Good 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-K, 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, 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. We expect our performance momentum to carry forward through the balance of this year into 2018 and beyond. UnitedHealthcare has been a distinctive organic growth leader over the last seven 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 longstanding 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 to 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, you should expect us to be different still a decade from now. Society will continue to need and drive change in healthcare. 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 for 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 three of those leaders, Dave Wichmann, Larry Renfro, and John Rex, to take us through our second quarter earnings report. Dave?
Thank you, Steve. We enter the second half of 2017 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 Optum Care 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 million people globally, including 126 million people in the United States, and we see UnitedHealth Group's US and global market potential as without practical limit at this early stage in the evolution of our company. Second quarter results followed themes from our first quarter performance. In the second quarter, the company produced strong and balanced revenue growth, pacing to exceed the $200 billion 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 second quarter to $2.46 per share. For the first half of 2017, adjusted net earnings grew 28% year-over-year to $4.83 per share. UnitedHealthcare continued to deliver exceptional results in the second quarter. Excluding the individual market, UnitedHealthcare grew to serve 2.5 million more people year-over-year, including 1.7 million more in the first half of 2017. 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 healthcare.
A business model increasingly centered on serving the unique healthcare 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 longstanding, 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.
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 three 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 a growing Medicare Advantage market again next year. States continue to turn to the private sector to strengthen and modernize their Medicaid programs. We are implementing four new state awards this year in California, Missouri, Nebraska, and Virginia. We discussed dual special needs plans with you in our first quarter call, and our revenues serving people through these plans grew 33% year-over-year in the second quarter.
In total, our community and state business served over 700,000 more people at June 30. Taken as a whole, the UnitedHealthcare businesses grew revenues this quarter by $3.2 billion or nearly 9% to $40.8 billion, despite foregoing over $1.8 billion in revenues from the ACA individual insurance market withdrawals and the health insurance provider fee moratorium. Earnings from operations exceeded $2.2 billion 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 Optum. 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 two 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 NPS disciplines, and drive strong, sustained multi-year 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. Or 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, second quarter revenues increased by $2 billion or 10% to $22.7 billion, driven by strong organic growth even as Optum Rx revenue growth rate was affected by its delivery of significant channel savings to customers and consumers. Optum's earnings from operations grew 20.5% to $1.5 billion, as operating margins expanded 60 basis points over last year to 6.7%. All segments grew earnings by double-digit percentage rates in the second quarter. At Optum Health, we grew to serve 9 million more people in the past 12 months with per capita revenues growing about 13%. This is an important metric as we look toward future deepening our relationships with the consumer. Growth continues to be led by our Optum Care business, which grew revenues by more than 40% through the combination of strong organic growth and strategic business expansion.
At Optum Care, 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 second quarter was our first full quarter with Surgical Care Affiliates included in Optum Care's results.
SCA's performance is slightly ahead of our expectations at this point. The SCA team continues to expand their business, establishing six surgical outpatient facilities so far this year. We are working an accelerating pipeline of opportunities on aligning future development priorities with our overall Optum Care geographic market strategy and the needs of consumers and our health plan customers. Like SCA, the MedExpress portion of Optum Care continues to grow steadily. MedExpress opened 20 new neighborhood care centers in the first half of 2017 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 two 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 five years into the Optum Care 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 or more. At Optum Rx, 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 Health 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. Optum Rx fulfilled 322 million adjusted scripts in the second 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 its 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. OptumInsight's revenue backlog grew 18.6%, or $2.1 billion, in the past 12 months, with $800 million added in the first half of 2017, including $300 million 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, 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 two business platforms drove strong, consistent, well-balanced results in the quarter. Five of the seven reporting businesses had revenue growth rates above 10%, as consolidated revenues grew 7.7%, surpassing $50 billion in a single quarter for the first time. Our consolidated earnings from operations exceeded $3.7 billion, and our net earnings to shareholders grew 30% year-over-year to $2.3 billion in the quarter. Second quarter adjusted EPS rose 26% to $2.46 per share. The second quarter medical care ratio of 82.2% 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% ±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 second quarter, and 14.5% through the first six months. For the full year, we expect to be at or slightly above the midpoint of our 2017 full year outlook of 14.5% ±30 basis points, due to the mixed impact of care provider expansion, which carries disproportionately higher operating costs and which added about 80 basis points year-over-year to our consolidated operating cost ratio in the quarter. These mixed 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, three months sooner than our previous outlook.
Cash flows from operations through the first half of 2017 are solidly in line with our outlook, and we continue to expect approximately $12 billion 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-$9.90 per share, prudently recognizing the strength in this quarter. We remain comfortable with the existing Street consensus view of third 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 Rex. 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 NPS 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 healthcare policies, funding trends and taxes, which we and you are all following closely. We respect the complexity of the social, economic, and political matters that are intertwined here, certainly at this stage in the national conversation, speculation about any outcome here would just be that. 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. With capital capacities at full strength, continued focus on thoughtful deployment of capital
Including expansion and diversification, both domestically and globally, and return of capital to shareholders through market rate dividends and measured levels of share repurchase. We will give you some initial direction on 2018 in our third quarter earnings call and the full review at our November 28th investor conference. We remain positive and constructive with respect to our organization's potential to better serve the health and wellbeing 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. Please, only one question per person. Thank you.
At this time, if you have a question or comment, please press star and one on your touch-tone phone. You may remove yourself from the queue by pressing the pound key. Again, we ask you to limit to one question per person so we can get to as many participants as possible. Thank you. We will take our first question from Justin Lake with Wolfe Research. Please go ahead.
Thanks. Good morning. I wanted to ask about the Optum Care business. First, let me congratulate Andrew on the new role. 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. Where do you see the ultimate business opportunity in terms of the TAM as you continue to roll out to your 75 target MSAs? 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 a general view of growth across Optum for a second, and then we'll get to Andrew. 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 our Optum360. We'll lead off with Andrew in a second. There's really, Justin, three areas of what I'd call metrics that we pay attention to when we're looking at our growth across Optum. Number one's our sales pipeline, and I think you hit that. Again, I'm talking about Optum in general. Our pipeline today is greater than $40 billion, and it's a strong pipeline.
That's not including what I would call mega deals. This is excluding them, but we have a very robust pipeline of about $40 billion. Our sales year to date is around $23 billion, and that $23 billion would compare to last year's sales in 2016, in total, of about $30 billion. The year before at about $10 billion. You can see the growth that's taken 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. It's up, and I think I mentioned it in the script, 19%, and year-over-year, about $2.1 billion. As we have really kicked this year off, and what we've done through the first six months has been very robust in all three of those areas.
Let me switch over to Andrew and let Andrew talk specifically about what the question that you asked, then we're going to walk through some of the other growth areas as well. Andrew?
Thanks, Larry. Good morning, Justin. As you know, we have a belief that there's a significant opportunity to improve the quality, the experience, and the cost of healthcare on a national basis, creating value for patients and the marketplace. The experience over the past several years has been that physicians can achieve outstanding results when empowered with the right analytics, tools, and support. The market is asking for these kinds of models to improve the cost quality of care. 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.
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. 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. Overall, total revenue and unaffiliated revenue growth were both in line with our expectations on the quarter. Optum Health and OptumInsight together had double-digit unaffiliated revenue growth for the quarter as well. I'd point also then to Optum Rx 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. 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, UHC grew faster in the quarter, which is obviously a positive impact to our revenue as well.
As we look at the quarter, our revenue and product mix are on plan for the year, with total revenue and external revenue both in line with our expectations.
Justin, this is John Prince, CEO of Optum Rx. I just wanted to talk a little about Optum Rx and how we're doing. We're halfway through the year. We're hitting our new business targets, and we 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 our 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 throughout this year. We have several new wins through the healthcare transformational lens, which we announced last quarter.
I'd say, overall, very optimistic about Optum Rx's compelling value proposition in the market. It's resonating well, and we're seeing very good results.
Thanks, John. Justin, Eric Murphy with OptumInsight. To Larry's point regarding Optum360, as well as our backlog. Regarding Optum360, we're in late stage assessments with four major delivery systems. Our qualified pipeline for Optum360 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. Then finally, I would share, we're bullish on where we land for the year regarding backlog of between $15 billion-$16 billion for 2017.
That was more than you asked for, Justin, but a very fulsome answer. Next question, please.
We'll go next to David Windley with Jefferies. Please go ahead.
Hi. Thanks for taking my question. I'm going to switch over to Optum Rx. 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 $1,300. 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. 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?
Oh, sure. David, this is John Prince. I'm not sure I followed all the math that you were doing, but let me take it at a high level. I think, what I see at the high level is happening, 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 sort of flat on a per script basis. 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 is we're delivering that. 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 with margin actually is up year-over-year. Actually, we're getting the margin on our line business really driven by that more volume. 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. What you're seeing in the revenue here, that's our story to market around pharmacy cost. Our real value story as you go to the market is people are looking at total cost of care.
We actually have a story in the market, which we're talking through, that actually talks about how we save a client $11-$16 per member per month as they talk about our whole synchronized solution. That is what our clients are receiving. In 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 serve in the market. Clearly, seeing a very differentiated value that our clients are seeing in their trend.
If I could just clarify. The point of the question was, where can the $11-$16 per member per month go?
Well, the $11-$16 goes back in terms of their total cost of healthcare. It actually wouldn't flow through our numbers. The client would see that, and the return that we give to them.
It accrues to the benefit of the client.
Right.
Our benefit is the retention of customers and the growth that we get.
Thank you.
Next question, please.
We'll go next to Kevin Fischbeck with Bank of America Merrill Lynch.
Okay, great. Thanks. I wanted to ask a question on MA. Actually, maybe a two-part question. First, given all the growth that you have there, just want to make sure that the performance from a margin across expectation is coming in line with how you guys expected it this year. I guess secondly, you mentioned that you expect to gain share again next year. Wanted to get a little more color on the thought process behind that. Is that because of group MA wins so far? 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.
Sure. Why don't we have Steve Nelson kind of give you the broader themes, and then Brian Thompson will fill in the rest.
Great. Thanks, Steve. Hey, Kevin. Steve Nelson. Let me just talk a little bit about how we're thinking about growth in the position of UnitedHealthcare
Overall, because I think the themes are pretty consistent as we move to the specific Medicare Advantage conversation. We've been very focused on a specific agenda, trying to drive value, improve our quality, very focused on cost, both medical and administrative, really driving an agenda of what we call distinction, trying to innovate around both our clinical experience and our service experience, driving improved NPS. We see that actually across our businesses, particularly in our MAPD business as well, driving more retention, which I think has significantly contributed to the growth and also the inline performance we've seen this year on that growth. Also, you just heard the Optum 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.
We're really bringing this agenda of distinction to new populations, whether we're talking about bringing more populations with complex conditions into Managed Medicaid or some of the emerging populations that we continue to see grow, whether it's at D-SNP or group Medicare Advantage as you referenced. Really well positioned across all of these businesses, but MA is a tremendous story. With that, maybe we'll 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. 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. 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 two years prior. The return of the insurer fee will be the single largest headwind in 2018.
Its return was assumed at our 2018 bid submissions. Despite the return of the tax and program funding pressures at large, we do intend to keep our benefit offerings as stable as possible. We intend to complement our 2018 growth and product stability with advances in both quality and satisfaction. Our products will again be designed for high levels of retention. On balance, we're very optimistic. We're optimistic about our positioning, both group and individual, against the backdrop of an 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. I guess most importantly, I'm trying to determine whether, is there an incremental investment spending in the number related to the provider side, or is that all just mix at this point? Thanks.
Jon?
Yeah, 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. That is a straight up the care delivery business expanding and growing, and that care delivery business somewhere now in kind of two-thirds of the range of all of Optum Health. 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. I just want to segment the 80 basis points does not include investments that we make.
Thank you.
Next question, please.
Go next to Peter Costa with Wells Fargo.
Hi, thanks. 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. 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. Maybe Jeff Alter and Daniel 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. 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. 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.
I think a variety of products and offerings, and really a 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 OptumInsight and analytics to determine the best providers, those that practice both first and foremost always quality, but then efficiency. We've created network and product structures that drive people to those top-tier doctors, using either copay or co-insurance variations. That 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.
I think that's a real story of the integration of UnitedHealthcare and Optum to deliver meaningful value to a marketplace that first 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. 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 run rate, tax rate, looking out that we should be modeling for next year, excluding obviously the return of the industry fee.
Yeah, we're going to not actually get into 2018 too much, John, you want to respond?
All right, guys. Thanks, Scott. John Rex here. I will speak to this year. We're not updating our tax rate outlook for the year here. Let me just talk a little bit about within the quarter, because we did speak about it last quarter also. There is nothing unusual that I would spike out in the 2Q effective tax rate beyond normal exercise activity. Typically, with stock-based compensation accounting, we're going to see more impact in the first half than the second half in terms of lowering that tax rate. You'd expect that to increase in the second half. In the first quarter, we had really talked about half of the impact that we expected to be non-recurring. That was really due to just an unusually large amount of stock option exercises. It was related in part to an older acquisition.
That was a piece we spiked out there. I wouldn't spike out anything as unusual in this quarter's rate, and we'd be still in that 32.5% zone. We always strive to do a little bit better if we can. That would be my aspiration, but that's where we'd be.
Okay, thanks.
Next question, please.
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 the third quarter 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&A type of transactions, the supporting Optum, Reliant, advisory board, et cetera. I guess conceptually, as you guys get to your debt to cap target, is the M&A environment just so robust that what you're seeing out there, that your capital's 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 David Wichmann's best for this response.
Sure, A.J. Thank you for the question. Very thoughtful. You're right that our ambitions are to achieve our 40% leverage ratio by the end of the third quarter, we think we stand a really good shot at getting there, which would be one quarter early. John's 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&A activity, we're certainly not going to start today. I think as you know, A.J., that M&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.
Those ambitions continue, as Steve lined out in his concluding remarks, 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 Optum Care, which we believe will be strong growth performers for us for the next decade. I could go on and list many more, but I think you get the idea. 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.
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.
Go next to Josh Raskin with Barclays. Please go ahead.
Hi. Thanks. Good morning. Wanted to ask about potential changes in tax rate. I understand it's very premature. We don't even have necessarily a real proposal from the Republicans. To the extent you guys have thought about it, I'm curious what the impact on your tax rate is from the non-deductibility of the excess compensation, how you would think about the interest deduction add back. As I look about your tax rate sort of before the Affordable Care Act, your tax rate today is running 400 or 500 basis points below where you were. Just trying to sort of level set the opportunity were 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, that 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, the Medicare, Medicaid markets, et cetera. It's a factor in terms of market, it's a destabilizing factor in the marketplace, both in its cost. The return of the tax in 2018 would further destabilize the market, which is already fragile, and make that market less affordable. We would clearly think that either repealing or deferring that would be a positive thing.
As it relates to our actual inner workings with our 2018 outlook, our tax rate and 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 third quarter, but for sure at our investor conference.
Do I get a mulligan then, Steve?
You do.
All right. Excellent.
You want to move on to another one?
Yeah. I'll pretend that didn't happen. My next question would just be, we've talked about Optum Health and Optum Care 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 Optum Care at all?
I think we are, but I think others are better qualified to respond to that. Maybe Larry to begin, and then Andrew.
Okay. Josh, as you know, when we put our program together, when we started Optum Care was probably about 2012 when we wrote the One Optum business plan. 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. We had a lot of different strategies in terms of how we were going to really attack, and put together our Optum Care programs. Urgent care delivery, the surgery care, house calls, behavioral, we have all of those programs in place, and they are actually functioning extremely well. I'm going to let Andrew talk about it. 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. With that, I'll turn it over to Andrew.
Thanks, Larry. Good morning, Josh. I'd say the local markets remain competitive in different ways and unique ways, depending on the market structure. As we look across our Optum Care platform from physician groups to SCA, 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. 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.
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. Again, in many respects, the increase in competition increases the demand for a distinctive platform, which we have.
Maybe we could then pivot to Dan, because that's really kind of the voice of demand in there.
Sure. 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. The reality is we've seen for a long time an opportunity to 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's been talking about. We do it in a couple of ways.
Certainly, we do it in terms of our approach to medical management, 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. More recently, with the acquisition of SCA 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. We're able to do, frankly, more acute procedures and more complicated procedures in that setting as well. We see a lot of opportunity in it.
We've got it in place in select markets today, we will be looking to expand that meaningfully over the course of this year and into next. 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?
I'd just like to add one other aspect of the Optum business, and that would be Optum360. 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 Optum360 clients that are actually involved with us in using those programs. We get caught up in terms of talking about how we're looking at our different programs in Optum Care, mainly from a health plan standpoint, when the Optum360 organizations are actively engaged with how we tie into them as well. 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's been headlines around states potentially tying Medicaid contracts to exchange participation, just wanted to get your thoughts on that. With re-procurements coming up, how concerned are you that states consider exchange participation even if not explicitly? How could that influence your views around re-entering the exchange? Thanks.
Maybe we'll have Austin begin to comment with respect to state-based dynamic.
I guess first 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've talked about before, is a real area of distinction for the combination of Optum and UnitedHealthcare. 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.
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. 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 shift in rates, could the market see a continuation of the 2% MA penetration increase that we saw in 2017? 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, I think we've been pretty consistent in the past that we do expect that penetration to go forward, we do expect the MA market to mature and grow.
Good morning, Sarah. Steve Nelson. I agree with Steve's high-level comments there. Clearly in our experience, we've seen tremendous growth in our Medicare Advantage. 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. Also in addition to that, there's just a real strong overall value proposition with Medicare Advantage, we're seeing that not only just with the folks that we serve, as we talk to policymakers too, there's really strong support for it. You see a population that needs it. It serves them well. It drives down costs. The satisfaction is up. It's definitely growing, we think that's going to continue, 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 considerably north of where we are, above 40%. Approaching 50% doesn't seem like an unreasonable idea to us.
No, I would think that we would think that it could go 50% or better.
Yeah.
Next question, please.
Thank you.
We'll go next to Matthew Borsch with BMO Capital Markets.
Thank you. I'm going to ask a question that sort of asked this 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. You're obviously doing better than almost all your competitors, most of whom are seeing attrition on the group commercial risk side. I guess a question on when you described your pricing, I think John did, as disciplined and rational, which I'm not disputing. My question is this really just that you are producing a better medical cost outcome, and so you can price lower than the market? 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 the spectrum of products, the design, et cetera. Jeff, you want to respond?
Sure. Yeah, Matt, I guess I would tie my response to kind of discussion with Peter. I would say the market moves on value. It doesn't necessarily move on price. 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 discipline 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. 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 OptumInsight analytics, next logical moves for buydowns. You really have to look at the value we bring as opposed to the price of our product.
I think that's the answer to why 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.
Yeah, thanks. Good morning. On Optum, you saw some really nice margin expansion in Optum Health and Optum Rx, 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 margins 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 Ana, obviously you're looking at it both from a financial perspective as well as from a margin perspective, and all that is in line with our expectations. I'm going to ask Tim Wicks to comment on this.
Sure. Thanks, Ana. First, as we think about the margin growth that we're seeing, we're pleased with a very strong start to the year 2017. The earnings are in line with our expectations June year to date and comprise about 40% of the full year expectations. 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 two examples where there's some seasonality. One is in OptumInsight.
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 OptumInsight quality and the risk businesses, the Optum360 content sales, as well as technology data and software sales. The second example I would use is in Optum Health as well, is when we look at Optum Health, SCA volume is characteristically also stronger in the second half of the year. Typically we expect the fourth quarter overall for Optum to be stronger than the third quarter as well as we go through the year.
Thank you. We'll do two more questions, and then we'll have to close it. We'll do two more questions first. Next.
We'll go to Sheryl Skolnick with Mizuho. Please go ahead.
Thank you very much for keeping me in. I'll just observe that if this is early-stage growth for a $200 billion revenue run rate company to produce what you're producing, I'd like to see what late stage looks like. Thank you for that. 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.
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 qualify it in any way to give us a sense of where the opportunities are. I know we've discussed it from the Optum Care perspective, but more broadly across the enterprise would be helpful. Thank you.
I'm not sure I can offer you too much specifics. That was intentional. I think that in general, if you take a look at our organization, we have grown well over the last couple years. We've been able to add some and introduce some strong companies into our portfolio. I think that if you see the growth and 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, focused on the things that are most important. 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. 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. 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.
We'll go to Zack Sopcak with Morgan Stanley. Please go ahead.
Hey, good morning. Thank you. I wanted to ask about CMS's 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? How do you think about the impact to that business over a longer term? Is it meaningful? Does it have any impact on your MA strategy going forward?
This is Andrew. I'd offer a couple 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. 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 triple aim in terms of the quality outcomes, the patient experience, and of course, material cost savings. We've been applying that in the commercial environment. There's been discussion for a number of years at the CMS level around the potential to allow total joint replacement at 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.
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 what the outcome will be, but this is a positive and consistent with the strategy we've been pursuing. Thank you. Thank you once again for your interest in our progress today. It's kind of midway through the year. Our performance and momentum remain 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. That concludes our call today.
This will conclude today's program. Thanks for your participation. You may now disconnect and have a great day.