Morning. I'll be your conference operator today. Welcome to UnitedHealth Group's 2nd 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 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 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 w ww.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8 ks dated July 19, 2016, 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. Please go ahead.
Thank you. Good morning and thank you for joining us today to review our company's Q2 performance. For full year 2016, both UnitedHealthcare and Optum continue to grow at a vibrant pace. The outlook for net earnings, cash flows and return on capital remains strong and consistent with our recent commentary. The steady advancement of innovative market responsive products, services and experiences has led to balanced organic gains across virtually all of our businesses.
We believe our businesses remain well positioned for continued broad based growth for the balance of 2016, for 2017 and in the years to come. As we reflect on this quarter's performance, we once again see exceptional growth, improved customer retention and important new business awards and opportunities leading to continued advances in both revenue backlog and sales pipelines. For Q2 2016, UnitedHealth Group revenues grew 28.2% year over year to $46,500,000,000 with all domestic lines posting double digit growth as we grew to serve 130 2,000,000 unique individuals. Adjusted earnings per share of $1.96 per share grew 13.3% year over year. Medical cost trends remained steady and consistent with the outlook we shared as we began the year and operating costs remained well controlled.
Last quarter, we updated you on our intent in 2017 to participate in only a handful of ACA compliant individual markets, what we refer to as the exchange market. That effort is on track and we do not expect any meaningful financial exposure on 2017 business from the 3 or fewer exchange markets where we currently plan to remain. Our 2nd quarter includes an incremental $200,000,000 in full year 2016 exchange market losses fully absorbed in these results. Along with what we absorbed last quarter, first half twenty sixteen results reflect an incremental $325,000,000 in full year losses beyond the expectation established as we entered the year. Looking at the company overall, we intend to carry strong 2016 business momentum into 2017 that will include investing in and improving our competitiveness for the years beyond 2017.
We will balance these investments with our commitment to provide returns to shareholders through growth in earnings per share and dividends. We will lay out a strongly positive and detailed view of 2017 later this year and address questions at that time. We'll now turn the call to Larry Renfro to discuss Optum's strong second quarter performance, then Dave Wickman will cover UnitedHealthcare and UnitedHealth Group overall. Larry? Thanks, Dave.
Optum's 2nd quarter results continue to build on the exceptional growth trends, earning results and operating performance metrics we have achieved for the last several years. 2nd quarter revenues exceeded $20,000,000,000 increasing 52% over last year. OptumRx revenues expanded 69% to $15,100,000,000 Optum Health and Optum Insight combined grew their top line to $5,800,000,000 growth of 20% over last year. Optum earned more than $1,200,000,000 in the 2nd quarter with all segments reporting earnings growth of 20% or more. First half twenty sixteen earnings from operations exceeded $2,300,000,000 compared to $1,600,000,000 in the first half twenty fifteen, an increase of 47%.
As expected, first half twenty sixteen earnings results represent just over 40% of Optum's full year outlook. Optum Insights revenue backlog grew 15% or $1,500,000,000 to $7,300,000,000 with growth particularly strong in revenue management, technology and government services. OptumHealth grew to over 80,000,000 consumers, up 6% over last year, while OptumRx is tracking well to its target of managing 1,000,000,000 adjusted scripts this year. The pipeline opportunities we are discussing with existing and prospective customers are increasingly more strategic. We are being asked to help fundamentally change and improve core business operations rather than simply respond to traditional RFPs or single point solutions.
Today, the average award size for OptumHealth and OptumInsight is more than double what it was
just a few years ago.
And Optum's qualified sales pipeline continues to grow strongly in both opportunity, size and quality. Last quarter, we discussed with you in some detail our vision for the next generation pharmacy care services business. So far this year, OptumRx has been honored to receive new external business awards for January 2017 covering more than 1,700,000 people, an increase of 40% over last year's sales results at this point in the year and the selling season continues. Sophisticated buyers are embracing our modern and innovative approaches to data and proprietary analytics, consumer engagement and service, specialty pharmacy and clinical programs that integrate to improve overall patient's health. A second high potential area is the health financial services market.
Independent estimates project market growth of more than 20% per year as the number of people using health benefit accounts expands and their account balances increase. Optum's health financial services business aligns with the company's efforts to help consumers navigate and use the entire healthcare system more effectively. Optum Financial Services serves consumers through 3,000,000 health financial accounts with approximately $7,000,000,000 in assets under management by year end 2016. And there are expanding opportunities in this area and others to simplify the consumer health care experience, incent prevention and wellness and provide consumers with deeper insights and more control as they seek to optimize their personal health and manage their health related finances throughout their lives. The consistent theme in these examples and in Optum's performance quarter by quarter is that customers are embracing Optum's innovative approaches to making healthcare work better.
We bring to market 4 things seasoned people, experienced operators committing to helping solve our clients' complex challenges proven technology, specifically technology enables solutions and tools to power clients' processes and operations. Unique data assets and analytics. We help clients gain insights, make better decisions and take better actions on multiple levels. Action and results. We have the flexibility and focus to respond quickly and execute our task accurately for those we serve.
Optum is uniquely positioned to serve as a valuable data enabled health services company in a growing $1,000,000,000,000 global marketplace, a company serving all stakeholders across the healthcare system, consumers, health plans, life science companies, governments, employers and healthcare providers. Now let me turn it over to Dave.
Thank you, Larry. Broad, diversified growth and strong forward momentum also continued at UnitedHealthcare again this quarter. UnitedHealthcare is passionate about modernizing and enriching the consumer experience and continues to advance new approaches to simplify that experience for the people we serve. 2nd quarter Medicare and Retirement revenues grew nearly 14% to $14,300,000,000 Strong retention and growth in Medicare Advantage and Medicare Supplement yielded net growth of nearly 1,500,000 people year to date. Growth in Medicare is being driven by dependable products that offer clear value and serve people in simple and caring ways.
For instance, while seniors are on the phone with us for other reasons, we will encourage and schedule hundreds of thousands of doctors appointments for them this year. Home visits by our house call nurses will be up 20% year over year to over 1,200,000 in 2016. Activities such as these along with consistent approaches around benefits, products, network engagement and tailored service meaningfully improve care quality, the consumer experience and customer retention. From these and other activities, we expect to serve a significantly higher percentage of our Medicare Advantage members through 4 star plans in 2017. This was a big lift by our people and care delivery partners, and I am grateful to all of them for what they have achieved on behalf of those we serve.
Strong organic growth continues in Medicaid as well with revenues up 14.7 percent to $8,300,000,000 as UnitedHealthcare Community and State served 225,000 more people in the 2nd quarter. This past quarter's growth includes new members in Iowa and expanded services in New York and we were awarded additional markets in Pennsylvania for next year as part of that state's program expansion. Importantly, Medicaid revenue growth also reflects a stronger mix as states continue to ask us to help them serve more people with more complex healthcare needs. We now serve nearly 5,700,000 people through state sponsored healthcare programs and we expect that growth to continue as we advance innovations to help states better serve their most complex and higher cost citizens, meeting their needs with more integrated social services built around their health. Our employer and individual business revenues also grew 14% to $13,500,000,000 in the 2nd quarter.
UnitedHealthcare grew to serve nearly 400 1,000 more people in commercial benefits through the 1st 6 months of the year outside of the exchange market products. This is strongly favorable to the initial growth forecasts for both self funded and full risk offerings. Turning to medical costs, we reported a care ratio of 82% this quarter, which is 30 basis points year over year a 30 basis point year over year increase, primarily due to adverse exchange market performance and the relative levels of claim reserve development in the quarter, offset by strong underlying core performance by the rest of our UnitedHealthcare businesses. Year to date, favorable prior year reserve development was $300,000,000 as compared to $130,000,000 in the first half of twenty fifteen. In the Q2 of 2016, reserves developed unfavorably by $100,000,000 Of this, dollars 60,000,000 relates to items that predate 2016 and do not impact 2016 core medical trends such as 2013 2014 Medicaid and Medicare true ups and settlements.
The current year portion of development relates to exchange market products. Beyond this component, the current year development in the Q2 was favorable. Commercial medical trend remains consistent with the original outlook of 6% plus or minus 50 basis points. Hospital inpatient admissions per person are lower year over year across all UnitedHealthcare businesses. Like most years, there are pockets of higher cost trends, including specialty pharmacy and the increasing use of ER and outpatient services this year.
Overall, healthcare cost trends remain in line and controlled. Bringing these items together, the Q2 UnitedHealthcare grew revenues by $4,500,000,000 or 13.6% on a year over year basis. The business grew by 320,000 domestic consumers in the quarter and has added more than 1,600,000 consumers year to date. UnitedHealthcare generated nearly $2,000,000,000 in operating earnings in the quarter despite the pressures from exchange market products and the Q2 prior year reserve development we just described. Stepping back, UnitedHealthcare has delivered steady distinguished organic growth consistently for more than half a decade and here's how we're doing it.
We help people achieve better health by using our data and analytics to simplify decision making and to help them access the care they need. We work with physicians and hospitals sharing information to help them make fact based decisions about the care they provide. And we focus every day on improving the quality of our execution in every interaction and process for the people we engage with and serve as well as those who provide their care. UnitedHealthcare still with only a modest national share in a growing healthcare benefits market, expect to drive further growth by delivering on these commitments better and better every day, every quarter and every year. Moving to UnitedHealth Group as a whole, cash flows from operations in the Q2 was $1,700,000,000 or about 1x net income compared to 0.7x net income in the year ago period.
Year to date, cash flow from operations of $4,000,000,000 was 1.2x net income, also ahead of last year's pace. The company repurchased 7,800,000 shares for $1,000,000,000 in the first half of twenty sixteen. Our Board of Directors increased the dividend in June by 25% to an annual rate of $2.50 per share. We will return nearly $2,400,000,000 to shareholders in dividends payments in the next 12 months. The debt to total capital ratio declined to 48% and we expect it will continue to decline in the second half of this year as we work back to a target in the 40% range.
Reflecting our performance for the 1st 6 months of 2016, overall growth and results have been favorable across the businesses. However, our exchange market growth is also above our original estimates as are the corresponding losses. Prudently balancing this overall performance, we are narrowing our 2016 adjusted earnings per share outlook to a range of $7.80 to $7.95 from the former $7.75 to $7.95 per share. We believe this to be an appropriate posture given the performance backdrop of the exchange business, even as the core businesses have performed strongly. As we consider the balance of 2016, we expect the combination of cost to set up new businesses for 2017 and ongoing investments in growth areas such as MedExpress, OptumCare and International, along with strong seasonal 4th quarter earnings performance from Optum,
Thank you, Dave. As we have discussed in recent conversations, we believe we are in the early stages of a unique era for UnitedHealth Group, looking ahead toward what may be the best and most important decade of performance for this enterprise. We serve growing markets that are seeking better performance in healthcare, both in the U. S. And globally.
We continue to strengthen and align enterprise capabilities to meet these needs. And we are intensely focused on the quality and consistency of the experience we deliver to our consumers, customers, benefit sponsors and care providers. On this latter point, we have the opportunity to evolve and differentiate our enterprise in the coming years by focusing intensely on redefining the quality and value of the healthcare experience for those we serve. And importantly, objectively measuring the impact of these efforts and recalibrating and enhancing our performance as we advance. With this focus, paired with evolving capabilities and the strong market positions of our growing diversified portfolio of businesses, we expect to drive differentiated growth for years to come.
These efforts will help people live healthier lives and make health systems work better for everyone. As a company, we're committed to making the most of this period of opportunity. We thank you for your interest today. And operator, let's open up for some questions. One question per person, please.
Thank
We'll take the first question from Matthew Borsch with Goldman Sachs. Please go ahead.
Yes. Could you just give us sorry, maybe some visibility on how you're handling the Medicare Advantage bids for 2017? I know the information is not public yet, but if you can just talk to directionally how much of the ACA fee suspension you've loaded into benefits versus reserving for other internal initiatives or earnings?
Sure. I think our orientation is to really make sure that we are serving the interest of seniors. Steve, do you want to
touch on that? Sure. Good morning, Matt. Steve Nelson.
Good morning.
Yes. So as you pointed out, it is a bit early to provide any detail, but I can give you some high level perspective and direction. We clearly want to build on the momentum that we're experiencing right now in 2016. So our objective is to continue to offer stability in our benefits, including premiums. There will be some enhancements where we think that's appropriate.
It's obviously a market by market conversation, but overall stability in both benefits and premiums. And this is driven in large part by the great improvement that we've been experiencing in our star performance, particularly for 2017. And then we're going to continue on the innovations around the member experience for clinical programs. And we think this well positions us for growth in both the individual and the group Medicare Advantage products and particularly in the group side, experiencing really strong sales and retention for 2017. Yes,
just sorry, go ahead.
With respect to the insurance fee and the moratorium there, I think it's important to think about that in the context of the overall funding equation. As you know, this program has been underfunded, 14% rate cut since 2010 and continues to be underfunded relative to medical costs. So our goal, as Steve mentioned, is to provide stability and valuable benefits to seniors. And it's a very effective program that continues to drive costs down and prove outcomes and satisfaction is really high. So our perspective and our approach has been after we take this into the overall funding equation, we're going to share a portion of it obviously with the provider partners and employer groups in the Group MA space and then passing on a meaningful amount to our members in the form of stable benefits and again enhancing where we can.
So I think that provides a perspective. And again, we're just we're really feeling great about the position of this business and the opportunities as we head into 2017 and beyond. Yes.
Great question, but it's just a little early in terms of going too far into it.
Can I just one follow-up? Okay, never mind. I know you got a lot of people. Go ahead.
So we can cover these offline, Matt, through the course of the day. Right.
All right.
Thanks. Next question, please.
We'll go next to Justin Lake with Wolfe Research. Please go ahead.
Thanks. Good morning. My question is on the exchanges. 2 things here. 1, I know you're broadly exiting, but wanted to get more detail on what happened here in terms of a postmortem.
Maybe Dan can walk us through how the initial $400,000,000 of losses was set when you originally realized the problem for 2016 and what the company has seen that has driven the loss to be about double that over the last 6 months or so. And then just lastly, you're running more than $500,000,000 of losses give or take in this segment for 2016 in terms of what you reported for this year. Can we simply add that number back to the 2016 16 reported earnings to get the true run rate to jump off for 2017 for Steve's strong earnings number for next year or is there some other adjustments we need to think about? Thanks.
Sure. So Dan, you want to take them through the math?
Sure. Good morning, Justin. Good morning.
My question was comprehensive. So just to rebaseline on the individual ACA. So our expectation coming into the year was that on a policy year basis, we would lose somewhere in the area of $525,000,000 We had done a premium deficiency reserve at the end of the year of 2 $45,000,000 to partially offset that. So the net of those 2 was about a $280,000,000 impact to 2016 earnings performance. And then in the Q1, we strengthened that or increased the loss expectation by $125,000,000 and then likewise added an additional $200,000,000 in the 2nd quarter, fully recognized in the quarter in terms of the expectation on the full year.
So when you put that all together, it's a shade over $600,000,000 of P and L impact to 2016. As you look at what's driving the increase inside that, so for the quarter, the $200,000,000 that we've added, it's a combination of 2 things. It's really more volume and higher consumption. And I break it down, about a third of that is higher volume. So we've got higher sales as well as more moderate attrition than we had expected.
And then the 2 thirds is really around the consumption. And obviously, we had unfavorable development on our exchanges relating to the Q1 in the second that came with higher Q2 costs and we've also let that inform our full year outlook. So 2 thirds of that 200 really relates to the underlying consumption. And what's changing underneath that to your question, the reality is the severity of chronic conditions inside the population actually increased on a year over year basis. If you look at the prevalence of chronic disease, things like HIV and hepatitis C, diabetes, COPD.
Those are examples of things that the prevalence was high to begin with in 2015 and that has increased into 2016. So that's what's informing our view. As you think about 2017, I would tell you of that $605,000,000 on the math I went through previously, a good meaningful portion of that will contribute to our 2017 performance. Some of the things offsetting that are certainly some semi variable and fixed costs associated with this business that don't go away as we shrink our footprint in 2017. Thanks, Dan.
That's I think a great response. So next question please.
And we'll go next to Sarah James with Wedbush Securities. Please go ahead.
Thank you. I wanted to circle back to comments around the negative prior year development. You mentioned that it was driven in part by Medicare and Medicaid settlements related to 2013 2014. What is that exactly? And it seems like an unusually long lag time for a true up, so if you could just talk us through that.
Sure. Dan, do you want to touch on that?
Sure. Good morning, Sarah. Well, first and foremost, I'd tell you that there are certainly a lot of inherent estimates in our business. And as a result, there's lots of pluses and minuses in any given quarter. So when you look at the portfolio of things that resolved in a given quarter, there are always some things that change period to period.
As it relates to the Q2, as Dave mentioned, we experienced $100,000,000 of unfavorable reserve developments and that was split 60% on the prior year and 40% on the current year. As you look at that prior year element, there isn't anything individually large. There's a collection of things and I'd tell you it was a blend of some old provider settlements as well as, as Dave mentioned, some government true ups, some of them dating back 3 years, particularly around Part D as you resolve the intersection between claims and corridors and reinsurance and programs inside that. So those are the things that contributed to that prior year element. Importantly though, those are all things that frankly don't have any bearing on our current year medical trend and medical outlook.
As it relates to the current year component, more than all of that was related to the individual ACA book of business. Absent that, we actually had favorable development related to the current year in the quarter. But important when you put it all together, from a medical cost perspective as well as a trend perspective, outside of the individual ACA, we continue to track in line with our expectations across the platform.
And some of it has to relate to how long it takes for the benefit sponsors and the administrations to actually get final data, so you can actually get resolution. Absolutely. Thank you. Next question, please.
We'll go next to Scott Fidel with Credit Suisse. Please go ahead.
Thanks. First, just a quick question is just on the exchange update. Where did you end up in terms of exchange lives in 2Q? And what is your updated loss forecast assume in terms of attrition for the rest of the year? And then just a second follow-up question, just on OptumRx,
looks like
you're actually annualizing now to over $60,000,000,000 of revenue annualized in the first half. So how are you thinking about the full year revenue guidance? I think most recently it was at $58,000,000,000 but it seems like your track or at least annualizing well ahead of that so far in the first half of the
year? Thanks. So that's an interesting 2 part combination. So Dan, you want to take the first part?
Sure, Scott. On the exchange enrollment, we ended the quarter with 820,000 lines in the exchange. So that's up about 25,000 from what we expected or from what we ended the Q1 at. As we look to where we expect to perform over the balance of the year, we expect that to moderate through attrition and land somewhere in the zone of about 750,000 lives as we close the year out. And then obviously, with this in 2017, we would expect a very meaningful reduction in that.
And OptumRx?
Scott, it's Larry Renfro. I'm going to start and then I'm going to ask Tammy Reller. Tammy is the new CFO at Optum and she's going to make a couple of comments here. So I'm just going to talk a little bit about the RX business for a second. We've been in business with Catamaran for about a year right now.
And when we did that, we had a lot of reasons we did the business and a couple of them, I thought might be important to call out in regard to your question and one was around the complementary strengths that we had and that was the retail and the mail focus and those business coming together as well as payers and employers coming together. But probably the most complementary was the technology and we've been able to get that put in place. The value proposition, and that's what I think you're starting to see now, the expanded services, the scale, as well as synchronization is starting to take hold and it's resonating in the industry. So we believe we're building a sound business and you know how that works. So we had a good first half.
We have hit all the metrics and are set up pretty well for the second half. And so I'll let Jamie comment on that.
That's great. Good. And I would just reiterate that integration going well, new business going well, renewals all going very well. So we appreciate the question on the business. The one thing I would just note too is that we had a number of items that we noted in the December Investor Conference on elements that would affect both revenue and as well as scripts and that has to do with Part D enrollment as well as one of our large clients moving to an administrative only relationship forward throughout the year, but again remain confident in the OptumRx business overall for the year.
Okay. Thanks.
Thank you. Next question, please.
We'll go next to A. J. Rice with UBS. Please go ahead.
Hello, everybody. I think I'll just ask broadly about capital deployment from here. Obviously, you're coming up on the anniversary of the Catamaran deal, where you step back from the share buyback activity, been running about $500,000,000 a quarter, which is less than previous. At what point do you think you might step that back up? And then also just on general acquisitions and opportunities for transactions there.
Can you give us any thoughts on the availability of deals and your thoughts about where you're focused?
Well, I think we'll address the capital allocation, but I would not get your hopes up that we're going to give you too much guidance about where we're focused and things like that, I think, as you might suspect. So, John, you want
to cover capital? Sure. Good morning, A. J. It's John Rex here.
So just thinking about the way you set up your question here. So, yes, we've repurchased about 1,000,000,000 shares, about $1,000,000,000 worth of stock year to date. That's against the guidance we had for $1,000,000,000 to $1,500,000,000 So you should expect that the repurchasing activity will moderate meaningfully in the second half of the year. And Dave had as Dave commented in his portion of the script, we're also committed to continuing to bring down our debt to total capital ratio back ultimately to our approximately 40% target range. So we're just slightly below 48% here as we exited the Q2.
And so we'd expect to continue to focus on meeting those commitments and bringing down that debt to capital ratio. So that's how I kind of think about it in terms of the progression on capital.
Okay.
And as it relates to M and A, I mean, we have a clear business model. We continue to be focused on building that out. We have talked in the past about allocating capital to cultivate capabilities that we think are important for the future. And we tend to be careful with respect to how we consider our timing and values. So I don't think any of those things that have been longstanding, attributes really change.
And so we continue to be attentive to the marketplace. But beyond that, I don't think we can give you much. Next question, please.
We'll go next to Peter Costa with Wells Fargo. Please go ahead.
It's going to be kind
of a broad question, but I'm curious about what you're seeing going on with drug price trend going on now. If we look at your bids, you've won some business with OptumRx, some very sizable accounts, including one where your pricing shows up in publicly filed information where you can see that your view on trend is a little bit below where some of the competitors are by 0.5% or 1.5%. So can you tell us what you think is going on with drug price trend and with the various regulation that's coming out or that might come out on drug pricing? And where do you see all that evolving going forward over the next year or 2?
So we'll comment from a PBM point of view and then maybe broadly in terms of the
pressure
on elevating drug prices broadly, particularly in the specialty categories. Mark?
Yes. Thank you. Good morning, Peter. Well, drug prices are the first item obviously on our clients list. And I think if you look at how we're attacking this, this last quarter has been a real differentiator for us.
As Larry said, the combination here for us was all about scale and it is intended to take to the supply chain. So as a much bigger business, we're talking about drug pricing every day to the biotech companies and to the pharmaceutical companies bringing product to the market. And the way we contract with them is to protect our clients as best we can from some of these price increases. Obviously, price can be addressed by regulatory issues, but also just by better management of the drug benefit. So we use our tools like formulary, like specialty steerage, like preferred and exclusionary networks to drive price down.
And in large part, this is what's defining us right now. We've reached a scale where we've obviously taken the drug spend that we manage for our clients to the supply chain and a differentiated model to drive down and contain to the best of our ability drug prices. And so rather than talk on a political stage about how to get after drug pricing, we're using the tools that we've deployed here and integrating them with better medical management in the broader Optum chassis. So we do think we have a differentiated model, a better way to get after drug price and drug cost management combining both the technology platform that Larry talked about and really the leading clinical management platform in the broader Optum. So that's what we're doing.
Next question please.
Next question is from Andy Schenker with Morgan Stanley. Please go ahead.
Thanks. Good morning. So maybe if you could discuss a little bit more how you see the Medicaid pipeline opportunity kind of evolving both near term and longer term, maybe even including the Pennsylvania MLTSS RFP. Dave in his prepared remarks said you expect to grow. So what's giving you confidence about your ability to continue to win RFPs going forward?
And then just real quick, how are Iowa costs running versus the losses assumed in the PBR? Thanks.
1st of all, as far as the pipeline, I think we mentioned a couple of times earlier in the year, we see a very robust pipeline. We expect to respond to about 20 RFPs this year that will be implemented over the next 3 years. Many of those, and I think this is really important piece, continue to include, and Dave mentioned this in his comments, more and more populations with complex needs. That gives us an awful lot of confidence because when you look at the combined capabilities of UnitedHealthcare and Optum, that really is in our wheelhouse. That's really where we can provide tremendous amount of value to the consumer, as well as our state partners.
So we see that continuing. The Pennsylvania LTSS opportunity is just one example of that. We'll see Virginia as another example of that, Oklahoma another example. So you're going to see a continued increase in these very costly populations. Keep in mind, when
you back up and look at
the macro story here, you've got $500,000,000,000 of spend in the Medicaid space. You've got about 70% of the membership in managed care today, but only about 41% of the dollars. So when we talk about confidence in the pipeline and opportunity to grow, that's really where that opportunity sits. Coupled with that, still some greenfield states, there are 15 states that don't have managed care today, some very large like North Carolina where we've been successful in working with the state to get legislation passed and that market will continue to develop. So again, I think it squares up very nicely with our capabilities and marks the road for good growth opportunity going forward.
In regard to Iowa, 1st and foremost, we're very pleased with the implementation. It's been going very well. We stay very focused on job 1, which is taking care of the folks we've been entrusted to do so. And we've built a very good relationship with the state. As you know, it's we're 1 quarter end, so it's very early.
So it's too early to really comment on what we're seeing. Early indications would be that it's in line with our expectations, but again, very early.
And we'll go next to Chris Rigg with Susquehanna. Please go ahead. Your line is open.
Good morning. Just was hoping to get some more clarification on Dave's comments about the drivers of medical cost trend. I guess just generally, when you made your comments about specialty pharma ER and outpatient and then inpatient, is that inclusive of the ACA exchange membership? And then more importantly, is it fair to say that the specialty pharma emergency room outpatient are trending higher than you initially expected and that's being offset by inpatient or just any color would be helpful? Thanks a lot.
Dan?
Good morning, Chris. Dan Schumacher. So, 1st and foremost, just as a reminder, coming into the year, our expectation was for a moderate increase in underlying utilization trend. That's what informed our pricing, our benefit planning, as well as the guidance we provided. And that's what we were able to manage to in the Q2, very consistent with our conversation in the Q1 and very much in line with our expectation.
Just kind of looking at how trends progress through the year, typically we talk in annual terms. But as we look to the quarters, we certainly don't view Q2 use as having accelerated beyond the Q1 rate. If anything, I'd probably tell you that Q2 is perhaps a little bit lower. To your questions about the categories themselves, the bigger drivers of our trend are certainly in pharmacy and outpatient, as Dave mentioned. And then working against that is more moderate levels of trend as we drive down per capita use on an inpatient basis.
The pharmacy piece, I will tell you that's largely driven by hepatitis C. So we changed our coverage criteria effective oneonetwenty 16 in our commercial business. So we expanded coverage and that's what's really driving that 8% to 9% pharmacy trend on a commercial basis that we talked about back at the investor conference. And then as you look to the outpatient side, inside there we see elevated levels of emergency room. Surgical procedures are contributing, also facility based, facility dispense prescriptions.
So that's kind of oriented more around the oncology space. So those are some of the bigger contributors. And not surprisingly, that is absolutely where our medical management efforts are focused to work down those costs.
All of those categories, I
will tell you, are within the ranges that we expressed at the investor conference, probably a little bit higher on the outpatient side, in line on the pharmacy pace, a little bit better on the inpatient side. But net net, we still expect on a commercial basis, our full year medical trend to be in the range of 6% plus or minus 50 basis points.
Great. Thanks a lot. You bet. Next question, please.
And we'll go next to Michael Baker with Raymond James. Please go ahead.
Yes. So Larry, I was wondering if you could update us on what you're seeing in terms of Optum opportunities on the international front.
Well, that's a good question. I'll start with probably the area that we're spending a lot of time in and that's the U. K. And what's going on with the U. K.
I'm going to ask Jeff Berkowitz who runs that area to follow-up my comments. But and we've talked about this in the past. We've been in the UK for about 10 years or so, but the past year we have put a lot of time and effort into the development of our products there. I would say that regardless of the political situation, the challenges, that the past year we've been able to establish ourselves in a capacity that people now understand the Ophram products, they understand our direction and what we're trying to achieve. So we remain bullish with some caution around what's going to go on, on the political side.
Jeff? Yes, Larry, just as you said, we've spent the past years in the UK establishing a very strong foundation.
We have a strong foundation with the National Health System, a strong foundation with the National Health System Improvement and a very strong foundation of work on and around with the Department of Health. And even with Brexit, Optimus Foundation continues to stand strong. And while we don't yet know all the ways Brexit will play out, as Larry just said, in the coming months years, We do believe that the health service right now will continue to drive its existing plans related to our own efforts there, and we will continue to work closely with England's Department of Health and the NHS to help them achieve those important missions.
And so Michael, it's Larry again. I would comment on Brazil that we are working with Emil and bringing our technologies, our services to that part of the world and that's going pretty well. And there are other development countries that are too early for us to talk about, but as we talked about back at the Investor Day, we believe this is about a $500,000,000,000 market. So we're going to stay and be a part of it.
Thanks for the update.
Next question please.
Next we'll go to Cheryl Skolnick with Mizuho Securities. Please go ahead.
Good morning and thank you. And first, I would be remiss if I didn't say congratulations to John and David and Tammy on their new roles. Well deserved and lovely to see. And with that, can we focus on something that's important, but I'm not sure we actually got a whole lot of detail around this. OptumRx has clearly done a very good job of winning competitive business and not based solely on price or not even importantly on price, but rather on what appears to be an innovative and intriguing combination of services and capabilities as well as scale.
Spend to spend to implement, which is great. But can you give us some more details about what you plan to do to ensure that these new lives as well as the existing lives have as seamless and experienced becoming OptumRx beneficiaries as did the 11,000,000 commercial lives, which you clearly were able to bring on without even a whisper of an issue. That would be very helpful. And with some estimate of what it will impact presumably in 3rd Q4? Thank you.
Sure. So, I think that's an excellent area of interest. So I'll start. Yes. So, Cheryl, it's Larry.
I'm going to ask Mark to comment after I finish. So I know you know that we have certain priorities that we work toward in Optum and one of them is to establish what I'll call these deeper, more comprehensive relationships. I think we had a goal to have about 8 to 10 of them by the end of 2016. I think we're pushing 17 right now. And these last wins were part of that.
So as part of going after that effort a few years ago, we have been strengthening leadership ever since that started. So we feel very, very confident in the leadership that we have and that we have developed as well as with the combination of catamaran and OptumRx, we're pretty solid when it comes to that. When you step over into implementation and execution, that happens to also be one of our key priorities that we pride ourselves on. So this is not really out of the ordinary what we do. So we looked at both of those things from an execution standpoint as well as from a people standpoint.
And so the third question you asked is about the monetary side of this and it's built in. So there should not be any impact at all to guidance. We expect to get these type of relationships and we built it in the plan. So there shouldn't be anything extraordinary that would happen from a financial standpoint. Mark?
Yes, Sheryl. Good morning and Larry, thank you. So, I think I'd like to just take a moment and talk about what broadly large scale buyers want and need. And we are feeling very good about the fact that our message is resonating and we posted some substantial wins here recently and it's not by accident. Large buyers have a set of complicated needs, but 1st and foremost, they need a flexible and proven technology partner and engine to drive their PBM benefit.
They obviously need market clearing economics and price matters. But our model providing superior service and really focusing on quality and then marrying our data analytics and our synchronization capability, these are really the reasons that our message is resonating. And then finally, if someone's going to make a bet on a big transition, you have to have a track record of executing on large scale conversions or transitions. And this combined business has that. As you know, there was a very large scale transition several years ago in OptumRx.
And in our prior business at Catamaran, we bought and integrated 8 companies. And so the notion of a heavy lift and making large scale implementations happen is something that we know how to do. So we're feeling really good about the balance of the year and the work plan in place to implement these flawlessly. If you look back on our Oneone16 where we also had a good number of new client wins, we got great channel checks on our implementation work because that's the heart and soul of this business. You have to do well.
It all starts with a successful implementation and we do know what to do. So thanks for the question.
Thank you. We only have a few more minutes, so a couple more questions. So the next one please.
And we'll go next to Frank Morgan with RBC Capital. Please go ahead.
Good morning.
One of the areas of growth you called out in OptumHealth, one of those drivers was expansion of behavioral services in the new Medicaid markets you called out on the press release. I'm curious, could you elaborate on that a little bit more on that particular growth opportunity? How sustainable is it? And how much did it contribute to this 15% growth in that segment? Thanks.
Sure. Mike? Sure. So this is Mike Wiessell. Thanks for the question.
I think when we look at behavioral health and we look at the Medicaid market in particular, we see a number of opportunities. I think we see them both in combination with UnitedHealthcare, as Austin mentioned earlier, in the areas of the long term social services or IDD populations. Those populations continue to kind of be driven into managed care in some way with the behavioral piece, so we see plenty of opportunity there. There are also other states which are looking to do that on a direct basis, and so we compete on a regular basis and have a robust pipeline today, specifically in the direct market with some of these states as they look to build it. So we see that as a continuing growth opportunity for us.
And the continued integration of behavioral health in the mainstream clinical?
Just to overcome, this is Austin Pittman. So Mike mentioned this, but the work we continue to do to really integrate our behavioral health with our physical health, really creating a new model that we're calling Whole Person Health is really an exciting new direction for us. It certainly will bode well for UnitedHealthcare and Optum's growth on that piece of business as well as that external business. In fact, you could probably think of it with a lot of the same attributes that were just discussed around OptumRx integrating and synchronizing that work with our full clinical model. Same thing applies here.
It's a really exciting next step for us.
And it's not limited to Medicaid. No. It's broad based. Next question, please.
We'll go next to Christine Arnold with Cowen. Please go ahead.
Hi there. You spoke to the backlog growth, which looks really nice in OptumInsight. Could you speak to where you see major opportunities and the kind of the composition maybe of the opportunities that you're seeing there?
Yes, maybe just in broad strokes though,
I'll start and it's Larry, Christine. So I'll get going here and I'm going to ask Bill Miller to come in on this as well. So when we look at all of our indicators and all are in line with what we are expecting. And 3 of the what I'll call the top metrics that we engage with to see how the growth is going, One would be our qualified sales pipeline and I brought that up a few minutes ago in the script. And I'll just tell you that from an overall year over year standpoint, our qualified sales pipeline, which is a very diverse pipeline, is double the size of what it was this time last year.
Obviously, number 2 is that backlog that we were talking about where we're up the 15% at 11.3 $1,000,000,000 Obviously, that's another key indicator. And I think the third one is even a stronger one and that's our, what I'll call our closed sales and how we look at the total contract value on that. And we're up 80% at the end of the second quarter and that 80% is going against the entire year of 2015. So I'm doing an 80% above on contracted total contracted revenue for Optum 80% above what was done in the entire year of 2015. So obviously the sales pipeline, the closed sales and the backlog, that's going to give us a jump start into 2017.
So we're feeling very good about where we stand right now. But I might just ask Phil to comment on some of the things that he's actually got going on inside some of these different metrics I'm talking about.
Yes. Hi, Christine. As Larry said, there's a lot of confidence if you interrogate that backlog and that prevailing confidence comes from. If you even look at Q1 and Q2, they were marked by some of the largest software deals we've done. Those have piled into the backlog.
We see more of that coming down the pipe in the future. Number 2, if you just look at the velocity, the sheer numbers, the size of it, as Larry noted, it is at breakneck pace. And then 3rd, if you kind of look at the nature and the demographics of that, just our activity in the pipeline in general, we are the recipients of more RFPs than we've ever been. We are engaging in strategic conversations with more constituencies at a faster pace than we ever had. And that includes health providers, health plans, governments, employers and certainly pharma.
And then also, I would think the interesting part about it is the comprehensive nature of the many of the opportunities in that pipeline. They're very big. They're long in their duration and they are really aligned with what we've always expressed in terms of these deeper and more comprehensive relationships. And there is a fair amount of it that's marked by analytics too. That's a growth market for us.
If you look at the demographics in there and you look at kind of the way we set up in the analytics market, it's clear that we're going to see growth there. The pipeline reflects that. And I think we have distinguished ourselves very well on the analytics front, on the revenue managed front, payment integrity. So it's a very diverse sort of boundaryless pipeline that I think bodes well for the rest of the year and certainly into 2017.
But to your point, has a long lead time and could be uncertain and unclear in terms of timeframes, right? Yes. It's just challenging to manage that. So, great question. Next question, please.
So we'll take 2 more and then we'll cut it off. And John and Brent and others will be around for the balance of the day.
And we'll go next to Ana Gupte with Leerink Partners. Please go ahead.
Yes, thanks. Good morning. So I wanted to get some more color on your comment on the capital deployment towards OptumCare. You've mentioned that as a focus area and MedExpress in context of these trends that we continue to see on outpatient mix shifting and ER and then most recently with the administration making all these changes, not the least of which is macro. I was wondering if you have an increased appetite at this time to buy primary care docs?
And are you seeing more willingness for them to affiliate with you relative to a hospital? And then the second part of that was what about ambulatory surgery centers given that seems to be a big trend in terms of elective surgeries and procedures?
Okay. Well, we'll go in another 10 minutes responding to that question.
Anna, it's Dave Wickman. Maybe just to extend on the capital deployment front and then if Larry or Jack want to comment as well, please feel free to do so. I think John Rex and his new role as CFO did a great job responding to our overall capital priorities. But I think it's been consistent over time. We have allocated about 50% of our capital to growth and about 50% of our capital to returning to shareholders.
And you can see that is strongly biased towards the dividend right now as we seek to also pay down our debt and get our leverage ratio down to 40%. The 50% on M and A, we really didn't touch on a whole lot. And our priorities remain pretty consistent as they have been. As you can see, we've been investing significantly in Optum and you can see the returns of that which have been extensive. I think the team has done a fantastic job of driving nice returns on the invested capital base that we put in place there.
2 of those areas were the MedExpress platform, which is the urgent care platform, which supports the notion of us providing a better quality, more consumer responsive and higher value care and in this case happens to be in the ambulatory setting. We said that with a foundational investment in MedExpress. And I think as you knew at the time, we would continue to invest in opening new locations in that business over time. And as you can imagine with de novo startups, they tend to create a little bit of a drag on earnings, particularly as you're just getting going in the early stages of that. Your instincts are right.
I mean, they kind of tie into the trend conversation that Dan discussed as well, which is we're seeing a higher utilization of ER and of course the care setting and the urgent care we believe is much more effective and will help to obviate costs not only for UnitedHealthcare but across all the payers that Optum serves. Another area of priority OptumCare business. Larry laid out quite nicely, I believe, the 75 markets that we want to pursue, which constitute about 80% of all healthcare. And one of the areas in which we're pursuing that is through the development of physician practices and services in those markets. And we have an initial foundation of that, I believe, about $10,000,000,000 of revenue or so on a combined basis.
We serve over 7,000,000 patients and we have a nice growing business, I believe in some stages of some 25 plus markets so far. And our activities there continue and we'll continue to deploy capital in that area and continue to pursue that development of our business in that primary care setting. Larry, do you want
to add? Yes, just a couple of things. Today, we have about 175 MedExpress urgent care centers and we have been doing about 30 startups a year. I think we'll ramp that up in 2017 to about 75. And then we probably have another additional 75 urgent care centers that were all part of the primary care businesses that we have and we have acquired.
So as Dave said, this is one of our top growth pillars in terms of what we're trying to do for the future and we're going to be focused on that. Now the other side of this is OptumCare and I'll let Jack talk about that.
Thanks, Larry.
In the OptumCare Care Delivery business, we're certainly in the early innings of building this. To your question on receptivity, yes, we are seeing increased receptivity of some of the higher quality physician groups, primarily organized around primary care to look not only to join us, but really to do something different in terms of the way they care for their patients, really looking for the assistance coming out of care delivery out of Bill Miller's business with Optum Insight around population health tools and really reequipping them to up their game to be more attractive to large plan sponsors and large employers looking to contract with physicians in an altogether different way. So we have been hard at work at that and we continue to seek the receptivity and we're going to be at it for certainly the balance of 2016 2017. And I think in one of your questions you had referred to MACRA, clearly game changing when it comes to the world of physicians and providers. We're certainly evaluating the regulatory release, but we think it is really a stamp of approval on where we're taking physicians and getting them right in the thick of more comprehensive population health management.
I think
we can play at that level and can do it right from the start.
Thanks. Very helpful color.
Last question, please.
And we'll take that question from Josh Raskin with Barclays. Please go ahead.
Hi, thanks for sneaking me in guys. Steve, you mentioned some commentary around 2017 and an outlook coming a little bit later. So I appreciate we're not going to get into the specifics here. But as you think about the comments you've made, dollars 2,000,000,000 of Optum Revenues that we know about Medicare Advantage, including the fee and group wins that you're seeing, the elimination of the exchanges, which that alone is $0.37 $0.38 this year, that's like 5% of earnings. Are there any offsets, anything we should think about that's unusual in 2017 in terms of a headwind that would preclude you from getting into your long term 13% to 16% growth?
So the only ones you missed on the upside were the stars, increasing stars performance and just the overall momentum of growth coming in. And then I think the offsets I would offer is, I think you have to remain respectful of 2 things and that is that our business has increasingly a large factor of federal and state programs and those programs have funding dynamics to them. So I think those things always have to be taken into consideration and respected. And lastly, as we've talked about through the course of the morning, kind of a never ending respect for medical cost trends, and particularly those that we outlined this morning, and making sure that we are addressing those effectively. And I think those two things are environmental, but have to always be called out as elements for consideration.
And as we indicated early, we are getting a lot of new business opportunities and successes and making sure that we stand those up in a very effective and successful way and are meticulous with respect to that execution. Those are the things that I would say balance off in terms of making sure that we are living up to our responsibilities. So that's the kind of outlook I would bring to it. Okay. So we thank you.
Just kind of in closing, UnitedHealth Group delivered, I think, a very strong Q2. UnitedHealthcare and Optum's products and services continue to grow and resonate with consumers and customers. I think our enterprise is well positioned to address the changing healthcare needs of the people and markets we serve. And in doing so, we continue to have the momentum of broad based growth that we're going to take through 2016 2017 and hopefully the decade ahead. So this concludes our call and we thank you for your interest today.
Thank you.
And this will conclude today's program. Thanks for your participation. You may now disconnect and have a great day.