Good morning. I'll be your conference operator today. Welcome to the UnitedHealth Group Third Quarter 2016 Earnings Conference Call. A question and answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded.
Here is some important introductory information. This call contains forward looking statements under U. S. Federal securities laws. These statements are subject to risks and uncertainties that can cause actual results to differ materially from historical experience or present expectations.
A description of some of the risks and uncertainties can be found in the reports that we filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings. This call will also reference non GAAP amounts. A reconciliation of the non GAAP to GAAP amounts is available on the Financial Reports and SEC Filings section of the company's Investors page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8 ks dated October 18, 2016, which may be accessed from the Investor page of the company's website. I would like now to turn the conference over to the Chief Executive Officer of UnitedHealth Group, Stephen Helmsley.
Good morning, and thank you for joining us today. This quarter, we are privileged to report continued broad based revenue and earnings growth, consistent execution and continuing forward momentum for our enterprise. We serve people's health and healthcare, a sensitive social and personal domain that we know requires a mission and values driven culture and a commitment to a quality experience, getting that experience right the first time for each individual we serve. We're advancing consciously and steadily in this direction with more to do to achieve the full potential and positive impact we could have in people's lives and on access to cost and on access, cost and quality of care. We work to improve overall healthcare system performance through clinical insight, enabling technologies and distinctive data analytics, applying those capabilities across our businesses.
This long standing approach, consistently executed, continues to produce distinctive quality outcomes, balanced growth and steady financial performance. 3rd quarter revenues of $46,300,000,000 grew nearly $5,000,000,000 over last year or 12%. Our adjusted earnings per share grew 23 percent to $2.17 per share. 3rd quarter adjusted cash flows of $3,400,000,000 increased 22% over last year. And 3rd quarter return on equity exceeded 21%.
Looking forward, we expect continued strong performance in the 4th quarter and into 2017. That performance will be built on strong customer retention and broad based growth across our businesses, driven by deeper and more strategic relationships and new business awards already received. To take you deeper, Larry Renfro will discuss Optum's 3rd quarter performance and then Dave Wichtman will cover UnitedHealthcare and UnitedHealth Group overall. Larry? Thank you, Steve.
At Optum, we are pleased once again to report solid results for the Q3 and the year so far with positive business momentum as we head into 2017. The market continues to affirm Optum's distinctive position as a scaled and broadly capable health services and innovation company. We have aligned our resources to address enduring market trends around helping make this health system work better. We have strengthened fundamental capabilities, deepened relationships across the industry, including unique collaborations like Optum Labs and built a reputation for reliable service even in challenging situations. And we balance investments in our core capabilities with the expectation that we consistently deliver operating earnings and returns on capital.
This quarter, we again closed several large long term business awards. Quest Diagnostics has asked Optum 360 to be their partner for revenue management, covering everything following the receipt of doctors' lab orders through billing and cash collections from health plans, payers and consumers. In collaboration with Quest, our analytics, processing approaches and technology can further modernize their business processes, improve service, lower costs, improve access to clinical and financial information and heighten transparency for consumers. Hospitals and acute care facilities continue to move to Optum 360's innovative revenue services products. Today, we serve more than 400 facilities through our patented computer assisted medical coding technology.
The number of facilities using our computerized documentation technology has doubled in the past year to more than 125. These represent solid advances in markets with significantly more growth and expansion potential. A recent BlackRock market research report estimated 85% of care providers are assessing and or replacing their approach to revenue management over the next few years. For the 3rd consecutive year, the experts at BlackRock have ranked Optum 360 as the best in the market in revenue cycle management software technology, in revenue cycle management outsourcing and in computer assisted coding and health information outsourcing solutions. During this coming quarter Optum 360 will reach a run rate of $60,000,000,000 in annual customer billings.
This quarter, consulting leader Frost and Sullivan named Optum the top population health management company in the nation based on their assessment of the OptumOne technology. OptumOne integrates patient clinical information with administrative and demographic data covering millions of people. Proprietary analytics are applied to help care providers identify and take action with patients who are at highest risk of adverse health developments. Today, nearly 700 facilities and nearly 7,000 medical clinics are using OptumONE, growth of 28% year over year. We see a broad range of opportunities in helping enable ACOs as this emerging market evolves.
The rise of ACOs and value based care in the market will only increase OptumOne's utility and value. OptumHealth revenues continue to grow strongly led by OptumCare local care delivery. OptumCare leverages modern technology and data analytics to improve clinical care and offer superior quality and value to patients, payers and physicians. Aligning care delivery improves the health of communities at the local level. In fact, perhaps nowhere else can the potential benefit to individuals be as profound.
And while OptumCare already comprises more than half of OptumHealth revenues, we are still early in developing this business. You should expect to see us continue to build out OptumCare market by market to emerge as a national platform for primary care driven ambulatory care services. We aim to expand our care delivery through owned or affiliated clinics to more than 75 local markets where more than 200,000,000 people reside. This quarter, OptumHealth was honored to receive a multibillion dollar award from the Veterans Administration to conduct medical disability exams for servicemen and women for a period of up to 5 years. This award highlights some of the unique services we can offer governments as customers and shows how the diversity of our capabilities and customer segments drives overall growth.
OptimaRx continues to advance our pharmacy care services business. This is another example of how we can help make the health system work better when we integrate across the Optum platform. We differentiate through the value of superior data analytics, clinical integration and consumer engagement at the earliest point of care possible. OptumHealth with its deep expertise, scaled capabilities and assets in care management, clinical insights and population health is helping to enable this transformation to what we call pharmacy care services. The value of this approach is particularly evident in the areas of chronic care and specialty pharmacy, where we generate more value for benefit sponsors and consumers than anyone in this market and we are still only in the early stages in the evolution of this approach.
The market is responding to our focus on total cost. OptumRx continues to perform well and expects to build on the success seen during 2017 selling season for 2018 and beyond. Our customer retention rate for January 2017 will be in the high 90s. Optum Insights backlog grew 24% year over year to $12,600,000,000 and script growth at OptumRx and the number of people served by OptumHealth continue to grow consistent with our expectations. Optum's 3rd quarter revenues grew 9.4%.
Our 3rd quarter operating earnings grew 28% year over year to approach $1,500,000,000 Year to date, earnings from operations are up 40% to more than $3,800,000,000 Our 3rd quarter operating margin of 6.9% expanded both sequentially and year over year led by Optum Insights margin and offset by continued investments in the Optum Healthcare Delivery businesses. We recognize Optum remains a young company, still in the formative stages in many respects and requiring continued investment and improvement. We know we can and should perform better and in turn help make the health system work better for more people. Now let me turn it over to Dave.
Thank you, Larry. We
are pleased
to report another quarter of strong growth and performance at UnitedHealthcare. Over the past 12 months, UnitedHealthcare has grown to serve more than 2,000,000 more people, once again with solid growth across all 3 domestic medical markets. This continues a remarkable organic growth trend at UnitedHealthcare. Over the half decade leading up to 2016, we came to serve 9,000,000 more people with medical benefits in domestic markets. We are delivering value through a combination of innovative and expansive product and service capabilities, data driven consumer engagement and decision resources, and modern value based relationships with care providers supported by data sharing and physician engagement.
These capabilities engage and support consumers, while containing costs for both the health consumer as well as their benefit sponsors. Our full year commercial medical cost trend remains solidly in line with our estimate of 6% plus or minus 50 basis points. The market continues to respond positively to the value UnitedHealthcare employer and individual plans offer. Excluding individual plans, our commercial group business has grown to serve 775,000 more people year over year, continuing its consistent pattern of growth. In 6 of the past 7 calendar years, our employer and individual business has grown the number of consumers served with cumulative growth across all products totaling in the millions of people, all of it organic.
In the seniors market, UnitedHealthcare Medicare and Retirement's performance continues to strengthen each year. In the past 12 months, more than 600,000 additional seniors have chosen our Medicare Advantage and Medicare Supplement products. These plans have excellent consumer retention rates and distinctive consumer net promoter scores. The strength in our Medicare business is grounded in the quality of our benefit offerings, the stability of our networks and a distinctive clinical engagement and consumer experience approach. This approach directly engages our own clinical resources when data suggests we need to better coordinate care.
These activities improve consumer satisfaction or MPS and strengthen loyalty, customer retention, STARS performance and the use of healthcare resources, all leading to better value for seniors. Our Medicare Advantage plans are increasingly recognized for quality and service. For 2018, factoring in our expected growth, we expect 85% of UnitedHealthcare's Medicare Advantage membership will be in plans rated 4 stars or higher by CMS. For 2017, we expect this metric to exceed 80%. This quarter, our group retiree call centers achieved J.
D. Power's certification, placing them among the highest performing in consumer services across all industries. This accomplishment reflects the commitment and compassion of our Medicare team who seek to serve seniors with high quality healthcare and flawless service. We expect 2017 to be another year of strong growth both in individual and Group MA. We also expect to grow in Part D in 2017 with the introduction of a new nationwide product set targeted to a broader senior demographic.
Our community and state plans have grown steadily in response to state governments' needs to improve quality for beneficiaries while ensuring the sustainability of their programs. The increase in Medicaid benefit coverage has been a clear success of the Affordable Care Act, serving millions of more Americans and using public funds in the most effective way. Our ability to improve quality and outcomes for all types of Medicaid beneficiaries, including those with some of the most complex medical conditions, has driven distinguished overall growth for us for a number of years, including organic growth of 9% or nearly 500,000 people in the past 12 months. Our commitment to quality care, outcomes and service have led to our position as the largest organization serving programs for dual eligible beneficiaries and those who need long term services and support. Today, we serve more than 1,500,000 of these vulnerable individuals for our state customers.
And our growth in these categories continues. This past quarter, we were honored to be selected to proceed to contract in Virginia and what will be another new state partner for us. And in just the past few days, we were selected to serve in Missouri, also a new state for our community and state business. Our new business and growth opportunities for 2017 and beyond are as robust as ever. Looking at these benefits businesses together, UnitedHealthcare grew revenues of 37,200,000,000 dollars revenues of $37,200,000,000 grew 13.3 percent year over year with organic growth again across the three businesses.
It has also been organic that same organic growth has been experienced over the past several years. Every business grew revenues by a double digit percentage over Q3 2015. Earnings from operations of $2,100,000,000 also grew 13% year over year on steady operating margins of 5.7%. Moving to UnitedHealth Group as a whole, our 3rd quarter revenues of $46,300,000,000 grew 12% over last year. The consolidated medical care ratio decreased 60 basis points to 80.3%.
Through the 1st 9 months of the year, our medical care ratio of 81.3% is nearly identical to last year. The operating cost ratio has improved 60 basis points year to date to 15%. The 3rd quarter ratio of 15.2% increased 60 basis points from the 2nd quarter, reflecting the regular seasonal increase in marketing and enrollment costs, as well as increased level of investment across the enterprise to develop and support future growth. As Steve mentioned, 3rd quarter adjusted earnings per share of $2.17 grew 23% year over year and were supported by distinctive cash flow. Year to date adjusted cash flows from operations of $7,400,000,000 are 1.4 times net income and adjusted cash flow was 1.7 times net income in the 3rd quarter.
We are increasing our outlook for 2016 adjusted earnings to approximately $8 per share due to the strength of the results produced by our businesses so far this year. We look to finish 2016 with strong momentum and carry that momentum into 2017. At this point of the year, the focus begins to shift to the coming year and we look forward to discussing our 2017 outlook with you in-depth at our Investor Conference on Tuesday, November 29. While we will reserve that discussion for another 6 weeks, we will offer that at this point, we are comfortable with where the consensus 2017 adjusted earnings per share are currently positioned on the Street. We remain committed to continually improving our performance.
If we finish the year with the momentum we aspire to, could potentially see our 2017 EPS view reflect a modestly stronger growth outlook. For now, we will maintain an appropriately prudent posture. Steve?
Thank you, Dave. I think at this point, it's important to acknowledge something we don't do enough of and that's a tremendous effort of our employees and the efforts they make to bring our mission into the day to day reality of helping people live healthier lives and helping make the health system work better for everyone. They exhibit the values we share across this company as they do that work, values of integrity, compassion, innovation, relationships and performance, are thanks to their commitment and hard work. As we move toward 2017, our enterprise is well positioned. You can hear the optimism in Larry and Dave's commentary today and see it in the consistency of our performance.
Our businesses are aligned to important market trends and delivering value to the increasing number of customers and people we serve. There's still a long way to go to serve at the peak of our potential. It is up to us to execute and we're privileged to have that opportunity. Thank you for your interest this morning. Operator, we can now take questions.
And again, one for analysts, please.
The floor is now open for questions. We'll take our first question from Matthew Borsch with Goldman Sachs. Please go ahead.
Yes. Hi. Thank you. I just wanted to ask on the outlook for the rest of the year for Optum. Is it still your expectation that you'll have about 60% of the earnings growth weighted to the back half?
And I'm asking because it's looks like that's going to be a pretty big sequential jump implied in the Optum earnings or margins, at least from how we're modeling it. If you could comment on that and maybe if there's anything you can tell us about the organic change that you've seen year to date in the Optum non inter segment revenues just as it's challenging to track that?
Sure. So I think those patterns are pretty consistent with prior periods. But Larry, you want to take that and then maybe John Rex or whatever will finish off. Larry, you want to start? Sure.
Hi, Matt. It's Larry Renfro.
Hi, Larry.
Couple of things. I think past history in terms of how our business is kind of lined up this way currently shows that the 4th quarter for Optum is always going to pretty much play out this way and I'll talk about that in a minute. So the Q3, strong quarter for us. It met expectations and we're exactly where we expected to be right now in terms of our in line expectations. The Q4 always brings to us seasonality.
And when we get into the seasonality, we're dealing with pay for performance, we're dealing with our incentives and our shared savings, what we're doing from a technology standpoint during the year, a lot of that comes to play and impacts us during the Q4. The number of new accounts that we have as well as AEP kicks in, some of our CODI kicks in. So we have a lot on the lift side in the Q4. But what I might do is talk a little bit about what our overall business plan has been. Our overall business plan has been to have these large, what I'll call complex relationships.
And when we get into that and this is all part of how we build this during the year, we expected to have around 10 of these major relationships. We're probably somewhere around 20 at this point in time And this has been building over the last few years. We have 3 measurements that kick into this as well. And that is our backlog. And I think I mentioned it a few minutes ago on Incyte of about $12,600,000,000 that's up about 24% year over year.
We have our qualified sales pipeline that will also kick in, partially during the Q4, that's up about 2 times over last year. And the 3rd area is our sales for this year, what I'll call our TCV, our total contract value, that's up about 3 times. So we're confident where we're at right now for the Q4. We believe the Q4 will give us momentum into 2017. So we're right where we expected to be.
I would tell you that this time next year if we're sitting here, we'll be having the same conversation because it will constantly be a seasonality issue for us to deal with in the Q4.
Sorry, John.
Yes. And just the so yes, absolutely expect those seasonal patterns to continue as we've seen over the years. If anything, that's just when you think about where the bias of sales to and growth is within the Optum businesses, that should be a natural outcome in terms of that seasonality persisting. So what you want to think about there in terms of businesses that
have that type of pattern.
You think about some of the quality solutions businesses, data sales and analytics, the timing and delivery of the large deals and certainly we've seen plenty of large deals across the spectrum this year, some of the network solutions businesses, all those businesses are typically second half weighted in terms of their performance and that's a pattern that we'd expect to persist.
And we'll take our next question from Justin Lake with Wolfe Research. Please go ahead.
Thanks. Good morning. Appreciate the early view on 2017 and you talked to being comfortable with consensus EPS, which implies about 14% year over year growth with potential for upside given the business momentum. When we adjust for the benefit of exiting the ACA individual market for next year, that growth looks closer to about 9% to 10% if I'm doing the math right. Just curious in terms of how you think about the main headwinds and tailwinds year over year we should consider when thinking about that growth rate relative to your long term growth expectations?
Dave, you want to comment?
Sure. Thank you, Justin. So as you said, we'll discuss 2017 at our Investor Conference in November. I think the largest tailwind for the business as you're probably picking up is growth, both at Optum, which you've seen pretty systemically throughout the year with the PBM wins and then obviously here with the Quest win, which is an Optum 360 win as well as what I'll call a lot of the smaller business size wins that occur in that business every day, a lot of which you'll see in that ramp in the Q4 as well. All those things speak to Optum's growth and I think UnitedHealthcare's growth is statistically well understood with the pattern of growth and its membership across all three lines of business.
The second one I would point out is the reduced loss position on the ACA that clearly will aid earnings in 2017 as well. On the headwinds front, obviously with that growth, there's a lot of implementation costs that need to occur. And then as you can tell, we're strategically positioning Optum to have a broader range and serve in more market segments as well. So there's a lot of de novo startup costs, if you will, in that business, as well as a lot of implementation costs for the substantive business that we've won over time. The last thing I guess I'd point out in 2017, particularly at this distance and maybe a reason why you feel like we may be more moderate in terms of our point of view at this early stage it's really this organization has a deep respect for medical costs and trend.
And while we expect them to be pretty level, our trends to be pretty level next year, We're deeply respectful of medical costs as well as the rating environment. As those things become clearer, that's when I think that will see us clarify our position with respect to 2017 and that could be as early as in the 2017 Investor Conference in November. And I'd say that
our commentary today was an attempt to be pretty positive about 2017. And I think the commentary about if the momentum continues and we have every reason to believe that it will, that we could be even stronger. But I really think that whole conversation really should is better had more face to face at the Investor Conference. So our purpose today is to kind of give you some positive body language on 2017, but really defer the conversation at the Investor Conference. So if you kind of take it in that spirit, that's the right way.
Next question, please.
We'll take our next question from Dave Windley from Jefferies. Please go ahead.
Hi, thank you. Good morning. I wanted to ask a question around OptumRx and drug cost trend. If you could comment on your views generally about drug cost trend? And then within your OptumRx business, are you seeing or are you deploying particular strategies that you think are delivering a competitively better drug cost trend?
Or should I think about the competitive differentiation being through the synchronization function and seeing savings elsewhere in medical benefits as you are interacting with pharmacy members? Thanks.
I think the answer to that is really both. And I think the distinctive dimensions of the OptumRx business is that they are really kind of redefining pharmacy care services to be much more integrated into the kind of clinical continuum to have impact on medical cost and to engage earlier, at the same time be able to bring kind of leading edge perspectives to the procurements of drugs and supply chain. So Mark, do you want to comment?
Yes. Thank you. Good morning, Dave. I appreciate the question. And I would say that the one thing our clients are focused on and hiring us to do is to manage their pharmacy costs.
And one of the reasons I'm excited about this business is there's no one in the industry who has the data, analytic and delivery assets really that Optum possesses. And so you mentioned synchronization. And as you know, this is a data driven approach. It's been central to the wins that we posted this year from some very large and sophisticated buyers. And so this is a new approach and we do think we're redefining pharmacy care services, taking pharmacy data, coupling it and linking it to medical data, linking it to the care delivery process and including lab behavioral data in a comprehensive data set.
We call it eSync. And the whole business is focused on now a whole person approach. How can we take everything we know about a member's medical condition and improve their care, utilizing cost strategies and cost trend management strategies that you mentioned, but much more than that, delivering care in a more meaningful way. This could include phone calls by pharmacists, house calls by nurses, this could include adherence programs. It's a full suite of programs all aimed at driving down total medical costs.
And so I'd say that's the one thing that's setting us apart in the market. We're feeling very good about where we stand in our position and we can see it in our pipeline and the growth opportunities that we're chasing. So thank you for the question.
Next question please.
We'll take our next question from Michael Newshel with Evercore ISI. Please go ahead.
Thank you. Good morning. Could you maybe give us some more detail on the where you directed the increased level of investments that you mentioned as raising the operating cost ratio? How much spending was not previously planned and incremental to the Q3? And also, is there anything incremental planned in Q4 that you didn't have planned earlier in the year?
Sure. John?
Yes. Thanks, Michael. John Rex here. So a little bit on OCR. So, first of all, I'd say that it was in line with our view here in terms of how we trended, in the 3Q.
So the first perspective being from 2Q to 3Q, there was a sequential increase of about 60 basis points in the OCR. And that is typical what we see, as we move into the open enrollment period and the investments that spend to prepare for that season began. So that is a typical move. And I think you're referring particularly to the year over year move of the 30 basis point increase. So that's, as you stated, primarily driven by increased investments.
I've cited a few places where we were making investments in the quarter. Things that you may have heard us referred to in the past and maybe be familiar with the ongoing stars investments, medical affordability and clinical investments, Specific businesses that we've been very vocal on in terms of where we expect to grow and invest such as the OptumCare businesses. And then I put a cost related to preparing for the growth we expect in 2017 across a number of the businesses, within our senior businesses, in M and R, some of the opt in businesses where you've seen there have been very some significant new business awards for next year and as we prepare for that. Just the general upward pressure also that we see from services growth. And then all of this, as you'd expect from us, normally offset partially by the productivity gains that we lost.
So within our expectations, if I sum it up, and those are the types of investments that we're making.
Thank you. Next question, please.
And we'll take our next question from Ralph Giacobbe with Citi. Please go ahead.
Thanks. Good morning. I was hoping you could maybe just walk through the favorable development in the quarter. We came off last quarter that had unfavorable development from both sort of current and prior year. And this quarter obviously had favorable, particularly in the first half.
So our estimates last quarter is essentially overly conservative on the exchange specifically, but also sort of the unfavorable development for last year. Just hoping you kind of flush out all those moving parts and maybe which end markets are impacted? Thanks.
Dan? Good morning, Ralph. Dan Schumacher. So maybe I'll start broadly on medical costs overall. From our view, certainly in the quarter, costs were well controlled.
And as you look at the consolidated medical care ratio, it was 80.3% in the Q3 this year and that's actually down 60 basis points year over year, so down a little bit more than we had expected. So we continue to do well managing costs across the portfolio within UnitedHealthcare. To the components of development specifically, so underneath that, we did have prior period reserve development in the quarter of about $120,000,000 and that was favorable. That's pretty consistent with the development we recorded in the same quarter last year. As you look at the pieces inside of it, to your question, the current year component was favorable $230,000,000 and that was partially offset by 100 and $10,000,000 of prior year unfavorable developments.
With regard to the businesses, I would tell you that it's really less about the exchanges, frankly, and it's more about our core businesses across Medicare, Medicaid and our commercial businesses, both the current year favorable as well as prior year unfavorable. And on the prior year unfavorable, I'd tell you that we do have a host of things that resolve in any given quarter. And there was nothing in this quarter that was individually material and that prior year element does not influence our current or our future outlook on trends. So as we look to the full year and look at our medical costs, we expect a medical care ratio of 81.5% on the full year plus or minus 50 basis points and I would probably tell you would likely orient below that midpoint.
Thank you. Next question please.
And we'll take our next question from Peter Costa with Wells Fargo Securities. Please go ahead. Mr. Acosta, please check the mute function on your phone.
Hello. Thank you. My question is on the margins in the Medicare business. Last year, you had higher spending for Medicare Star Scores that impacted your Medicare performance. This year, did that spending continue at the same level?
Or has it come down a little bit? And then going into next year, how do you plan to utilize the HIF holiday given that the health insurance fee comes back in 2018? So what should I think about for a trend in margins last year to this year to next year to 2018?
Steve, you want to comment on that? Steve Nelson? Sure.
Good morning, Peter. Steve Nelson. I'll start by just giving a kind of broad perspective how we think about 2017 as we enter, I think we're 3 days into our annual enrollment period for 2017, really think we're well positioned overall. As you mentioned, we've seen improvement in our stars. And when we contemplated our benefit planning back in the spring, we obviously considered that, had insight into that and also the insurer's fee moratorium as well.
And so that allowed us to make some meaningful investments and bring to market some stable benefits that we're really excited to offer to our seniors. It's meaningful to them. The stability in premiums and co pays and choice. And so we think we're really well positioned. And then you add to that the capabilities that we've been investing in as well, in terms of our quality, which benefits our members, but also it's something that we're going to stay diligent about.
We also have, I think Dave mentioned in his opening comments, some of the distinguished capabilities we have in our member experience and service. So all these position us really well for growth, but it's in terms of the margin specifically, we wanted to position this business for growth and we think we have done that. The margins we target between 3% 5%, we're operating toward the upper end of that range at this point and expect to continue to do that in 2017.
We spent more on Starz, but we also got benefits from Starz. The performance in Starz has really been highlighted.
Yes. On the Starz specific investment question, I would say that we this time last year actually we were talking about investments, strategic investments we're making in Starz and we continue at about the same level, looking for more effectiveness, more efficiency and some productivity gains, but generally at the same level, don't expect that to initially increase, but we are getting really strong returns and very excited about the performance and the results that we're seeing in Star.
Very stable. So stability is kind
of the order of the day in terms of the approach. And this was a business that was challenging a few years back and has been kind of brought back into line. So very positive. Next question please.
We'll take our next question from Scott Fidel with Credit Suisse. Please go ahead.
Thanks. Interested if you can give us an update on how the net new business pipeline has developed for OptumRx for 2017? And then also just separately, maybe an update on the commercial side in terms of how the national accounts selling season ended up shaping up for you guys?
So that is a 2 part question. Mark, you want to take the first part?
Yes, Scott. Good morning. Mark's here. Well, we feel pretty good about the scorecard for 20 16. As you know, we posted some very large wins, what I would categorize as some of the smartest and most sophisticated buyers signing on with OptumRx.
And I think these large wins validated our model. I mean, we've put this business together. We're a year and a few months into it. And I do think the strategic rationale for the combination is proving out. I think at the end of the day, the reason that we're posting these wins is, 1st of all, we are driving better economics in the market.
That's important when you're trying to save money in drugs. But it is this differentiated model that we're selling. The pharmacy care services model is resonating with very sophisticated buyers. I think what you're seeing, Scott, is the convergence of the traditional PBM model, which we're trying to rebuild and combining it with the Optum clinical platform. Here we're talking about Optum Health and all the care management, data management and care delivery services.
And so, I think if you start to look at it, we've emerged as a sort of destination platform in this industry and feel very good about the selling season and the wins that we'll post and bring live in 2017.
Jeff? Good morning, Scott. It's Jeff Walter. Just comment on the national account season. We're wrapping up that 2017 selling season now.
And as we've talked about in the past, this was a fairly light season for active employees, and it has played out this way. We continue to be able to manage our client retention well up in the high 90s, which is a testament to the value and the relationships that we value that we bring to those clients and the relationships that we have. We'll probably wind up with a relatively flat membership result when you take into account the success of our group and A efforts. So on that front, as I said, it was a fairly light active season, but we saw a very, very robust season for Group MA and as Mark mentioned, some of the PBM offerings. And I think what we really showed to the marketplace is that we could take the value of this enterprise to bear on those opportunities and really combining the unique expertise of the commercial business, our Medicare business and our OptumRx business and bringing really seamless solutions to the marketplace for our clients.
And we produced a very successful result for the 2017 selling season for both our Group MA business and our OptumRx business.
Next question please.
And we'll take our next question from Josh Raskin from Barclays. Please go ahead.
Thanks. Good morning. Just want to talk about capital deployment and specifically share buybacks. I know you guys have been intent on reducing your leverage this year, but looks like it was relatively slow in the first half and really fell off again in the Q3. So I guess I'm curious, 1, was there something in the market 2017?
Is that a more normal sort of return to a more normal pattern for UnitedHealth Group?
I think we're completely in line with our plan and pattern. So I don't think there's we don't view this as anything of that nature and we have reduced debt. So I think it's all in line with plan. John?
Yes, Josh.
So particularly on share repurchase. So for the year,
we had anticipated, particularly on share repurchase. So for the year, we had anticipated $1,000,000,000 to $1,500,000,000 in total share repurchase. In the first half, we did $1,000,000,000 so we anticipated that we'd be slowing meaningfully in the second half of the year.
We repurchased about $140,000,000 in the
Q3. So consistent in terms of our full year expectation in that $1,000,000,000 to $1,500,000,000 range. Near term, you're right, we've discussed we have been focused on delevering our balance sheet and applying more of a free class flow to debt reduction. But the pattern that you've seen this year consistent with kind of how we approached the year in terms
of our share repurchase activities.
So really completely in line. Yes. So I don't think there's anything that's and nor do we plan to stray from that. So our capital allocation approaches are perfectly consistent. Next question please.
And we'll take our next question from Gary Taylor from JPMorgan. Please go ahead.
Hi, good morning. I was hoping to get a few more details on your ACA compliant individual business. And I guess happy that it's not a big topic of conversation for the first time in a few quarters. But one, wondering if you could give us both your on and off exchange compliant enrollment. 2, I think in the Q3 a year ago almost 20% of the individual compliant enrollment was coming through special enrollment period.
I wonder where that stood this year versus the 20% last year. And then just finally, presumably the MLR in the first half of the year has been pressured as you booked additional full year losses for your ACA compliant businesses. And I suppose we flipped to a point where the PDR is probably now helping the medical loss ratio. So any color you could give on either how much the PDR came down or maybe even just what your MLR looks like in your ACA compliant business this quarter versus a year ago? Just some help on how that's shaping up versus the projected losses.
Sure.
I think we can answer those. Dan?
Thanks, Gary. That was a fulsome question. First to the enrollment. So on the enrollment front, we ended the quarter with 770,000 exchange lives and another 210,000 off exchange. So on a combined basis, our individual ACA block was just a shade under a 1000000 lives at the end of the quarter.
When you look at the performance inside the quarter, I would tell you that, as you pointed out, nothing's really changed on the ACA front and that's a good thing. Our Q3 was very much in line with our revised expectations that we set coming out of the 2nd quarter and we've continued to maintain our full year view. To be more specific about it, so we recorded losses in the quarter of $200,000,000 and of that $120,000,000 was offset against the premium deficiency reserve and the remaining $80,000,000 flowed through the P and L this quarter. That $80,000,000 of P and L impact is very comparable to the P and L impact we had in the Q3 last year, so very similar year over year. And from our view, we think that we're appropriately positioned for the remainder of the year.
I think you also asked about the contribution of enrollment from special election versus open enrollment. I would tell you that we have a little less orientation towards special election this year as compared to last year. So to your point, we were a little shade above 20% sitting through the Q3 of the year and now we're more in the mid teens as you look at our ACA compliance membership base. Hopefully that
covers the list. Thank you. Next question.
We'll take our next question from A. J. Rice with UBS. Please go ahead.
Thanks. Hello, everybody. Probably just go back to discussion around Optum. If I think about the announcements you've had this quarter with the Quest announcement takes you into a new area for revenue cycle management, the VA contract certainly dramatically expands the business with the government in that area. I know you've talked about DoD contracts as well.
And I think there's been ongoing commentary about discussions with international governments, NHS, for example. Can you just talk about sort of the expanding opportunities that Optum has? And what are some of the pie in the sky opportunities looking out 2 or 3 years for Optum?
I don't think we think of them as pie in the sky, but I think Larry can respond to that. So A. J, good to hear from you. Let me start with international and I'm going to ask a couple of people to help me out. I'll ask Bill to join into this and I might ask Amir to join in from an OptumCare standpoint and I think Mark's already covered it.
But on the international front, I'd say we spent the last year and a half building our foundation. We've been planting seeds and I would say that we're strong with the NHS, we're strong with NHS Improvement. We're getting stronger with the Minister of Health as well as the Secretary of Health. As we sit here today, we actually have the Minister of Health with us for the next 2 or 3 days on tour with quite a few of the commissioners of the trust, which would be hospitals the way we would know it. I'd say that as we've gone through this, with the relationship building and where we stand, the pipeline is getting stronger and I believe that 2017 will be a year that we will validate as we've been validating some things here in the States.
So that's where I would say that the international sets in the U. K. We are also working with our sister organization, Emil in Brazil and that's more of a health plan as you know the way that we would approach that from our standpoint. So we're working day in, day out to line up with them. We are also looking at other emerging markets.
We are looking probably in the way we would go about it, look at Australia, maybe Mexico, maybe Asia, but we're going to finish out what we're doing with the U. K. And have a very solid start as well as in Brazil before we start to pursue other things. So again, we've talked about that market potentially being a $500,000,000,000 market and we remain focused and confident that that's the size of that market. When you move over into what we're doing on the what I'll call our large deeper relationships and I spoke about that both in the script as well as on the other answer.
Instead of me speaking on this, I'm going to ask Bill to talk about it from an Optum Insight 360 standpoint and some of the large relationships we're working with. And then I'm going to ask Amir to do the same on the, what I'll call the OptumCare side. I will make one comment myself on what we're doing in the military. We closed the we were able to get this nice award with the Veterans Administration on disability exams. So that's we won about 8 out of 12 regions, exactly 8 out of 12 regions.
4 at LHI, that's in La Crosse, Wisconsin, 4 in California with MSLA that we own. It'll service about 4,200,000 servicemen and women and we'll be going strong with that starting in January of this year. So Bill?
Yes. Thanks, Larry, and good morning, A. J. With respect to our manage our revenue management offerings, we've used this word validation a fair number of times this morning. And I think in the case of the win that we had with Quest, it just validates once again that our boundaries of where we can offer these technology enabled services is expanding.
And I think Quest represents that as one of the largest, if not the largest, lab diagnostic companies in the world. And I think whether it's a health plan, whether it's an employer, whether it's a health system, they all do go through a rigorous evaluation process and whether it's Quest or Dignity, which we talked about in the past, they're looking for modern technology, modern systems. We're looking for people that can bring in accuracy and the expertise that could reengineer workflows, that can leverage a worldwide workforce. And peppering in all of that is someone who can drive analytics and insights to really automate and improve the economic performance and the efficiency performance of their own operations. And anyone that evaluates us likes to see that, 1, we're comprehensive in that approach.
2, we pretty much line up culturally with them. And they really enjoy the fact that we drive a performance based contract with them. So we're very much focused on aligning ourselves with them so they are successful. And that formula is working. It's highly enabled by a very modern set of portfolios that, as Dave said, people buy every day.
But more and more, we're seeing a trend in the marketplace where any of those constituencies are looking for more of an end to end comprehensive approach to handling some of these most pronounced formidable and desirable option in those contexts. So with that said, maybe I'll turn it over to Amir.
Great. Thank you, Bill. A. J, this is Amir. Nice to hear from you.
So we're continuing to see great growth on the OptumCare side. As you know, we have laid out 75 strategic markets that we see as important for ourselves to be in. We are well in over half of those markets and we continue to see growth into new markets as well as growth within those markets. And within those markets, we're seeing growth across different payer categories and we're also seeing growth across the continuum of care assets. We also continue to grow our MedExpress centers.
We see great success in our consumerism approach there with MedExpress and we'll continue to expand those assets. And we also see ourselves addressing more and more complex populations, dual eligibles, of course Medicare Advantage, special needs populations as well. So we'll continue to see that. And then applying these capabilities, leveraging the capabilities from Optum Insights, our analytics, our risk stratification into our care delivery groups. And now, as Larry mentioned, applying those capabilities from OptumCare and Optum Insights abroad globally.
Next question please.
We'll take our next question from Kevin Chispak with Bank of America Merrill Lynch. Please go ahead.
Great. Thanks. The quarter looks pretty good overall. So I'm going to go back and harp on the one thing that I still, I guess, just doesn't look right to me, which was the negative prior year development. We're not used to seeing that from you guys at all.
Now we've seen it 2 quarters in a row. So just wanted to understand, I guess, how comfortable you are with the reserves? And just to get a little more color, I understand that you mentioned there's a lot of things going on and it was more of the core business than exchanges this quarter. But any color you can provide there about what was really driving that because we're just not used to seeing it. It looks like at this rate you may be showing some of the lowest growth development you've seen in the last decade.
So just wanted to understand your visibility into reserves and what's been driving that recently?
Yes, I'll just commentary before Dan gets to it is that we don't really strive for a formula development numbers. We try to get as accurate as possible. So if we had absolutely no development, it would actually be perfect. So I think you shouldn't read anything too much into this beyond the fact that we continue to be very vigilant in making sure that our trends are appropriate, our reserves are appropriate, true things up in appropriate timeframes. Dan, you want to come back and comment one more time?
Well, Kevin, I would just add that when you put it in the context of our total medical spend, what you're seeing, as Steve mentioned, is greater accuracy. So last year we had north of $100,000,000,000 of medical spend across the platform. This year will be north of $115,000,000,000 And what you're seeing is as we bring more rigor, better analytics to a better system connectivity, we tie in more real time to delivery partners, you're seeing improvements in the accuracy of those estimates. And as you look at it on a year to date basis, we're sitting at $190,000,000 of prior year favorable development that compares to $230,000,000 for the 3 quarters last year. So from our perspective, there's some vagaries that happened quarter to quarter, but on balance, it's we continue to get more accurate and for us, it's that's our aim.
And as I mentioned at the outset, our medical costs continue to be well controlled and they're coming in a little bit better than we expected in aggregate. So that's great.
Next question please.
And we'll take our next question from Michael Baker with Raymond James. Please go
ahead. Thanks a lot. With the Section 1332 waivers going into effect January 2017, do you expect any states to meaningfully alter their approach to either addressing the broken public exchange or in managing healthcare costs?
So I would say that we'd be we should be a little bit retrospect with respect to our view of how states will approach exchanges and how exchanges will play out in the new administration. So we're really not interested in commenting on that. What I would say is that our agenda here has been very focused on solid opportunities for access around simplifying the environment in total, about going into managing the costs and keeping the affordability of these programs more relevant to the marketplace and to really kind of lean to the programs that have really worked extremely well. Medicaid has been a very significant success of the ACA and wherever that has played out, those environments, those markets have actually been more stable and better performing. And Medicare continues to be a core program of the country and that funding for both Medicare and Medicaid is something that we have been advocating consistency and stability of it.
Kind of those themes are what we have stayed with. And I think commenting beyond that, particularly as the new administrations take hold and so forth, our posture is to be very constructive about making the marketplace work most effectively and serving the most number of individuals and making that system simpler and more usable for everybody. So I think beyond commenting on that level, I don't think we are going to get into what's going to happen going forward on either state basis or federal. Next question please.
And we'll take our next question from Christine Arnold with Cowen. Please go
ahead. Hi,
there. Thanks. Little nips here because a lot has been asked. On Medicaid,
are you
seeing in terms of the rate outlook and the kind of margin outlook there? I know some of the expansion states are coming through with some pretty hefty rate cuts. You continue to gain business, so you're going to improve margins on some of the business that's new to you. So how do we think about that? And then with respect to OptumRx, you won be growing Medicare Advantage, you're going to be growing PDP, you've got these new contracts offset by minor losses of membership relative to all of that in individuals.
So top line looks it's going to be up a lot. But did you have to give up margin with this new business? How should we think about the Optum margin next year, Rx, OptumRx?
So I thought you were going to Medicaid. So we'll start that way with Austin and then we'll finish with respect to the OptumRx. Austin?
Thanks, Christine. Good morning. So there's really not a lot different in the Medicaid rating environment today than there has been over the past several years. As you know, states continue to be challenged to balance their budgets while continue to develop new high quality programs to care for, as been mentioned already today, larger and larger populations and many of those populations with much more complex needs, we're honored to play a role in helping them do that and give consistency to both the quality delivery and the consistency in cost for their programs. We continue to see rates in the low single digits keeping pace with medical.
And really, you've got to look at this pluses and minuses in line with the specific economic situation of a particular state. So again, nothing particularly different. We continue to see things come out in line with our expectations.
Mark?
Yes. Good morning, Christine. So, it is true that we've seen good membership growth in MA PDP and obviously the performance in UnitedHealthcare has been strong as has a number of other health plan clients that we service. And so we're not going to get into the 2017 outlook. As we've said, that will be covered in the 2017 investor conference coming up.
I will comment though on the margin profile. I think that we're very comfortable with the current margin profile. We've talked about performing in the 3% to 5% range. And so we've not had to underwrite business in a deficit and we're comfortable that the business will perform at that level for the foreseeable future.
Next question please.
And we'll take our next question from Chris Wieck with Susquehanna Financial Group. Please go ahead.
Good morning. Most of the big questions have been asked, but just two clarifying questions on Optum. When you talk about the growth in healthcare delivery business and the behavioral services, 1 on the healthcare delivery side, is that primarily MenExpress? And can you give us a sense for how the units have trended since you acquired it in the spring of 2015? And then on the behavioral side, when you say expansion into new Medicaid markets, are you does that mean you're layering sort of a specialty service into existing Medicaid managed care contracts or it's completely new sort of business line at the Medicaid level?
Thanks a lot.
Chris, this is Amir Rubin. I could take both of those. So, yes, we're continuing to see a lot of growth on the OptumCare side, both on the local care delivery, our medical practices as well as on MedExpress. MedExpress, I think you have specifically, we now have over 100 and centers in 16 states and we're planning to grow to over 200 by year end and we're continuing to see investments into the future there on that platform, which has been very successful. In OptumCare, we're now managing approximately 20,000 physicians serving over 8,000,000 consumers, as I said, in almost now 51 geographic markets.
And so we'll continue to see growth there. We also serve through our special needs programs in Optum Health and our complex care management over 2,000 specialty nursing facilities. So we'll continue to see growth there. On the behavioral side, we're seeing growth both at the Medicaid level and having success with some wins in states, as well as on the commercial side, selling more business to employers and through to health plans as well.
But nothing that's actually structurally integrated into these proposals and things like that? Correct. Basically operated on an open market integrated basis? Correct.
So we'll take about 2 more questions, I think.
And so next please.
Okay. We'll take our next question from Ana Gupte with Leerink Partners. Please go ahead.
Yes, thanks. Good morning. So it sounds like with that 80.3% on the loss ratio, your commercial group underwriting spread seems like it's pretty stable. You sound confident on the cost trend. Any thoughts on the trends you're seeing in the selling season on pricing as the Blue Cross Blue Shield seems to have to expand on exchanges and maybe sustaining more losses.
Is that influencing their pricing posture? And then secondly, on the self insured side, what are the mix shifts doing? And is that in any way impacting the price competition in fully insured?
I'm not sure I can piece that question together fully. I think it's really around pricing. We're not going to comment really about others or what others might be experiencing, but we can kind of give you some commentary with respect to what our pricing philosophies are. And I think we're in pretty good shape as it really is the coming year. So Jeff?
Good morning, Anna. So I'll comment on what we see in the marketplace in general and I would say what we see in the marketplace in general is affirming of pricing, particularly in the fully insured, which has helped us to grow because of our remaining sort of our historical discipline in pricing continues. We always price our businesses to our view of our forward cost trends. And as you look back into our 2014 year that we took some losses because of that discipline. And now as those markets begin to firm again, we are growing in those marketplaces.
So I think the general tone in the marketplace right now is it remains a competitive environment. And we believe that will continue through the 2017 season in small business and key accounts. But most importantly, what we focus on is making sure our products add value to our clients and are priced
appropriately for our forward view of cost. We're not seeing anything unusual in terms of the pricing environment.
No. If anything, it's a pretty benign environment right now.
Both on the insured and self funded level. Yes. Okay. One last question, please.
We'll take our final question from Cheryl Skolnick with Mizuho Securities. Please go ahead.
Thank you very much.
So
there have been a couple of criticisms of late, which I think your quarter results, congratulations to everyone, kind of put to bed. But I'm going to ask this question anyway because it comes up from time to time. And that is, so obviously it's not possible for UnitedHealthcare to win all of this business on its merits, but rather it must be under pricing and therefore must be crushing its margins. So in view of the fact that you didn't do that this quarter and it seems from your seemingly well based enthusiasm for your momentum and strength of your business and customer relationship that you're unlikely to crush your margins off the new business in several coming quarters. How much of this new business win is actually related to the and also the ability to preserve margin, especially within UHC, is attributed to the integration of all of the business units, not just in OptumCare within OptumHealth, but or not just the UHC with OptumInsight, but all of it together.
So I'm asking the same question I asked basically in Q3 of 'eleven and 'twelve and beyond, which is how much of your results is as a result of the transformation of United itself to a better, smarter integrated business with Optum and United Healthcare, never mind the transformation of the marketplace?
Well, as usual, Sheryl, your questions almost don't need answers. We are a profoundly different value proposition. We are, we try to bring value to the marketplace through a much more diversified proposition and that each year gets more effective, more integrated, more mature. And I think that as Dave said in his commentary, 6 to 7 years of steady growth in the UnitedHealthcare business, the growth across all of the platforms, it is a different proposition. And I think that's kind of really just sums it up.
I won't go further than that. And again, we just have to prove that every quarter in terms of our own performance, our execution, the consistency of our growth and the consistency of our financial performance as we continue to grow and expand the business. And they are still a lot of opportunity. We are far from our full potential. And generally, when we conclude these sessions with you, we have an internal meeting talking about how much better we should be doing and could be doing if we perform to full potential.
So we are going to continue on that path and pleased to perform consistently this quarter, expect to do it into the finish of the year, have a positive attitude on 2017 and we're just going to keep working on that level. So that's I think a good way to close out the call. So we thank you for the conversation today. I think we've delivered a strong Q3. We reported solid growth in virtually every business across both Optum and UnitedHealthcare.
We are going to leverage this forward momentum and expect to close 2016 with real energy and drive strong and sustained performance into 2017. We'll continue to elevate the quality of our service. I think that's really important for us. We are very focused on NPS and quality performance to bring that to customers and to bring it to providers, improve the healthcare experience for consumers and we look forward to talking to you again next quarter. Our investor conference in November is just a few weeks away and we have held back a number of things this morning so that we can have a robust conversation with you in November and we look forward to that.
So thank you for your participation this morning.