Good morning. I will be your conference operator today. Welcome to the UnitedHealth Group 4th Quarter and Full Year 2015 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 Security Laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.
A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. This call will also reference non GAAP amounts. A reconciliation of the non GAAP to GAAP amounts is available on the Financial Reports and SEC Filings section of the company's Investors page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8 ks dated January 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.
Good morning. Thank you for joining us today as we close on 2015 and look ahead to 2016. We finished 2015 in line with the guidance provided at our December Investor Conference with 4th quarter adjusted earnings per share at $1.40 bringing full year 2015 adjusted earnings per share to $6.45 Overall, UnitedHealthcare had a positive year and finished with strong Q4 growth, exceeding 300,000 members and growing across all its markets. Optum delivered an exceptionally strong 4th quarter with revenues up 70% and earnings up 46% over the prior year. Before we go into the business commentary, let me offer a brief recap of 2015.
2015 UnitedHealth Group revenue grew more than 20% to $157,000,000,000 with organic revenue growth of 10%. Our cash flows were exceptional at $9,700,000,000 up 21% year over year. Our dividend increased 33% to an annual rate of $2 per share this year. UnitedHealthcare grew to serve more than 1,700,000 more people domestically, as Optum grew its revenues by 42% and revenue backlog by more than 20%. Excluding the impact of individual exchange compliant products and reserves related to the initiation of a new Medicaid contract, UnitedHealth Group still grew revenues by 19% in 2015 and grew operating earnings 15% to $11,800,000,000 and that would have produced an adjusted earnings per share of $7 a 16% year over year increase, again absent those two items to give you an idea of the underlying strength of the enterprise.
Know the individual exchanges are top of mind to you and Dave Wittmann will discuss these fully in his comments. As we said at the Investor Conference, the balance of our total business, the well more than $175,000,000,000 of it is thriving considerably stronger and better positioned than this time last year. We are committed to delivering a strong 2016 performance year in growth, in financial results and in the quality of our services and net promoter score or NPS performance metrics. 2016 is off to a strong start, considerably stronger than 2015. Our initial growth trends are very encouraging and our service performance for new January business is strong.
Optum's revenue backlog and pipelines have never been stronger. Medical costs in the Q4 trended slightly better than expected and we are confident our benefit businesses have appropriately priced their products for 2016. Our operating business platforms drive these results. So I'll ask Larry Renfro to review Optum's performance for full year 2015 and Dave Whitson to cover UnitedHealthcare and provide some UnitedHealth Group enterprise wide comment. Larry?
Thanks, Steve. 2015 was without question an exceptional performance year for Optum in revenues and earnings growth. And in our preparations to set up 2016 to deliver well for the nearly 115,000,000 people we serve. Optum's businesses have strong momentum and are producing strong sustainable growth across the board. Since beginning the 1 Optum journey in 2011, we have compounded revenues at 23% per year and operating earnings at 34% per year.
In 2015, Optum's revenues of $67,600,000,000 grew 42%, including organic revenue growth of 13%. OptumRx revenues grew 51% this past year to $48,000,000,000 and even excluding the catamaran combination posted solid double digit organic growth. Optum Health and Optum Insight together grew revenues to more than $20,000,000,000 which is growth of 24% over 2014. Our full year operating margin of 6.3% reflects the increased mix of pharmacy care services revenues, driven by OptumRx organic growth in 5 months of catamaran business. Both OptumHealth and OptumInsight's strong full year 2015 margins are sustainable, and we project operating margin expansion for OptumRx in 2016.
In 2015, we added to our strategic relationship portfolio, which now numbers 10, And we remain focused on developing more of these comprehensive large scale relationships. They leverage Optum's unique end to end capabilities to help solve the broader challenges customers and prospects are facing in a changing health care environment, whether they are physicians or hospitals, health benefit sponsors, governments or consumers. To illustrate, consider Optum 360 revenue management relationship with Dignity Health, where cash flows have already improved by $1,500,000,000 and accounts are being settled a full 8 days faster and where our documentation technology is helping Dignity Health physicians meet demanding ICD-ten requirements, even as they are realizing a 50% gain in productivity. Or consider OptumCare, our expanding care delivery business, in which we are developing some of the most impactful and durable consumer relationships. Today, we serve 7,000,000 patients through more than 150 payer relationships across our physician practices, our community based clinical services and our MedExpress Neighborhood Care Centers.
MedExpress operates at the conversions of healthcare and retail, measuring success one patient at a time. MedExpress can provide as much as 90% of the care patients receive in the ER and for as little as 10% of the cost. MedExpress mitigates costs for both payers and consumers, while providing high quality convenient care. We currently operate over 160 neighborhood care centers with a goal of operating several multiples of that number 5 years from now. Today, there are OptumCare Clinics in more than 2 70 locations in 26 local markets, having recently added ProHealth in the Connecticut market to that distinctive high performance practice portfolio.
Our pipeline for growth is gaining momentum as well. The Awesome Care approach respects local market norms and expectations, and our doctors consistently deliver high quality results for the communities they serve. We consistently We consistently outperform benchmarks around acute care readmissions and skilled nursing facility stays. More than 3 quarters of private Medicare patients we care for are in health plans rated 4 stars or better. And more than 96% of our patients would recommend our local care provider office to others.
For patients with complex medical conditions, our integrated care model has proven distinctive results. We delivered on average a 50% reduction in overall health care costs for medically complex patients with very high patient and family satisfaction. A number of OptumCare's high performing practices have been nationally recognized for their performance in the council care initiatives, including Monarch in Southern California and ProHealth in New York Metro Area. And finally, our house call services continue to deliver clear and distinctive value for Medicare recipients and payers with 98% patient satisfaction and more than 1,000,000 visits to patients delivered in 2015 and further growth in 2016. With the market momentum we have today and through these constantly advancing capabilities, we expect OptumCare will remain a high growth business for many years to come.
As we share other examples in future quarters that reflect Optum's growing diversification, such as our military and veterans health services or our pharmacy care services or our technology support services, you should see with even more clarity a pattern emerging, the application of data, technology and services to bring better performance, helping health systems work better for everyone. Today, revenues from our top 25 customer relationships at Optum have quadrupled over the last 3 years. In 2015, the average customer award size doubled across OptumHealth and OptumInsight. And we expect continued strong customer retention at OptumRx as we work to bring the powerful benefits of the OptumRx merger to these clients. Prominent organizations continue to inquire about how our capabilities can help them.
So we are exploring potentially large and interesting new strategic relationships. In many cases, these pairings could further accelerate growth in the Optum Insights backlog, which now exceeds $10,400,000,000 and grew by more than 20% year over year. Within the current portion of that backlog, we already cover more than 80% of Optum Insights full year projected 2016 revenues. We remain optimistic about the prospects for Optum in 2016, 2017 and beyond. For 2016, we are projecting revenues to well exceed $80,000,000,000 which would be growth in the area of 20% and for operating earnings to grow 30% to 34% to more than $5,550,000,000 Optum is becoming an increasingly valuable business and now represents about 42% of UnitedHealth Group's consolidated operating earnings outlook.
Now let me turn it over to Dave. Thank you, Larry. UnitedHealthcare continues to differentiate itself from competitors on a foundation of distinctive service, product innovation and integrated clinical and network value and the result is strong sustainable growth. UnitedHealthcare now serves 46,400,000 medical members and we have leading market positions in private health insurance segments of North and South America. Over the past 5 years, we have grown by nearly 13,500,000 people or 40%, well diversified across commercial, government programs and international offerings.
This reflects the deliberate diversification and consistent competitiveness of our offerings globally. UnitedHealthcare continued this trend in 2015, growing to serve 1,750,000 more people domestically as it continues to improve its market share. UnitedHealthcare's full year revenues grew nearly 10% to $131,300,000,000 The full year operating margins of 5.1% decreased as expected, declining 70 basis points year over year due to the effects of public insurance exchange products. Full year commercial medical cost trends of 5.5% came in at the low end of our initial outlook 1 year ago. Our cost trends reflect the positive sustainable impact of higher consumer engagement, strong alignment of incentives with care professionals through value based relationships and improving data collection and application.
We are equally pleased with emerging innovation trends in our business focused on advancing the consumer movement in healthcare. Today, 25,000,000 consumers are served through our advocate for me service model. People served by this innovative approach are more engaged in their health and are more effective in their health care decision making and are more satisfied. Today, over 23,000,000 consumers have joined our Rally digital health applications and we are seeing steady advances in daily active use of these services, including importantly engagement around selecting primary care physicians, better use of urgent care over emergency care, screenings and higher adoption of personal health and condition management programs. And today, our Real Appeal digital medical service designed to help manage weight and reduce the onset of diabetes has been deployed to accounts representing 1,000,000 people in just the last half of twenty fifteen and with an additional $500,000 committed for the first half of twenty sixteen.
The initial results are encouraging with 46% of participants achieving a meaningful reduction of 5% or more of their body weight within 16 weeks. 5% weight loss reduces the conversion to diabetes by nearly 60% according to studies conducted by the National Institute of Health. Given these exceptional results, we plan to make available digitally a broader set of preventative medical services to engage people to live healthier lives to the fullest. Across UnitedHealthcare, we intend to continue to positively impact the quality of social services, condition management, cost and quality transparency, convenient care, wellness and the overall quality of life of the consumers we serve by giving them the tools like these to engage them in their health. Our work is improving the quality of patient care.
In Medicare, we have closed 9,000,000 gaps in care for the seniors we serve. We will serve 1,700,000 members in health plans with higher star ratings in 2017, as we expect at least 63% of our members to be in a 4 star plan. And we will further improve that percentage in 2018 to 80% or more. It is not a coincidence we are off to our strongest growth start for Medicare Advantage in company history. We expect to close Q1 with growth of around 300,000 seniors in Medicare Advantage and we are tracking well against our full year outlook of 325,000 to 400,000 people in that growth.
In commercial benefits, we combine tiered networks, our clinical strategies and innovative product designs in a myriad of ways to align to a wide array of affordable price points for employers and consumers. Today, 1 third of our commercial customers are served through one of these more affordable plan offerings. That's double the number from 5 years ago, and we expect that percentage to more than double again over the next 5 years, aiding to our exceptional growth. In Medicaid, over the past 2 years, we have secured new contract awards totaling more than 2,000,000 people. Managed Medicaid continues to emerge as the ultimate long term sustaining solution for states and we believe UnitedHealthcare offers our state customers the most distinctive and comprehensive set of capabilities.
Like in Medicare and Commercial, we are well positioned for 2016 growth in community and state. Turning to exchanges. We expect to start the year at around 700,000 or fewer public exchange members and expect these numbers will steadily decline over the course of the year. We are not pursuing membership growth and have taken a comprehensive set of actions to contain membership and sharpen performance over the balance of 2016. We have withdrawn platinum products, increased prices, eliminated marketing and commissions, intensified clinical engagement and medical management with this membership group and reduced operating cost as appropriate.
As a matter of prudence, we have increased our premium deficiency reserve by $65,000,000 above our investor conference estimates, bringing the total 4th quarter charge to $340,000,000 $245,000,000 of that charge addresses 20 sixteen's exchange compliant product exposure. This is in addition to the unreserved losses including in our 2016 outlook. Combined more than $1,500,000,000 set aside for 2016. We believe we have fully captured 2016 exposure now based on our actual starting enrollment. And by mid-twenty 16, we will determine to what extent, if any, we will continue to offer products in the exchange market in 2017.
In Medicaid, the start of the new program in Iowa has been deferred, while the state has also increased the assigned enrollment for each contracted plan, which increases our estimate of revenues. We are in constructive discussions with the state concerning elements of an effective and sustainable managed Medicaid program to serve that market. As we look into 2016 2017, we believe UnitedHealthcare will continue to grow at a strong pace and profitably improve its market share. Fundamentally, UnitedHealthcare is emerging across the spectrum of consumer driven products, service, wellness, transparency and most important care engagement and clinical quality, particularly in government programs. We have room to improve, but sharp focus on NPS and the quality of the work we do and a culture centered around helping others, we have an opportunity to offer even greater value to consumers, providers and customers alike in the coming years.
Before Steve sums up, let me touch on the outlook for UnitedHealthcare Group as a whole. We are committed to strong performance in 2016 across UnitedHealthcare and Optum in service, in operations, in growth, in earnings generation and in cash flow production. We foresee cash flows approaching $10,000,000,000 and adjusted net earnings of $7.60 to $7.80 per share. Again, adjusted net earnings for us is GAAP EPS plus after tax intangible amortization. We encourage everyone to move to adjusted net earnings to enable better comparability among companies and among the analyst community.
We expect about 46% to 47% of full year earnings in the first half of the year with Optum at approximately 40% of its full year plan in the first half exactly as you saw it last year and in the past. We expect the rate of our earnings growth to strengthen during 2016. Current consensus street estimates for Q1 adjusted earnings per share might be slightly strong compared to our expectations at the moment. All in, we have a strong view of 2016 and look forward to this year. Steve?
Thank you, Dave. At our Investor Conference, we offered a sense of the growing innovation and entrepreneurial activity in our company and the restless drive our team has to grow and improve performance. On the customer side, we're committed to further elevating satisfaction for consumers, care providers and all our stakeholders to levels more often seen outside our industries to better meet the increasing expectations people and society have for healthcare. When our Net Promoter Scores reflect people being staunch advocates for our products and businesses because of the way we make their lives simpler and the value we provide as they define and experience it as consumers and customers, we'll be on the path to creating truly distinctive and substantial growth and brand equity. We believe a differentiated brand and reputation will drive accelerated growth and market share gains for our businesses for years to come.
Our goal for serving you as investors in 2016 is simple. We're committed to delivering clean, strong results this year, backed by a growing pipeline of opportunities for 2017 and beyond. We expect distinguished revenue growth, earnings and cash flow in 2016 that continue to reflect the diversity, breadth and overall strength of our enterprise and the valuable businesses we are building. Thank you for your interest today. And operator, can we take some questions this morning?
One per analyst, please. Thank you.
As possible. And we can
take our first question from Matthew Borsch with Goldman Sachs. Please go ahead.
Yes. Hi, good morning. Could you just talk about what the factors were that caused you to increase your booking for anticipated losses in 2016? I guess maybe I think it was $45,000,000 higher on the exchange side and $20,000,000 higher on the Medicaid contract, if I got that right?
Yes, you do. And it's really just purely updating. I think Dan Schumacher can take you through it. Good morning, Matt.
Good morning.
So you're right. We did increase our loss expectations for 2016. And what it came down to really as we closed out the year, we took a prudent posture on the 2015 impact and then we carried that through to 2016 outlook and then we adjusted further for a little higher enrollment expectation for 2016. So those are the elements that played into the increase in both the 2015 impact assumed losses for 2016 in the individual exchange compliant plan offerings. And then with regard to the Medicaid portion, that's simply just a function of a higher enrollment expectation as the number of carriers was reduced from 4 down to 3.
But when you put that all together in total, as we closed the year, it was about $100,000,000 of impact beyond what our guidance had assumed from December.
Okay.
So our base business, the vast majority of our business performed exceptionally well and we delivered fully in line with the expectations as we closed out 2015. And then as we look to 2016, we've incorporated that again fully into our outlook as we reaffirm our guidance for 2016.
And if I could just one related question. In the Q4 on individual enrollment, I think your total book is about $1,200,000 How did that change as a result of the maybe in at the end of the year and then coming into this year as a result of the co op insolvencies and related instability in the individual market? So
I think the last time we talked, we talked about our individual exchange compliant being about $700,000 of that $1,200,000 you as we step into January and then it will start to shrink again over the course of the year as some of those enrollees trend out. Okay.
Thank you.
And I would just say it's kind of an overarching philosophy. Our goal is in this area is to be careful, conservative and to make sure that
we really capture all this, so
that really we really have de risk 16. Next question, please.
And we'll take our next question from Josh Raskin with Barclays.
Hi, thanks. Good morning. I want to talk a little about Medicare Advantage. I know the CMS data is relatively preliminary, but certainly seems like you guys are well on pace to beat the 400,000 for the full year at the high end. So just curious, it doesn't sound like you've gotten much star improvement this year.
So what made your products more attractive? Is it more retention? Is it more agents or coming from other plans? Just any color on where the growth is coming from?
Sure. It is good growth as Dave indicated, but Steve Nelson can really respond to that and it is a very positive story.
Thanks, Steve. Hi, Josh. It's Steve Nelson. Yes, very positive about the growth that we're seeing coming through the AEP and just a little insight into that growth. First, it's important to remember that it comes as a result of and after a couple of years of really hard work as we repositioned this product to some of the changes in the Medicare Advantage program, introduced premiums, created a more aligned and engaged network and relationships with our providers and meaningful improvement in STARZ as you mentioned.
And second, we really like where the growth is coming from. And so I think Dave mentioned in his comments about $300,000 or so as a result of AAP, about a third of that comes from group. So really good insight into that pricing and that membership. And then within the individual business, meaningful improvement in our retention also has added to this growth. And so this is membership that we've been engaged with and they've been involved in our clinical programs.
And it's very evenly spread across geography and products. But stability of our products, the evolution of our portfolio is really resonating in the market. And so I think that's all contributed to the growth. And we expect this Medicare Advantage product to continue to grow as we look at 2017 and beyond.
And Steve, just a quick follow-up on that. Do you
have a percentage of how many are coming from previously not in MA, whether that's agents or traditional fee for service versus how many are coming from other plans, competing plans?
It's a little early to give that kind of color, but I would say in general in terms of how we look at the membership, it's very much in line with our expectations.
Okay. Thanks. Next question, please.
And our next question comes from Andy Schenker with Morgan Stanley.
Hey, thanks. Maybe just going back to the exchange enrollment real quickly, just a few on the membership here.
Maybe if you could talk a
little bit about how your positioning or membership growth compared to the existing states versus the 11 new states you entered? And then relates to that obviously still a little over a week less than open enrollment. So just how you're what kind of forecast are you expecting for total enrollment? I assume you're trying to you assume there's a big jump in the last week or 2, but just how we should think about that $700,000 related to expectation last 2 weeks? Thank you.
Dan? Sure. Good morning, Andy. So on the exchange enrollment specifically, the 700,000 that Dave mentioned beginning January, we ended the year with just about 500,000. So that jumped up to about 700,000 as of oneone.
We'd expect that over the balance of the open enrollment period to grow something underneath about to about $800,000 something a little south of that. And then we would tread out. In terms of the where it's coming from, I would tell you that the net growth is coming with a greater orientation towards those new states as well as expansion areas, but a little bit of mix of both.
Thanks. Okay. Next question, please.
Our next question comes from Chris Rigg with Susquehanna. Please go ahead. Good morning. Thanks.
Just on the last question, I got a little confused with the numbers, Dan, just on the $800,000 versus $700,000 $500,000 ending a year $650 ish $1,000 now.
Can you just confirm did you end the
year at $650,000 or was it 500,000? And then my real question with regard to all of this, do you know how many of the people that have currently signed up were enrolled with
you guys last year versus new membership? Thanks a lot.
Sure. So just to be clear, we ended we're going to we ended the year with 650,000 lives in individual exchange compliant offerings. Inside of that 500,000 of them were on exchange. So the balance 150,000 was off exchange. And then as we step into January, that exchange component, which ended the year at about $500,000 grows to about $700,000 And then as you move towards the end of the open enrollment period, it grows further up towards 800,000 something south of that and then works its way down over the year.
The off exchange is more level than what we experienced in the on exchange. And then to your last question about mix of enrollment, More than half of the enrollment is new to us and a little less than half of the enrollment is existing enrollment base.
Great. Thanks a lot. Thank you. Next please.
And we'll go next to A. J. Rice with UBS. Please go ahead.
Hi, everybody. Just might ask focus my question on Medicaid both you update your membership with one player dropping out in Iowa. Is that enough to move the needle? I guess we've had some companies comment on concern about profitability in Medicaid year to year. Can you give us a flavor there?
And then finally on that, the health insurer fee question for 2017, have you gotten any clarity from CMS as it relates to Medicaid and Medicare and how they're going to treat
that? Well, that is quite an impressive single question, A. J. So we'll break that up into pieces and we'll start with Austin on Medicaid. Sure.
So hey, A. J, this is Austin. How are you? Good. So, first of all, I
think you were asking about Iowa. We did increase our membership outlook and assumptions for Iowa as the state moves from 4 players to 3. As far as the sustainability of the program, I think first of all, as we stated before, we're really honored to have been selected to serve the people of Iowa. We continue to be feel good about the relationship that we've developed with the state. We're in very productive conversations with them about really tried and true methods to ensure long term stability.
And so we feel good about where that's headed and it will become a long term and very durable part of our portfolio. And really with regard to the rates overall, as you know, states are always pressured. There's nothing new in that. I think we're very pleased with our business, most pleased with the value that we've been able to bring to our customers and to the consumers over the years. We've got a very strong management team, very locally deployed and able to manage these populations and really help people in very vulnerable situations and deliver value for the long term.
So I think we feel good about a pressured but stable rate environment and the growth in this market.
And nothing really distinctive in terms of the rate environment, the same pressures that exist every year? Absolutely.
Dan? Sure. A. J, it's Dan Schumacher. On the health insurers tax, I'd be remiss if I didn't mention that.
From our perspective, obviously, the tax just increases the underlying cost of health care and as
a result makes health care less affordable. So as
we look at the elimination of it for 2017, we're certainly encouraged by that. And frankly, we've been long supporters of its permanent repeal. Now with that said, I'll tell you in terms of the impact, in Medicaid, we expect it to be no impact. In the commercial business, because that's priced on a policy year basis and the tax is levied on a calendar year basis, there's no impact over 3 years, but there are some differences by year and we expect it to actually be a drag on our 2016 earnings. We've estimated that impact to be about $100,000,000 of pre tax or about $0.06 earnings per share.
And then lastly, the Medicare business, the tax has not been part of the rate setting process previously, so we wouldn't expect it to be for 2017 either. Okay. And that pressure
is covered in our guidance. We basically absorbed that in our guidance given the strength of
the
start of the year.
Next question please.
We'll go next to Kevin Fischbeck with Bank of America.
Great. Thanks. Just go back to the exchanges. I guess if we shift the premium reserve from 2015 into 2016, Are you saying that you expect to lose more money on exchanges in 2016 than you did in 2015? And if so, why would that be the case?
I guess you had a chance to price up the core business.
Well, I'll have Dan answer this, but I think as a matter of prudence, what we are doing is making sure that we have covered ourselves appropriately in 2016. And if that means we set aside more money between the reserves that have been set aside and the what we have covered within our guidance that is clearly our purpose. We are really focused on making sure that this item is really covered in 2016. And so I think that's what you should read through in terms of
our activities. Dan? Sure. Good morning, Kevin. So if you move the premium deficiency reserve and reset the years and look at it on the individual exchange compliant plans within 2015, we lost about $475,000,000 on the 2015 policy year.
In the 2016 policy year, as Dave Wickman had mentioned, we'll lose more than $500,000,000 So we've got about a 10% increase in the loss assumption balance against about a 25% to 30% growth assumption in the underlying enrollment base. And the reason that we're able to do that is to the points that you mentioned. Obviously, we came in with very strong pricing in that mid double digits. And further, we made some strong refinements to our product portfolio. Those are the largest contributors.
But beyond that, we're also working every single day to tune our operating environment as well as focus our clinical interventions and our network orientation around this population.
I guess you're saying it's the losses they're going to be in you mentioned like half the growth is going to be in new states and new geographies. Is that why the losses is that why you have losses really at all building up? Or do you think that the core business is actually going to get worse as well?
No, I think it's going up because we've got enrollment growth. And then balanced against that is our pricing, our product positioning, our clinical interventions, our operating environment and the improvements we're making
there. And I might point out that this is what we are providing. We are being careful in terms of making sure that we have covered this off. These are not losses that we are sustaining. These are what we have protected ourselves against in terms of 2016.
Okay. Thanks.
And we'll take the next question from Peter Costa with Wells Fargo. Thanks for the question.
Previously, you said that you were expecting $0.13 to $0.15 or $200,000,000 to 225,000,000 dollars as additional losses from the exchange business in 2016. It seems like that grew a little bit because you talked about over $500,000,000 now in losses including the $245,000,000 PDR. But my question gets to if that's the right number the $0.13 to $0.15 and maybe correct me if I'm wrong that would be say $0.14 at the midpoint added to your the midpoint of your $7.60 to $7.80 guidance. So let's call that $7.84 of potential earnings. That's only 12% growth from the $7 number that you have excluding those the individual business item.
Last year you grew 16% to get to that $7 in terms of earnings. Which of your core businesses is the one responsible for the slowdown from 16% to 12%?
Well, Peter, those are projected numbers. We would think that we could perform even more strongly. So I think that by just isolating that against a beginning of the year range may not be a fair comparison in comparing your 16% to 12%. Actually, as we take a look across our spectrum of businesses, we really don't see any of these businesses in a position that they are actually I would say they're all stronger than they were as we compared to this time last year as we entered clearly across the board at Optum. The strength of the portfolio from one end to the other has advanced.
And in terms of UnitedHealthcare, I think all those businesses have strengthened the and I think our positioning on the exchange has strengthened. So I think my view on this is that it is a pretty positive outlook.
16% you'd say the difference between the 16% and 12% then is PPD perhaps? Is that what you'd say?
No. I'm not sure you can in my view, take that one element and then project against an estimated earnings range as we go out. We could be even stronger than that. Okay.
Next question please.
We'll take our next question from Gary Taylor with JPMorgan.
Hi, good morning. This is a question for Larry, I think. When we look at OptumInsight, operating income was up a couple of $100,000,000 sequentially, same case last year was up about $100,000,000 sequentially in the Q4. Can you just remind us the source of the seasonality in the operating income for Optum Insights Waste?
Sure. I think we'll have Larry kind of give you some sense of the growth momentum there and then respond to that specific question. Jerry, it's Larry. I think that you've seen over the last few years that the Q4 is obviously a dominant quarter for us. We believe that will stay that way.
If I had to break it down, I'll give you 3 areas to think about. A lot of times at the beginning of the year, we're making investments and those investments pay off in the Q4 and you see a little bit of that happening. We're also in implementation mode during the year and those implementations and installations also come through in the Q4 and that enables us to obviously have a stronger position at that point. When you look at the products and services, there are specific products like obviously distribution that goes along with open enrollment, but also our paper performance and incentives will also hit in the Q4. So we don't see that changing.
We see that being the pattern that Optum in general will be experiencing. Okay. Thank you. Next question, please.
We'll go next to Christine Arnold with Cowen.
Thank you. Impressive increase in backlog for OptumInsight. Can you remind us, I think you gave us some parameters at Investor Day, how to translate that into expected revenue over time?
Sure. Christine, it's John Rex. Good morning. When you think about the backlog, dollars 10,400,000,000 backlog, you see an insight, some of the guidance points that we provided on that is you should expect about 60% of that to be recognized in the 2016 revenues. So that would equate about 80% of the full year revenue outlook.
Another way to look at that is that the average duration of the backlog runs about 20 months. And these have been fairly consistent numbers and I'd expect that to be fairly consistent as you look ahead also.
So, Tristra, it's Larry. One thing I would add to what John said is that, as of now about 90% of our 2016 revenue is locked in. Obviously, that's part of the backlog. Okay. Perfect.
Thank you.
We'll take our next question from Sarah James with Wedbush Securities.
Thank you. I just have one quick qualifier before my question is. So you had mentioned earlier that there are conversations with states on Medicaid rates around tried and true methods that ensure stability. Does that mean I'm wondering if this is referencing changes in the risk adjustment methodology that can lead to some premium givebacks? Or are you talking about other aspects of tried and true methods?
So this is Austin. Really, I was talking about a whole portfolio of methods. So you can think about care coordination, network management, the level of transparency that we address, the rates and emerging experience over time with states. So you could narrow it down to anyone. We've got a very long term history of 20 30 year relationships.
So a lot of success in how we work with states. And so that's what led us to feel so confident and comfortable with where we go with Iowa and really with our whole portfolio of states.
Got it. It's just that I know some of your peers are trying to lobby to get those risk adjusters changed back. So I wasn't sure if that was an indication that United was as well, but it sounds like there's some other aspects that you're negotiating with.
Yes. And I wouldn't comment any further detail about the specifics of any conversation with any state.
Got it. Then in the past, you've talked about opportunities for growth in Medicaid outside the RFP cycle like states assigning LTSS or carving in other products? Do you still see that as a possibility? And is there anything near term?
You got it. Sure. So let me comment on the pipeline overall, which I think is very strong. States continue to move and look to managed care as solutions for their healthcare needs. That movement continues as states have really embraced this.
I think that activity in fact, I think we expect to respond to over 20 RFPs this year that will be implemented in 2016, 2017 and on into 2018. So again, when I say the pipeline is strong, it's very strong. That's heavily weighted towards more complex populations. So that's really what you're talking about when you speak to LTSS and the movement of those complex populations from fee for service into managed Medicaid. We've got one of the largest books of business in that space.
We've got a very long history of dealing with these very vulnerable people and delivering real value to those individuals, so as well as value to the states. So I think we feel and Dave mentioned it in our opening comments, I think uniquely positioned between UnitedHealthcare and Optum to really serve these populations, and help them live healthier lives year over year and deliver value back to the states in the process. So I think our outlook for that continued movement even within states where we're already providing traditional TANF population managed care to continue to grow into those complex populations.
Thank you. Next question, please.
We'll go next to Cheryl Skolnick with Mizuho USA.
Thanks so much. First of all, let me step back. I mean, against the backdrop of a somewhat challenging situation with exchanges, let me and this shouldn't sound false, compliment everyone from UHC to Optum to senior management on the way you performed and handled during 2015. I'm impressed by especially the fact that from where I sit, the progress you've made with the cost structure as well as positioning of the business. I don't remember United having a better cost structure, better positioning going into a growth year in a very long time, if ever, than you've got now.
So let me ask a question about one of those things that's interesting to me that you performed well on, which is the cash flow. It's, I guess, multipart 1, why the strength? 2, does this change in any way your thoughts around share repurchases versus deleveraging versus investments in the business for 2016? And 3, if you're going to it seems like 2016 guidance is perhaps a little bit more conservative, if not a little modest on the cash flow. And I was just wondering what you think might change?
Thank you, Chip. Dave will touch on the beginning of that and then we'll get into the share buyback, invest, etcetera part is part 2. Thank you, Sheryl. First, thank you for the recognition of the hard work this team has done this year, particularly in the last half of the year to get its cost structures aligned and to really position this business for growth in 2016 and beyond. Cash flows were exceptionally strong.
I think from past calls and discussions that we've had, we were very, very focused on cash flows and in particular managing the balance sheet elements of our business and the strength of the cash flows or the departure from what our original expectations were really around collecting receivables more quickly and paying claims more in line with what our contractual requirements are as opposed to paying early. So just better working capital management and really contributed to that. As it relates to then what our priorities are for that is around share repurchases, deleveraging and investment. We're going to continue to maintain a very balanced posture with respect to those things. Obviously, it's important that we continue to delever the business as we had indicated that we would over the course of 18 months following the Catamaran transaction and we continue to be committed to doing so.
Part of that is that our expectation is that we'll continue to curtail our share repurchases at least for 20 16 unless extreme circumstances arise. But for 2016, it's about $1,200,000,000 to $1,500,000,000 in cash use. And as you can probably suspect by the activity that's underway in our business, we continue to be a strong investor in new capabilities organically in our business, but also through acquisitive means. As it relates to 2016 and the cash flow, it's certainly jumping off of a $9,700,000,000 cash flow year with stronger earnings expectations for 20 16, you would expect that you would achieve higher cash flows. And as a result, we use the language of 9.5 $1,000,000,000 to $10,000,000,000 in cash flows.
We're now talking closer to $10,000,000,000 And we'll take a hard look at that over the course of the Q1 and reassess whether or not we can push that number forward. But clearly, the business is operating well from a balance sheet management perspective. We'll do all we can do to move that the cash flow number forward.
Excellent. Thank you so much.
Next question please.
We'll go next to Scott Fidel with Credit Suisse.
Thanks. Just had one follow-up first on the exchanges. At the Investor Day, I know you had talked about assuming around a negative 15% margin in the exchanges. Just as you work through sort of the updated math is that still how we should be thinking about that or sort of different relative to that number? And then just a follow-up question.
Just interested outside of the exchange just on the membership front, how membership ended up developing for the rest of the commercial risk business for the 2016 enrollment period, most notably in the small group segment? Thanks.
Sure. We'll let Dan comment on the first and then Jeff also kind of speak to the business in 2016. Good morning, Scott.
So where we landed on a policy year basis as we closed out 2015, our policy year losses on the exchanges were in that mid double digit rate, mid teens range that we talked about in the investor conference, so 15%, 16%. And if you look at 2016 on a policy year basis, we expect that to moderate some. We'd be into the low double digits from a margin percentage basis with higher enrollment base, lower percentage margin losses, again, on those things that I talked about earlier. So the strength of our pricing, the pre positioning of our product portfolio and then our management efforts underneath that. So hopefully that provides a sense
for what you're looking for. And then Jeff on the enrollment? Sure.
Good morning, Scott. It's Jeff Alter. So we closed out 2015 with very strong growth across both our fully insured and self funded product. I would say driving a good part of that was increased retention of our existing clients. And in certain markets, we saw the market come back to our pricing, particularly in small group.
We also had the opportunity to win back a very large part of the Health Republic Small Group Block in New York at our rates. And as you recall, from early 2014, one of our headwinds was that Health Republic pricing against our small group block in New York. So we were were in position to win that back during the Q4 of 2015, which is good. We also couple that with very strong specialty sales. Our vision and dental products are selling really well.
And I think it plays to sort of our value in the marketplace, our strong brand, our consistent pricing and the ability for folks to take advantage of our increasing innovation in the marketplace, the service that we deliver and our efforts to make the healthcare system a little simpler for our members. So we're really encouraged by the growth that we've had over the last 18 months. We see that momentum continuing as we pace into 2016 and feel good about what that will deliver in 2016 and 2017 and beyond for our shareholders and our members.
Okay. Thanks.
Pretty positive. And so maybe we'll just take 2 more questions. And then as you know, John and Brett will be available through the course of the day for questions and any other areas of interest. So maybe 2 more questions, please.
And we can take our first question from Ralph Giacobbe with Citigroup. Please go ahead.
Thanks. Good morning. Just wanted to go back to cash flow. Again, it seemed even stronger than usual. Are you holding back claims at all with ICD-ten implementation?
And maybe just generally speaking, are you seeing any impact at this point from sort of a coding and acuity perspective relative to your expectations?
Thank you. Not at all, but we'll let Dave handle that and others who want to comment on coding, but those are not issues at all. I'm not sure what to add to that. Other than not at all, those are not issues at all. No, this is just purely really more refined cash flow management principles across the company.
The enterprise is doing well and really managing cash flows. Obviously, the performance of the business, Sands exchanges is strong. And then couple that with the balance sheet management, we are not holding claims or doing anything other than paying them in accordance with contractual terms. It's part of the value that comes from a more integrated UnitedHealth Group than what we've experienced in the past, probably the more fragmented healthcare platforms or claims adjudication platforms. As we continue to move towards a common set of technologies, working more closely with Optum and UnitedHealthcare, we're seeing the benefits of strong cash flow.
And in terms of ICD-ten, maybe we'll go real quickly to UnitedHealthcare as it relates to them and then flip to Optum and talk about more Healthcare as it relates to them and then flip to Optum and talk about more broadly the industry and what we're seeing. Sure. Ralph, it's Dan Schumacher. From an ICD-ten standpoint, there's really nothing
to update from the investor conference and my comments there. The reality is we are paying tens of millions of claims in the ICD-ten code set. And as you look at inbound volumes, rejection rates, auto adjudication rates, throughputs, ending inventory, all the way through that process stream, I would tell you all of that is in line. And so there's nothing getting hung up, nothing getting slowed down. And to Dave's point, really around the cash flow, it really comes down to just managing better to contract terms as we have more of our business on common platforms, which allows us to do those kinds of offsets.
In terms of Optum Insight? Sure. Obviously, we believe we have an extremely strong product line that we're offering that's increasing productivity and results. And I'll ask John Prince to comment on it. Thanks, Larry.
Ralph, in terms of ICD-ten, we've been practicing and preparing for ICD-ten for years. In terms of working with our customers, we've actually had great results. One of the products that has had great results is our computer assisted coating. We've actually had a very distinctive product in the market and the customers that use it actually have seen a significant increase in productivity versus traditional products in the market. Thank you.
So one last question please.
And we'll take that question from Ana Gupte with Leerink Partners.
Yes, thanks. Good morning. I wanted to follow-up on Peter's question and your response around what I thought you I heard was the upside to your guidance for 2016. And I'm just looking at all the things that have developed. We've got a weak flu season.
You've both followed even more losses from exchanges in Medicaid. Pricing looks pretty good. Your days and claims payable have gone up year over year by 3 days. Your STAR membership membership rebalancing looks good as well. And special enrollment periods may be a tailwind.
Are there any headwinds are missing? Or should we think that there could be upside to your consolidated care ratio and your margins that you're projecting for 2016?
Well, that is an excellent list. I'm not sure I could have done better myself. And I just think it is the 19th January. I think we should be careful in terms of how we are discussing our results. We have to truly work through the balance of our exchange.
We do think we have reserved for it and considered it appropriately into our 16 numbers. And as I said, it's the 19th January and I think that we should move forward thoughtfully and prudently in our business. I think those are the factors. In terms of headwinds, as we said before, we have less than before, but we clearly have to play out the year. And that's what we intend to do.
I think our focus is to really deliver a very clean, strong financial year to the marketplace to continue to advance our business, continue to innovate, continue to diversify across both the platforms of UnitedHealthcare and Optum and kind of that's our focus. I think we always endeavor to try to perform better, but I think our guidance right now is a very appropriate range. And I'm assuming you've taken some of the input in terms of how the quarters might play out from our commentary in the teleconference. So I think we'll just end it at that. And once again, I'll thank you for joining us today.
And I'll leave you with a few closing thoughts. Kind of as businesses Optum and UnitedHealthcare, we think really advanced their capabilities significantly in 2015. And UnitedHealth Group's revenues and operating earnings grew significantly as cash flows increased as we've talked about over 20%. And our dividend has increased, and we will certainly address that in the middle of the year as is our custom. UnitedHealthcare served more than 1 700,000 people domestically, growing virtually in every market that we serve.
And Optum grew its revenues by 42% and its backlog by more than 20%. In 2016, we expect to continue and accelerate this growth trend and carry it into 2017 and beyond. We intend to further differentiate our products, our services by focusing on consistently high quality in everything we do and creating real value for customers and consumers on their terms. We remain committed to delivering clean, strong financial results as I said for our shareholders this year with a growing pipeline of future opportunities. So we appreciate your interest today.
This concludes our call. And as I said, John and Brett will be available through the course of the day. We thank you for your attention. Thank you.
Ladies and gentlemen, this does conclude today's program. Thank you for your participation. You may now disconnect. Have a great day.