not sure I saw all the math that you're doing, but let me take it at a high level. I think I'd see at the high level what's happening and if you just look at our external client market is that our number of clients we serve is up, our number of scripts is up, but actually the revenue is flat on a per script basis. And I think that is really what you see is that the value that we're doing of really looking at net best cost for our clients as we're delivering that.
And I think that's also why our story is resonating in the market in terms of the value that we bring to our clients. What we're also seeing is that even though we're delivering that value, our external product gross margin actually is up year over year. So actually we're getting the margin online business really driven by that more volume. So we're actually getting greater margin on it, but we're actually delivering that value back to the client. When we're going out into the market, we're actually talking about not just the pharmacy cost, but we're talking about total cost of care.
So what you've seen in the revenue here, that's our story to market around pharmacy cost. But our real value story as you go to the market is people looking at total cost of care. And so we actually have a story in the market which we're talking through that actually talks about how we save a client $11 to $16 per month as they talk about our whole synchronized solution. And that is what our clients are receiving. And our UHC book, about 30% of the clients have that synchronized value.
We also do that on a direct basis and also with other partners in terms of other health plans that we're serving the market. So clearly, we've seen a very differentiated value that our clients are seeing in their trend.
So if I could just clarify. So the point of the question was where can the $11 to $16 per member per month go?
Well, the $11 to $16 goes back in terms of their total cost of healthcare. So it actually went through our numbers. Actually the client would see that and the return that we give to them.
In regards to the benefit of the client, our benefit is the retention of customers and the growth that we get.
Thank you.
Next question, please.
Go next to Kevin Fischbeck with Bank of America Merrill Lynch.
Okay, great. Thanks. I wanted to ask a question on MA, actually maybe 2 part question. First, given all the growth that you have there, just want to make sure that the performance from a margin and cost expectation is coming in line with how you guys expected it this year? And I guess secondly, you mentioned that you expect to gain share again next year.
I wanted to get a little more color on the thought process behind that. Is that because of Croup MA win so far? Is there anything we don't have your competitors' bids yet for next year. So I just want to know what gave you confidence in saying you're going to gain share this early in the process?
Why don't we ask Steve Nelson kind of give you the broader themes and then Brian Thompson will fill in the rest.
Thanks, Steve. Hey, Kevin, it's Steve Nelson. Let me just talk a little bit about how we're thinking about growth in the position of UnitedHealthcare overall and because I think the themes are pretty consistent as we move to the specific Medicare Advantage conversation. But we've been very focused on a specific agenda, trying to drive value, improve our quality, very focused on cost, both medical and administrative, but really driving an agenda of what we call distinction, trying to innovate around our both our clinical experience and our service experience driving improved NPS. We see that actually across our businesses, but particularly in our MAPD business as well, driving more retention, which I think has significantly contributed to the growth and also the in line performance we've seen this year on that growth.
But also you just heard the Oppenheimer team talk about their robust capabilities. And as we bring those things into UnitedHealthcare, we continue to see that really resonating in the market across all of our businesses. And so we're really bringing this agenda of distinction to new populations, whether we're talking about bringing populations into more populations with complex care, complex conditions into managed Medicaid or some of the emerging populations that we continue to see grow, whether it's a DSNP or Group Medicare Advantage as you referenced. So really well positioned across all of these businesses, but MA is a tremendous story. So with that, maybe just have Brian give some color about what we're seeing there early in this year.
Steve, thank you. Kevin, good morning. This is Brian Thompson. For 2017, we are off to a very strong first half of the year on both service and support as well as our engagement with our new seniors that have chosen UnitedHealthcare. What we are seeing is aligning to our expectations.
We are not only pleased with what we're seeing in 2017 year to date, but also our positioning as we look forward to 2018. And we have a very positive long term outlook for the industry and for us specifically. We expect, as you heard, to continue to outperform the market in 2018 overall on MA balance both in group and individual just as we did this year and the 2 years prior. The return of the insurance fee will be the single largest headwind in 2018. Its return was assumed at our 2018 bid submissions, but despite the return of the tax and program funding pressures at large, we do intend to keep our benefit offerings as stable as possible and we intend to complement our 2018 growth and product stability with advances in both quality and satisfaction.
So our products will again be designed for high levels of retention. So on balance, we're very optimistic. We're optimistic about our positioning, both group and individual, against the backdrop of advancing very positive industry growth outlook for 2018.
Thank you. Next question.
Next question is from Chris Rigg with Deutsche Bank. Please go ahead.
Good morning. I just wanted to ask or get a little more color on the operating cost ratio and just to better understand the mix dynamic there. And I guess most importantly, I'm trying to determine whether is there an incremental investment spending in that in the number related to the provider side? Or is that all just mix at this point? Thanks.
John?
Yes. Thanks. John Rex here. When I talked about the 80 basis points of impact, that was truly just the mix impact of a higher proportion of really care delivery businesses in our revenue base and that's the impact that we're seeing in the business. So that is a straight up the care delivery business expanding and growing and that care delivery business is somewhere now in kind of 2 thirds of the range of all of OptumHealth.
There are always investments we're making across the businesses. And certainly within our OCR this quarter, there were plenty, but our commitment to you is always to balance those and as we deliver our results. But I just want to segment the 80 basis points does not include investments that we make.
Thanks. Next question, please.
We'll go next to Peter Costa with Wells Fargo.
You mentioned the impact of the health insurance fee coming back next year. If it does come back next year, that turns into quite a price increase for the commercial plans to have to pay more than most businesses are growing these days. So can you talk about what you're seeing employers do right now to counteract that rising cost in terms of what cost cutting measures are they putting in place and what cost cutting measures are you putting in place
to help ameliorate the rate increase?
Sure. So maybe Jeff Alter and Dan Schumacher can combine on that.
Sure. Thanks, Peter. It's Jeff Alter. A few years ago, we put forth a very purposeful initiative to expand our portfolio of fully insured products, which included broadening that portfolio to reach many different price points and then connecting those products with varying network structures. So we have a very robust product portfolio that allows our clients to adjust to increasing medical costs, whether that's driven by pharmacy or driven by medical costs or driven by legislative and regulatory actions.
So our clients have the ability to create buy down opportunities or to change in complementing their benefit strategies without having to change their carrier because of the proactive work we've done in our product portfolio, particularly in our fully insured product portfolio.
So I think a variety of products and offerings and really focus on a broad range of price points.
Is there anything in particular that's being picked up more than not? I
would say that there's far more interest in network or varying network constructs. One of the more popular choice has been the leveraging of our more than a decade old premium designation program where we use a lot of the Optum insight and analytics to determine the best providers, those that practice both 1st and foremost always quality, but then efficiency. And so we've created network and product structures that drive people to those top tier doctors using either co pay or coinsurance variations has become very popular because it helps our clients achieve the price points that are affordable for them, but also give them the comfort that people are getting better outcomes at a lower cost. And I think that's a real story of the integration of UnitedHealthcare and Optum to deliver meaningful value to a marketplace that 1st and foremost drives people to the best performing physicians, but overall achieves a price point for their sponsors.
Thank you. That's helpful. Thank you. Next question, please.
We'll go next to Scott Fidel with Credit Suisse. Please go ahead.
Thanks. Just had a question just on the tax rate. I know there's been a few discrete items this year. So, first, just if you have just an updated guidance for the tax rate this year and then, what you would view as
sort of a good sort
of run rate tax rate looking out that we should be modeling for next year, excluding obviously the return of the industry fate?
Yes. So we're going to not actually get into 2018 too much, but John, do you want to respond?
Thanks, Scott. John Rex here. I will speak to this year. So we're not updating our tax rate outlook for the year here. Let me just talk a little bit about within the quarter, so because we did speak about it last quarter also.
So there is nothing unusual that I would spike out in the 2Q effective tax rate beyond normal exercise activity. So typically with a share purchase with stock based compensation accounting, we're going to see more impact in the first half and the second half in terms of lowering that tax rate. So you would expect that to increase in the second half. In the Q1, we had really talked about half of the impact that we expected to be non recurring. And that was really due to just an unusually large amount of stock option exercises.
It was related in part to an older acquisition. And so that was a piece we spiked out there. But I wouldn't spike out anything as unusual in this quarter's rate and we'd be at the still in that 32.5% zone. We always strive to do a little bit better if we can. And that would be my aspiration, but that's where we'd be.
Okay. Thanks.
Next question, please.
We'll go next to A. J. Rice with UBS. Please go ahead.
Hello everybody. Just maybe ask about capital deployment. John, I think in your prepared remarks you're saying that you guys will hit your year end target by the end of Q3 for where you were hoping debt to cap would be. There's been a lot of discussion in the press about your potentially being involved in various M and A type of transactions supporting Optum, Reliant, Advisory Board, etcetera. I guess, conceptually, as you guys get to your debt cap target do you is the M and A environment just so robust that what you're seeing out there that your capital is going to continue to be mainly focused there?
Do you see an opportunity to maybe reestablish more actively the buyback program? Give us some flavor for where you guys are thinking on capital deployment. I
think maybe Dave Wickman might best in this response.
Sure, A. J. Thank you for the questions. Very thoughtful. So you're right that our ambitions are to achieve our 40% leverage ratio by the end of Q3 and we think we stand a really good shot at getting there, which would be 1 quarter early.
John has done a very nice job in managing our capital structure and getting us into that position along with our team. As you know, we don't discuss rumors and speculation about our M and A activity and we're certainly not going to start today. But I think as you know, A. J, that M and A has been a critical part of the way in which this organization has identified new opportunities to serve more people and more markets broadly. And those ambitions continue, as Steve lined out in his concluding remarks and in the opening remarks around those ambitions being both domestic as well as global and really focused in the services category, really continuing to support Optum's growth and diversification, establishing platforms like you saw with OptumCare, which we believe will be strong growth performers for us for the next decade.
And I could go on and list many more, but I think you get the idea. So it is a core part of
our emphasis.
As it relates to share repurchase, we continue with a consistent policy at this time whereby we are just trying to keep our share count level. And as I believe you saw in June, we increased our dividend again to a rate of $3 per share, which was a 20% increase, in continuing with our ambitions of advancing our dividend to a market rate level. Thank you.
Okay. Next question, please.
We'll go next to Josh Raskin with Barclays. Please go ahead.
Hi, thanks. Good morning. I want to ask about potential changes in tax rate. And I understand it's very premature. We don't even have necessarily a real proposal from the Republicans.
But in to the extent you guys have thought about it, I'm curious what the impact on your tax rate is from the nondeductibility of the excess compensation, how you would think about the interest deduction add back? And then as I look about your tax rate sort of before the ACA, your tax rate today is running 400 basis points or 500 basis points below where you were. So just trying to sort of level set the opportunity where there to be changes and maybe specifically on those two items that we know have the potential to change.
Josh, we are really not going to try to get into themes that could affect 2018 outlook. We'd really prefer to do that not in a piecemeal way, but in a more fulsome way when we can really talk about all the elements. The insurance tax is clearly if it's sustained a headwind influencing 2018 and its progressive nature really affects the cost for consumers in both across the commercial, Medicare and Medicaid markets, etcetera. And it's a factor in terms of market it's a destabilizing factor in the marketplace, both in its cost. So the return of the tax in 2018 would further destabilize the market, which is already fragile and make that market less affordable.
So we are we would clearly think that either repealing or deferring that would be a positive thing. But as it relates to our actual workings with our 2018 outlook or tax rate so forth, we're just going to save those so that we can actually go through them with you in a more thoughtful way, in a more complete way, maybe to some extent in the Q3, but for sure at our investor conference.
Do I get a mulligan then, Steve?
Yes, you do. All right.
Do you
want another one?
Yes. I'll pretend that didn't happen. So my next question would just be, we talked about OptumHealth and OptumCare specifically. We're seeing a lot of discussion amongst competitors around growth in urgent care and ASCs. How would you describe the competitive landscape?
Are you seeing more and more supply of like services in the market? And is that impacting OptumCare at all?
I think we are, but I think others are better qualified to respond to that. So maybe Larry to begin and then Andrew.
Okay. Josh, as you know, when we put our program together, when we started OptumCare, it was probably about 2012 when we wrote the 1 Optum business plan. And so I would say we got out early in terms of how we were going to approach the market and how we were going to look at it from an investing standpoint or we would partner, we would contract, buy, build. So we had a lot of different strategies in terms of how we were going to really attack and put together our OptumCare programs. So urgent care, care delivery, the surgery care, house calls, behavioral, we have all of those programs in place and they are actually functioning extremely well.
And I'm going to let Andrew talk about it. But the one thing I would say is we are early, but we have an established platform. We didn't miss any boat here. We are out and we understand the marketplace and we are in the process of evaluating many different organizations on how we see that they fit with us and we have a very robust opportunity that we are seeing in the marketplace. So with that, I'll turn it over to Andrew.
Thanks, Larry. Ed, good morning, Josh. So I'd say the local markets remain competitive in different ways and unique ways depending on
the market structure. But as we look across our OptumCare platform from physician groups to FCA, MedExpress, House Calls, the distinctive capabilities that we have really create a demand for what we have to offer in improving the quality, the cost, the experience of care and improving the provider experience. And so I'd say as the market forces continue to push towards higher quality at more cost effective price points, the demand for a distinctive platform that can enable physicians and care providers to achieve better results, leveraging tools and insights and other components of our platform, the need for what we have to offer is growing. And we remain very bullish and optimistic around the opportunity to expand across the 75 markets to deepen our presence in the markets we currently serve. As Larry referenced, we believe we're in the very early stages of this opportunity.
And again, in many respects, the increasing competition increases the demand for a distinctive platform, which we have.
So maybe we could then
pivot to Dan because that's really kind of the voice of demand in there.
Sure. So Josh, one thing I would just highlight is, obviously, when you look at our spend and the composition of it and how much of it orients to the acute setting, We've got so many surgical procedures and so forth that are happening in inpatient and outpatient hospital settings. And the reality is we've seen for a long time an opportunity really focus on the site of service, get them into places where we can drive better quality, frankly, a better patient experience at a lower cost, as Andrew has been talking about. And we do it in a couple of ways. Certainly, we do it in terms of our approach to medical management.
So looking at prior authorization and making sure that we're getting it into the right site of service on the front end before procedures are happening. We're also building it into the product designs as well so that we're putting incentives in there to make some of the transitions from acute to ambulatory to really drive the kind of outcomes that we're looking for. And more recently, with the acquisition of STA and our partnership there, we are really leaning into that and investing in quality incentives for surgeons so that we can drive greater volumes into these less intensive settings. And we're able to do, frankly, more acute procedures and more complicated procedures in that setting as well. So we see a lot of opportunity.
And we've got it in place in select markets today, and we will be looking to expand that meaningfully over the course of this year and into next. So those are some of the things that we're doing around both the plan design, the medical management as well as the incentives to put those three things together in alignment to drive those transitions from acute settings to ambulatory settings and drive better cost, value and experience. Larry?
So I'd just like to add one other aspect of the Optum business and that would be Optum 360. Sometimes we forget that on the primary care side, the urgent care and now what we're doing with surgery care, across the board, we have strategic relationships with a lot of the Optum 360 clients that are actually involved with us and using those programs. And so we get caught up in terms of talking about how we're looking at our different programs in OptumCare mainly from a health plan standpoint when the Optum 360 organizations are actively engaged with how we tie into them as well. So that's a whole other avenue of our business there.
Thank you. Next question please.
We'll go next to Ralph Giacobbe with Citigroup. Please go ahead.
Thanks. Good morning. There have been headlines around states potentially tying Medicaid contracts to exchange participation. So just wanted to get your thoughts on that. And then with reprocurements coming up, how concerned are you that states consider exchange participation even if not explicitly?
And how could that influence your views around reentering the exchange? Thanks.
Maybe we'll have Austin begin to comment with respect to their state based dynamic.
So I guess, 1st and foremost, these are really state by state discussions and not something that we're really going to comment broadly here and not going to speculate about that. I would say, with regard to your second question, we are constantly in conversations with our states on how to expand coverage for more people, particularly those with complex needs. A lot of the activity that we see both in renewal activity as well as new business certainly surrounds that, which as we talked about before, is a real area of distinction for the combination of Optum and UnitedHealthcare. So we're very positive. We look forward to continuing to serve our states and find solutions, particularly again around these populations with very complex needs.
So and so we'll continue to work with states and so forth, but we don't see anything that establishes what might be a trend with respect to tying these kinds of programs together. States have been I think very thoughtful about this to date. So I think that's the best response we can offer at the moment. Next question?
Our next question is from Sarah James with Piper Jaffray. Please go ahead.
Thank you. Given what we know now about Medicare market forces with the HIF and rates, Could the market see a continuation of the 2% MA penetration increase that we saw in 2017? And long term, given the inherent value proposition of Medicare Advantage, where do you think penetration is heading? Could we ever get to a market that is 50% MA?
Maybe I'll have Steve respond to that. But I think we've been pretty consistent in the past that we do expect that penetration to go forward and we do expect the M
and A market to mature and grow.
Yes. Good morning, Sarah. It's Steve Nelson. I agree with Steve's high level comments there. We have seen clearly in our experience, we've seen tremendous growth in our Medicare Advantage.
And while that clearly we think is driven by some of the things that we uniquely bring to the market, whether it's the stability or benefits, the product designs, the service and the clinical models. But also in addition to that, there's just a real strong overall value proposition with Medicare Advantage. And we're seeing that not only just with the folks that we serve, but as we talk to policymakers too, there's really strong support for it. So you see a population that needs it, it serves them well. It drives down costs.
The satisfaction is up. It's definitely growing. And so we think that's going to continue. And so we do think there's an opportunity to further advance the penetration of Medicare Advantage. Where it can go, hard to tell, but I don't think it's unreasonable to think about something north of considerably north of where we are above 40%.
Approaching 50% doesn't seem like unreasonable idea to us. No. I wouldn't think
that we would think that it could go 50% or better. Next question, please.
Thank you.
We'll go next to Matthew Borsch with BMO Capital Markets.
Yes. Thank you. And I'm going to ask a question that sort of asked us before. But just as you had started with your comment that you've added 600,000 group commercial risk lives year over year. I just wanted to understand, I mean, you're obviously doing better than almost all your competitors, most of whom are seeing attrition on the group commercial risk side.
And I guess a question on what you described your pricing, I think John did as disciplined and rational, which I'm not disputing. My question is, is this really just that you are producing a better medical cost outcome and so you can price lower than the market? Because it's a lot of this business, correct me if I'm wrong, it moves on price. Sorry for
the long question.
No, I think that we started to get into this a little bit before when Jeff Alter was commenting. It's I think a function of many things of which cost structure is clearly part of it, but it's spectrum of products, the design, etcetera. So Jeff, you want to respond?
Sure. Yes, Matt. I guess I would tie my response to kind of discussion with Peter. So I would say the market moves on value. It doesn't necessarily move on price.
And we have been very purposeful across our products, our services. The focus on NPS has I think brought a much stronger value proposition to particularly the fully insured small group market. Long term disciplined pricing is a good thing. And I think you're seeing the discipline that we had in the early stages of the ACA now coming back to us as a value play. Couple that with a very purposeful decision a number of years ago to broaden our product portfolio and to offer a much broader spectrum of network opportunities for choice for particularly our fully insured small group clients.
We also have undertaken a different view with our distribution community, our brokers and consultants, a more disciplined approach with them, narrowing some of that distribution network to more favored partners and giving them some added services. So one of the things that we've learned over the years that our brokers and our consultants in that marketplace seek to do business with those that make it easier for them to do business with. We've created again with the assistance of Rally and our Optum partners, a much easier way for our small business brokers to onboard clients with us, to make plan changes, to recommend using some of the Optum Insight analytics, next logical moves for buy down. So you really have to look at the value we bring as opposed to the price of our product. I think it nets the answer to why our particularly our small group fully insured business has done well over the last few years.
Thank you.
Thank you. Next question, please.
We're next to Ana Gupte with Leerink Partners. Please go ahead.
Yes, thanks. Good morning. On Optum, you saw some really nice margin expansion in Optum Health and OptumRx despite the mix shifting pressures you talked about on providers. I was just wondering if this is an area of focus for the organization or this is one off and where could the margin shake out by business line and overall?
Larry, maybe you want to respond to that? Clearly an area
of focus, right? It is an area of focus. And on a we're obviously, you're looking at both from a financial perspective as well as from a margin perspective and all that is in line with our expectations. So I'm going to ask Tim to Tim Wicks to comment on this.
Sure. Thanks, Anik. First, as we think about the margin growth that we're seeing, we had a or we're pleased with a start, a very strong start to the year 2017. The earnings are in line with our expectation June year to date and comprised about 40% of the full year expectations. And so right in line with both our prior several years of experience in the first half of the year as well as our 2017 guidance.
I think it's also important to understand that there's seasonality in our businesses and maybe I'll just point to 2 examples where there's seasonality. One is in Optum Insights, as you know, the second half of the year is typically pretty strong in terms of the relative distribution of earnings growth in the year. And it's really driven by several of the businesses in Optum Insight Quality and the Risk Businesses, the Optum 360 content sales as well as technology, data and software sales. The second example I would use is in OptumHealth as well is when we look at OptumHealth, SPA volume is characteristically also stronger in the second half of the year. And then typically, we expect Q4 overall for Optum to be stronger than the Q3 as well as we go through
the year.
Thank you. We'll do 2 more questions and then we'll have to close it. So we'll do 2 more questions first. Next question.
And we'll go to Cheryl Skolick with Mizuho. Please go ahead.
Thank you very much for keeping me in. So I'll just observe that if this is early stage growth for a $200,000,000,000 revenue run rate company to produce what you're producing, I'd like to see what late stage looks like. So thank you for that. But the real question I have here is that I've learned over time to pay close attention to what is said on this call. And one of the things that you mentioned, Steve, early on in your remarks was that words to the effect of it is now time to turn our attention to cost.
In the past, when you've turned the organization's attention to something, it's resulted in significant advances for the business enterprise as a whole. And I'm wondering if this is one of those things that we should be paying attention to. And if so, if you can quantify it in any way or but more broadly across the enterprise would be helpful. Thank you. Thank you.
But more broadly across the enterprise would be helpful. Thank you.
I'm not sure I can offer you too much specifics, but that was intentional. I think that in general, if you take a look at our organization, we have grown well over the last couple of years. We've been able to add some and introduce some strong companies into our portfolio. And I think that if you see the growth in essence of the net productivity out of that, you'd sit back and say that there's an opportunity to strengthen the enterprise, continue to lean the enterprise, focus on the things that are most important. And if you recognize the value equation as it's played out in the marketplace, many of today's themes were around retention of customers, value to customers and so forth.
As one of the questioners pointed out, the price point is a very important part of this. We have to challenge ourselves to deliver value all the time. We're in a very strong position. This is a great time to be taking that challenge up. And that's what we're focused on.
We think we can deliver more value. We think we can drive more innovation, fresh approaches. And I think this enterprise is focused and ready to do that. The alignment of new technologies to that effort, use of more advanced data analytics produce a lot of opportunity for us, particularly just given the setup of our businesses. So that's those are the themes around that and we are focused on a marketplace that's going to be looking for value and think that we can anticipate that.
I think NPS is a big part of that effort as well.
Okay. Thank you.
Thank you for the question. Next last question please.
And we'll go to Zach Zoftek with Morgan Stanley. Please go ahead.
Hey, good morning. Thank you. I wanted to ask about CMS' proposal to remove knee arthroplasty from the inpatient only list. Was that something that you considered happening in the near term when you were in the stages of acquiring SCA? And how do you think about the impact of that business over a longer term?
Is it meaningful? And does it have any impact on your MA strategy going forward?
This is Andrew. I'd offer a couple of comments here. From an SCA perspective, the team there has been focusing on higher acuity procedures for several years in orthopedics and spine and cardiovascular. And that includes total joint replacements, which the SCA team has been performing on a commercial basis for a number of years with outstanding results, very consistent with the AAAIM in terms of the quality outcomes, the patient experience and, of course, material cost savings. So we've been applying that in the commercial environment.
And there's been discussion for a number of years at the CMS level around the potential to allow total joint replacement in the surgery center setting, which we, of course, would embrace, allowing us to extend the benefits of that platform in terms of quality experience and obviously reducing total cost and extend that to the Medicare population. So in many ways, we've been anticipating this. This is something on a commercial basis we've been doing. We can't obviously speculate as to how what the outcome will be, but this is a positive and consistent with the strategy we've been pursuing.
So thank you. Thank you once again for your interest in our progress today. Kind of midway through the year, our performance and momentum remains strong. We expect to continue to deliver higher quality and value in healthcare and sustainable growth throughout 2017, 2018 and the years to come. Our thanks to our people who are through their commitment to our mission and culture are helping to drive our enterprise to reach its full potential.
Thank you and that concludes our call today.
This will conclude today's program. Thanks for your participation. You may now disconnect and have a great day.