Good morning. I will be your conference operator today. Welcome to the UnitedHealth Group third quarter 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 is some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that 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. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K, dated October 15, 2015, 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, Steven Hemsley. Please go ahead.
Good morning. Thank you for joining us to review UnitedHealth Group's third quarter results. Our business continues to grow as we develop and respond to large and emerging market opportunities across both the healthcare benefits and services sectors. Healthcare markets worldwide continue to evolve with nations and market participants of all types seeking to build better healthcare systems that are more informed and modern, lower cost, simpler, and more responsive to consumers. Organizations throughout healthcare are searching for ways to improve by leveraging data and information to more effectively deliver quality care that is measurable and delivered with greater precision and consistency in response to ever-increasing pressures around cost, access, and transparency. We have consciously positioned UnitedHealthcare, Optum, and UnitedHealth Group to deliver practical innovation and significant value in this environment.
UnitedHealth Group's third quarter revenues grew 26.6% year-over-year to $41.5 billion, including strong 10% organic revenue growth across our businesses. Consolidated net earnings of $1.65 per share were in line with our expectations, as was the net earnings margin, which decreased by just over 1% year-over-year, reflecting the greater mix of pharmacy care services as well as early-stage, lower-margin individual exchange business, lower levels of reserve development, and accelerated investments in improving Medicare Stars quality, principally closing gaps in care for the seniors we serve. Year to date, we have grown net earnings per share by 14% on revenue growth of 17%. Our return on equity of 19% reflects a balanced use of capital and organic initiatives to build our business.
Quarter-end days claims payable increased two days sequentially and one day year-over-year. Cash flows from operations continued to be strong at more than 170% of net income this quarter. Year-to-date cash flows of $6.2 billion have grown by 11% and represent a strong 135% of net income for the nine-month period. I will ask Larry Renfro to provide a review of Optum. Dave Wichmann will cover UnitedHealthcare and some UnitedHealth Group enterprise comments. Larry, you want to take it?
Sure. Thanks, Steve. Optum continues to innovate to address rising market needs, particularly those of larger, more sophisticated organizations, which have complex healthcare service delivery and management challenges. Our businesses are producing strong, sustainable growth across the board. Optum's revenues of $19.3 billion grew 61% year-over-year this quarter. Our results include Catamaran within OptumRx results for the first time and reflect exceptional overall organic revenue growth of 15%. Optum Health and Optum Insight together grew revenues by more than $1 billion or 25% year-over-year to more than $5 billion this quarter. Third quarter operating margin of 5.9% reflects the increased mix of pharmacy care services revenues as well as integration and intangible amortization costs related to Catamaran. Both Optum Health and Optum Insight delivered double-digit percentage operating margins in the quarter.
We continue to focus on the opportunities to dramatically elevate value for customers in five large growth markets: clinical care, pharmacy care services, information and technology solutions, government services, and international. Our One Optum approach means we build strong, strategic, and senior enterprise-level relationships that transcend individual product categories and point solutions. We start by listening closely to our clients so we understand the issues from their perspective. We bring deep experience, creativity, strategic partnerships, and our own differentiated capabilities in healthcare, combined with responsive and practical operational solutions. This can lead to working sessions, which often lead to pipeline, backlog, and revenues and earnings. Optum360 is a good case in point. It has grown to 7,500 employees, serving 1,600 hospitals and is helping manage more than $50 billion of their billings.
Just last week, customers surveyed by the Black Book, a leading research organization, ranked Optum360 offerings as the best in the three key product categories for the sector. We are still in the early stages as hospitals and health systems shift to professionally managed revenue approaches. Domestically and in other nations, we are in discussions with high-profile healthcare organizations regarding our wide range of technology and information-enabled services. We are exploring significant opportunities to serve the healthcare needs of U.S. federal government programs and talking with prominent healthcare organizations about innovative technology infrastructure and application services and a comprehensive suite of technology-enabled payer services. Any one or more of these has potential to develop into a multiyear, multibillion-dollar strategic relationship. Across Optum, this type of proactive approach is driving positive results.
Third quarter backlog for Optum Insight exceeds $10 billion in value and grew 34% year-over-year on an external basis. Our pipeline is continuing to grow at an exceptional rate as well. The median deal size for Optum Health has doubled over the past three years. We are delivering more care to more people through more payers at Optum Care. We now deliver care to more than seven million people annually through our Optum Care businesses. Market interest in OptumRx continues to grow in response to the value we can drive through more integrated downstream drug benefit and care management efforts, especially around the growing specialty for pharmaceutical segment. The U.S. Department of Health and Human Services has authorized agencies under its purview to conduct innovative healthcare research with Optum Labs using Optum Labs' big data resources.
These indicators should help give you a sense of both our continuing progress and the meaningful opportunities we are developing. We will continue to execute on the details for our clients with a focus on quality and service and further build our growing reputation for being the trusted partner that gets the job done. We are optimistic about the prospects for Optum in 2016, 2017, and beyond. Let me turn it over to Dave.
Thank you, Larry. UnitedHealthcare continues to differentiate its products on the foundations of distinctive quality, service, innovation, and value. As a result, UnitedHealthcare has grown domestically to serve nearly 300,000 more people in the third quarter, 1.5 million more people this year, and nearly 1.7 million more people over the past 12 months. We enter 2016 with even more distinctive products, capabilities, and relationships, we expect to continue to deliver impressive levels of growth next year as well. UnitedHealthcare's third quarter revenues of $32.8 billion grew year-over-year by $2.8 billion, or 9.2%, all organic. The UnitedHealthcare operating margin of 5.7% decreased as expected, declining just over 1% year-over-year due to lower levels of reserve development, solid growth in early-stage, lower-margin public insurance exchange products, and increased investments in Medicare Stars quality.
We continue to expect a full-year consolidated care ratio of 80.8%, ±50 basis points, likely above the midpoint of that range based on our year-to-date experience. The annual care ratio is being modestly affected by the performance of our new public exchange benefit programs, which now serve nearly 550,000 people. Like others, we observed market-wide data this past spring that suggested the risk pool served by public exchanges would require more medical services than original expectations. Rather than wait for our own experience with our new members to fully develop, we increased rates and repositioned certain products market by market for 2016, we expect improved performance next year. We will expand to 11 new markets in 2016, we continue to expect exchanges to develop and mature over time into a strong, viable growth market for us.
We have accelerated the uptake of our medical care quality programs to achieve Star ratings beyond the strongly improved levels CMS recently published for payment year 2017. Our Medicare Stars improvement does come with a related increase in medical costs. We are confident we have implemented the necessary steps to achieve our goal of 80% or more of our members in four-star or greater programs by payment year 2018. Star quality improvements will strengthen our reimbursement rates in 2016, 2017, and 2018, enrich our Medicare Advantage programs benefit offerings, and further our growth and financial position. Our 2015 commercial medical cost trend outlook continues to be biased towards the lower portion of our 5.5%-6.5% full-year forecast. In total, UnitedHealthcare has maintained a nearly 6% operating margin year-to-date in 2015, identical to the year-to-date margin at this point in 2014.
Driven by year-to-date organic revenue growth of more than $9 billion, UnitedHealthcare has advanced earnings from operations by $540 million, which is a growth rate of more than 10%. All three of our benefits businesses are producing strong results. Let's turn to a review of a couple examples that illustrate how we work locally and use technology to serve the two most important participants in healthcare, the doctor and the patient. We are increasingly aligned with physicians and hospitals, and we continue on our course to deliver $65 billion or more in care annually by 2018 through value-based care contracts. Today, these programs touch as many as 13 million of our consumers, delivered in part through more than 650 accountable care arrangements. This includes growth of more than 160 new accountable care arrangements so far this year alone.
In many instances, these care providers and UnitedHealthcare bring in Optum to help them manage population risk and improve operational performance on a more systematic, organization-wide basis. Larry has given you a feel for how this trend positively affects demand for Optum's services. Let me give you a few more examples. Together with Optum, we are also supporting physicians' operational needs with Link, which we have discussed before. Link is a cloud-based digital platform that provides secure workspace and connectivity between physician offices and health plans, enabling them to efficiently communicate and transact business. By year-end 2015, Link will be serving more than 600,000 physicians nationwide. We offer them connectivity to 75 distinct dedicated applications relevant to their operations. We continue to grow both the installed customer base and the portfolio of applications and capabilities.
Our goal is to fully serve physicians' practices with core transactions and information exchange, as well as scheduling, referral processes, transparency, and other services. On the patient side with Optum, we increasingly focus on the local community and deliver care and services in people's homes. You have heard about our house call program in Medicare, and we have begun using it in targeted commercial and Medicaid patient situations as well. The more than 1 million house calls our physicians and nurse practitioners will execute this year increases our medical spend up front. They encourage people to get annual care visits with their physicians, appropriate vaccinations, and so on. The benefits are substantial. We have more satisfied consumers with better healthcare quality, and we protect them from potentially higher medical costs down the road. Consumer satisfaction and retention are significantly strengthened by the house calls experience.
At the community level, we have hundreds of community health workers on the ground helping address the root causes of healthcare issues for Medicaid members with complex medical conditions. We meet with them in their homes and help them access the health and social services they need to better manage their health. This includes addressing housing, employment, access to healthy food and nutrition, as well as transportation and other public support services. Again, UnitedHealthcare is improving the quality and consumer satisfaction while helping to reduce exposure to potentially higher costs from untreated or undertreated conditions. Our people are also on site in hospitals, helping with discharge and follow-up care planning. They are in physicians' offices helping address gaps in care and documenting Medicare quality compliance.
They are on the phone and on the web, treating every interaction as an opportunity to add value for the consumer by helping them understand the actions they need to take to improve their health. You can see the benefit programs and approaches like these in our results. Growth in local commercial markets, where our efforts to be more local are having positive effects. Distinguished and ongoing growth in service to large self-funded employers who are among the most informed and discriminating in assessing service, quality, innovation, and total value. Consistent Medicaid awards from states which focus on elements of quality, service, and total value in their valuation process.
In just the past two weeks, we have been honored to be selected by the state of Michigan and the state of Texas for program expansions, and we recently finalized our commitments to serve the state of Iowa as a culmination of their award process. Our Medicare Stars quality is sharply higher for 2016 and 2017, thanks to our employees and the strong performance of the care providers who have worked collaboratively with us to better serve seniors. We believe UnitedHealthcare will continue to grow at a strong pace, profitably improving its market share as a direct result of the quality, consumer satisfaction, and total value we deliver. Before Steve sums up, let me touch on the outlook for UnitedHealth Group as a whole.
Considering together both the positives and pressures of the first nine months of this year, we continue to expect our full year 2015 results will fall within the range of $6.25-$6.35 per share. We would remind you that that range absorbs $0.10 per share for Catamaran and compares favorably with our original outlook of $6-$6.25 per share. We continue to expect a further lift in the rate of earnings per share growth in 2016. The range of street estimates for the next year is quite wide, and we expect to be within that range. Not surprisingly, we would begin in a more conservative posture or range as we have in prior years. We will defer specific questions on 2016 financial performance to December 1, when we host our annual investor conference in New York. Let me turn it back to Steve.
Thank you, Dave. Larry and Dave have given you some sense for why we continue to be optimistic about our potential to deliver value throughout the broad healthcare system and to grow. You heard some of our touchstones in their comments. Relationships built around trust, collaboration, and mutual respect for the challenges in delivering healthcare, improving it, and making it simpler for the people involved. Innovation, developing products and processes that truly help people solve real problems, and then embedding and driving these ideas to scale quickly to improve the overall system. Quality, measured by how consumers, physicians, and other customers define it and feel it. Responsive and compassionate service, which goes hand in hand with quality and defines people's healthcare experience. Our aspiration is to serve others on their terms, not ours.
Satisfaction and value, which together capture how well you bring all these elements together to help people in differentiated ways. We believe executing well on these elements at scale, with nearly 200,000 dedicated people pulling in the same direction, will make a difference for those we serve and drive distinctive, sustaining growth across our enterprise. Thank you for your interest this morning. Now, operator, can we now take some questions?
At this time, if you have a question or comment, please press star and one on your touch-tone phone. You may remove yourself from the queue by pressing the pound key. Please do not utilize a speakerphone or headset when asking a question. We ask you to limit to one question per person so we can get to as many participants as possible. Thank you. We'll take our first question from Peter Costa with Wells Fargo. Please go ahead.
Thanks. Good morning, everyone. Can you clarify a couple of things you said about the cost trend? You said cost trend would be at the lower end of the guidance range of 5%-6%, and you said MLR would be above the midpoint of the guidance range. I assume the difference there is the spend on Medicare Stars scores. Can you talk about how much you're spending on Medicare Stars scores in the MLR component, and what exactly the impact there is to you guys?
Well, I don't think we're going to get quite that granular, but I think we can respond to that kind of in themes and maybe between Dave and Dan.
Sure. Peter, I think you have most of it right. The cost trend commentary around the commercial cost trend is to be on the lower end of the 5.5%-6.5% range. The MLR is expected to be above the midpoint, and you're right, it's because of the impact of spending more on Medicare Stars, which is substantive in the quarter as well as for the full year. I think you saw the results of some of our earlier efforts in our 2017 funding year. What we're really focused on right now is making sure that we continue to improve upon that so that the 2018 funding year is at that 80% 4-star or higher level across the board, if not higher.
We also have, as you know, we've grown our government services mix quite a bit in our business, and that is across Medicaid, Medicare, as well as we kind of group in the insurance exchange into that as well. Those things have a tendency based upon mix to bias that MLR up just a bit as well.
How should we think about that going forward into 2016?
Going forward in 2016, we continue to expect strong growth across all components of the UnitedHealthcare business as well as Optum. Influencing the MLR, I think we'll see strikingly better performance on the insurance exchange business, not only because of expansion, but also because improvements in the overall MLR and operating cost structure of that program, so both. I think you'll continue to see strong growth in both Medicare and Medicaid, which will put some pressure on that as well. I would expect us to continue to grow nicely in those two categories as well.
Growth in those categories, so growth in government programs, exchanges, so forth, even middle market, tend to come at slightly lower margins. You're seeing that blend effect in these results.
We'll spend more time with you on that at the investor conference, Peter.
Great. Did the underpayment of risk corridors impact this quarter at all?
No, they did not.
Thank you.
Next question, please.
We'll take the next question from Matthew Borsch with Goldman Sachs. Please go ahead.
Yes. Maybe if I could just continue the discussion on the ACA exchanges. Can you help us understand the elements that make you confident you're going to get strikingly better, I think you said, performance on the ACA exchanges next year? Maybe this is good, maybe this is bad, I don't know, but you have these co-ops failing, the largest in the New York market. I assume that you may pick up a lot, or you may want to pick up a lot of membership from that, and you have price increases. It's unclear what the mix of membership is going to be next year with regard to health status. Can you just talk to that?
Sure. We'll let Dan and Jeff kind of comment on that. Dan?
Sure, Matt. Good morning.
Good morning.
With regard to the exchanges and some of Dave's earlier comments, in the first half of the year this year, we got industry data that suggested that the underlying use of medical services in that population was high, and higher than we thought. The good news is we used that information as the foundation for our 2016 pricing. We put in strong price increases. Average increases across the country are in the double digits. We also took steps to eliminate some products and reposition other products. As we look at our exchange business for 2016, that really speaks to Dave's comments about why we expect to see very nice improvement year-over-year.
As it relates to our 2015 experience and our own block of business and what we're seeing, in the first half of this year, we did not see much in the way of medical use. We had much less use as members rolled on for the first four months of the year, and they started to get connected to coverage and care and so forth, and we've seen an increase in that. While we're calling it out, we called it out in the context of mix in the second quarter. In the third quarter, we're calling it out more specifically because on the year, we expect the individual exchange business to put pressure on the consolidated care ratio. However, as Dave mentioned, we fully expect to perform within the range of the guidance we provided last December at the investor conference.
Dan, thank you. That was great. I'll get off now. I know you have a lot of people.
Thanks, man.
Thank you. Next question, please.
We'll go next to Joshua Raskin with Barclays. Please go ahead.
Great. Thanks. Just to follow up on the MA Stars investments. Talking about an overall MLR this year that'll be above the midpoint. Every 10 basis points is, I don't know, $130 million, $140 million of investment on the full year. I don't know what that implies, but that seems like a pretty big investment. The two questions are, one, are these temporary in nature? Are they just impacting 2015, or are we going to see this continue into 2016, i.e., could this be a possible tailwind for next year? How do you think about the ROI? What are you measuring? Are you just measuring simply the bonus, the reimbursement improvements? How do we think about the cost versus the investment versus the upside from these investments?
Sure. I guess somewhat globally, I'd offer that the investments are significant, and we have made that clear in the past in our goal to really get 80% or better of our overall Medicare at four Stars and above. There's also benefits associated with that because when you're achieving that level, you have flexibility with benefits and the reimbursements are better. We're probably front-ending more of the investments than we are getting the benefits at this point in time, given the fact that we were somewhat coming from behind, if you will, in terms of overall star performance. Dan or Steve, you want to comment further?
Josh, to your question around do we expect levels to maintain? Yes, we do. We expect to make comparable investments forward in our Stars and quality performance. As you saw in the 2017 payment data, we saw nice progress, and in year our performance for 2015 is improving, which will carry forward to improvement in our 2018 performance. Beyond the Stars outcome, we also have outcomes in terms of quality and performance underneath that as you look at medical costs and so forth that contribute in. Those are some of the things that play into how we look at the balance between the cost and the return.
Given the look-back nature of this, the market hasn't even really seen our best performance in terms of Stars, we really haven't gotten the benefit part of that yet. Steve?
Okay.
Sure. Josh, it's Steve Nelson. Good morning. Just a little more color on the investments. When people talk about the medical costs, you can think about things like provider incentives, annual care visits, impact of very specific programs like diabetic navigators and in terms of diabetic programs for that population. In terms of administrative investment, it's around things like embedded practice support. We have 2,000 clinicians that are focused on closing gaps of care locally, and then reorienting our organization like call centers to facilitate closure of gaps and getting people to the right care. These are all paying great dividends for our members. We have 1.7 million members that are in improved plans. It's great progress, but as Steve and Dave have both noted, we're not done. We made some progress.
We're not satisfied and look to improve on that for 2018 payment year to at least 80% of our members in four-Star plans or higher.
I was going to say, just to follow up, does that translate into above market level MA growth rates for you guys? You've been growing sort of, let's call it in line with market this year. Should we think 2016 and maybe more so in 2017 and 2018 that you start growing faster than the overall MA market?
I think that would be our hope. If you sit back and set a return on investment, I think this is a vital program. We think it has great growth potential in terms of the demographics as well as the orientation of Medicare itself to be more towards Medicare Advantage. This gives us opportunities with respect to benefits, and I think it should translate to greater growth, and that's why we're making those investments. Yeah.
All right. Thanks.
Next question please.
We'll go next to Sarah James with Wedbush. Please go ahead.
Thank you. SG&A was a bright point in the quarter, came in better than consensus expectations. Now that Catamaran is closed, how do you think about runway SG&A?
Excuse me, we didn't hear the beginning of this. Could you start again?
Sure. SG&A was a bright point in the quarter, came in better than consensus expectations. Now that Catamaran is closed, how should we think about runway SG&A? I think guidance was set pre-Catamaran at 17% plus or minus 30 basis points.
Well, we are always managing our SG&A as tightly and appropriately as possible, but we're also making investments that are often embedded in SG&A. investments in terms of some integration of businesses, as well as things that Dave mentioned, such as Link and elements such as that. Do you want to start?
Sure. Terry, you're right that the Catamaran was probably the most significant influence on the care ratio in the quarter. We also had increased productivity impacts on that as well. It's offset somewhat by the business mix, as you can see from the growth from Optum as well as in our fee-based programs. There's a little bit of an insurer fee offset as well. We do expect Catamaran overall had pulled down that ratio by somewhere around 180 basis points or so in the quarter. We would expect that kind of a trend to continue as it relates to Catamaran, but we would continue to expect some offset of that related to continued high growth in our services business over time.
Great. Thank you. Next question, please.
We'll go next to Sheryl Skolnick with Mizuho Securities US.
Very much. Once again, a very nice job on navigating through the various and sundry challenges. One of the things that intrigued me was a comment, Larry, about the opportunity being both domestic and international, if I read your press release correctly, it looks like UnitedHealthcare Global, which we don't focus on all that much, had actually a nice year-over-year growth rate. In the context of great change occurring, not only U.S. in terms of payment methods and industry structure, but also overseas in Europe, for example, I'm wondering if we're likely to see some renewed interest in that, given that your Amil experiment has now got some time under it, and your thoughts on the potential for international to be a new growth area or expanded growth area for United.
That's a great question, we clearly are focused on international and the opportunities to really bring principally services to bear there. Larry, do you want to talk about it?
Sure. Sheryl, let me start by saying, if you looked at the way that we're positioning ourself in the, I think I mentioned this earlier, the five, what I'll call future growth areas, you would find international, you would also find that international pretty much wrap around most of the products that we offer in the States. We obviously are working in Brazil to support Amil and we have people on the ground and we're building the Optum presence there, that's going extremely well. We're starting to really take a look, I think I can talk about it somewhat, at the U.K. We've been there for a while, but at this point in time, we're trying to look at some of the things that we've done with Optum360 and how that is working in the States.
A lot of the challenges that are being experienced in the U.K., we seem to be sitting in a pretty good spot to at least assess and have conversations and try to determine if we fit. It's early innings in terms of these discussions and what we're trying to do, but we do see a future there. We think that some of the experience we had in healthcare.gov will actually apply, we're kind of off and running at this point in time.
Thank you.
Yeah, I think it's fair to say that even the best healthcare systems are interested in using information, developing better measures to improve quality and performance, and those really are a sweet spot for Optum. Next question, please.
We'll go next to Michael Baker with Raymond James.
Yes. Thanks a lot. Given that we're in unprecedented time on the M&A front, I was wondering if you could point to any tangible benefits that you've seen so far or what you would expect to see as the process of review continues.
As we kind of intimated in our last teleconference with you, we really are not going to comment on the transactions of others. I would say they're going through, I'm presuming, a regulatory review process, we haven't really seen any real activity in the marketplace that we could offer any commentary on.
All right. Thanks.
Thank you. Next question.
We'll go next to David Windley with Jefferies. Please go ahead.
Hi. Good morning. Thanks for taking the question. Wondered if you would be willing to comment on the client reaction that you've observed or experienced since the Catamaran closure or in and around the Catamaran closure. What has been your retention rate, or just kind of sense of retention there? Secondly, also with Catamaran, are you commenting or willing to comment on the reset to your long-term margin goals with the change in mix that Catamaran brings into Optum? Thanks.
Sure. I think it's a pretty positive story. Do you want to start, Larry?
Sure.
Can't hear, Larry.
Can you hear me now? Sorry about that.
Yeah, that's better. Thank you.
Sorry, David. We didn't have the button pushed. What I thought I'll do is I'll start, then I'm going to hand it off to Mark Thierer, because he's dealing with this on a day-to-day. What I would say is that we believe that our message is resonating with our clients. Now, we do have very sophisticated, knowledgeable, and successful clients, and that's actually a positive. As we have really gone out and discussed our value proposition, really talking about enhanced services, talking about operational efficiency, purchasing scale, as well as synchronization, I think across the board, we're really feeling pretty good and think we have started off with a solid start. Mark, maybe some comments?
Yeah. Thanks, Larry. David, good morning. Well, we spent the last 90 days on an airplane, Larry and I have visited really all our largest clients, as you'd expect, and that includes health plans, employers. We visited the consultant marketplace. I have to tell you, the reaction has been universally positive. Our clients like the scale of this combination. They like the fact that we've had a 10-year relationship and that that'll basically represent no conversion risk in terms of platform conversion. They especially like the fact that we've got a very expanded service offering with the full suite of Optum services, and many of them have been looking at, and in fact, buying those services along the way anyway.
They like the fact that we've got a good team, and the same team's in place to continue to take care of them, and obviously, they're liking our value proposition. We're feeling pretty good about the client reactions, and I'd say overall, my early read is things are looking good. I'll just go on to say that the integration work is off and running, and the first 90 days have been very crisp. We're off to a good start in bolting these businesses together.
Very good. Thank you. Does this change your margin, Larry, your margin goal long term?
Maybe I could offer a perspective on that. We're a portfolio of margins across the expanse of our total business, and so different products and services will actually drive different margins, and appropriately so. We have some businesses that are strong double digits, and we have businesses that are low single digits, and we're looking to drive and expand margins and do it in appropriate ways. Appropriate ways meaning we're driving value and consistency, we're driving productivity that doesn't really compromise service and so forth. As these elements come into our total portfolio across UnitedHealth Group, they're certainly going to change the mix of that margin. In total, we're driving towards appropriately expanding margins. As these elements come in, they're just going to change the mix. They're not really going to influence, I think, the performance of the business.
Okay. Thank you.
Next, please.
We'll go to Andrew Schenker with Morgan Stanley. Please go ahead.
Thanks. I appreciate you want to defer specifics on 2016 financial performance to Analyst Day, but you've already mentioned several, sounds like to me, tailwinds, including Medicare and exchanges for next year. Maybe if you could just discuss and summarize these broad headwinds and any tailwinds for 2016, that'd be helpful. Thank you.
Sure. We look at some things that we sit back and when you really do the pluses and minuses of it, some of the things that are headwinds now turn to be tailwinds, and new versions of them appear as headwinds. For example, I think our year one markets for our year one markets for exchanges will actually be a positive for us next year, but we are moving into 11 new markets, and we will have to see how those markets will play out. I think our advances in Stars is a positive, but we, as Steve indicated, we have clear aspirations and visions to improve our Stars performance so that we will continue to be working on that level as well. I think OptumRx will have integration benefits, but they'll also have integration costs.
I think those kinds of things start to play out. I think our Brazil performance is strengthening, but that market's stability is something we're watching closely. We are getting nice growth in lifted Medicaid, and we have some new successes there, but we are going to have to implement them. Just given the total performance, we're seeing rate pressures across Medicaid. We try to take somewhat measured look as we set our outlook for next year, that we have a portfolio of these pluses and minuses. In total, we very much like where our business is and the growing capabilities. The deployment across the expanse of the markets tend to even out these pluses and minuses. We're pretty optimistic about next year, and as Dave indicated, we're looking to accelerate our earnings growth rate.
Thank you.
Next?
We'll go to Chris Rigg with Susquehanna Financial Group.
Good morning. Just wondering, can you give us a sense for how Catamaran impacted the quarter, whether it was dilutive, accretive, neutral? Then just some specifics around the integration costs and what the intangible amortization related to deal was in the quarter. Thanks.
Dave?
Catamaran contributed nicely to the quarter. It achieved what expectations we had for it. Similarly, the cost associated with initial integration activities were consistent with what our expectations were as well. I'm not going to get into specifics about how it contributed. The one thing we did do is we suspended our share repurchase. That had a negative effect. For the full year, as we indicated earlier, we expect that it would cost us about $0.10 a share all in. We were able to manage to overcome that and retain and continue to advance our guidance as well. In terms of the increased levels of amortization, it is about somewhere around $0.20 a year. Think about it in that context. We're on a base of about a run rate in UnitedHealth Group, somewhere around $0.34 a year.
Combined, maybe thinking out to 2016 on a run rate basis, around $0.54 of amortization per year. Okay. Thanks a lot.
Next question, please. We'll go to A.J. Rice with UBS. Please go ahead.
Yes, thanks. Hello, everybody. Maybe following up a little bit on that last question. Two things. On the buyback front, obviously you laid out a plan with Catamaran. Is there any update on that plan, particularly as it relates to next year? Does the volatility in the market sway that in any way, make you think it's better opportunities and maybe being quicker to come back and buy stock more aggressively? Then just with the comment on the amortization, there'll be a bigger disparity once these pending deals complete on you reporting GAAP EPS and everyone else reporting cash EPS. Any thoughts about that? Maybe changing that?
Sure. Maybe you want to take the first one, and I'll take the second. Sure. On the buyback front, what we'd indicated is that we would reduce the level of buybacks for about 18 months or so. We expect to continue to maintain that reduced level through the end of next year. Think about it. Our target is to get somewhere around a 40% liquidity ratio. That's not hard and fast. Of course, we're going to continue to pursue M&A opportunities. Of course, if we needed to step up our share repurchase activities because of some kind of market event or otherwise, I think we have the flexibility to do so. There's nothing hard and fast about the way in which we operate that. We manage our capital structure effectively over time. We're generally on a course towards a 40% total debt. Yeah.
The total capital. In terms of the supplemental per share earnings, I think we'll address that at the investor conference coming up. We'll likely begin to provide the supplemental information with respect to how we would perform on both bases.
Okay, great. Thanks.
Thank you.
Next question, please. We'll go next to Kevin Fischbeck with Bank of America. Please go ahead.
Okay, great. Thanks. I don't know whether I'm just spoiled or what, you guys mentioned how you've beaten numbers and raised guidance a few times already this year. I was a little bit surprised that there wasn't more upside in the quarter or around the guidance. I understand the dynamics around high exchange MLR and Stars investments, but these are things that you largely would have anticipated probably at the beginning of the year and at very least when you reported Q2 results and provided guidance back then. Just trying to figure out if there's something that you would point to that didn't quite work out the way that you were thinking heading into Q3 or something that you're worried about into Q4. I personally keep coming back to trend.
Whenever you guys provide guidance, you provide guidance assuming trend will rise back to normal. You start off providing guidance, then you're at the low end of the range, and now you're reiterating at the low end of the range. Does that imply that trend is in fact rising as we've gone through the year? That combined with the lack of underlying development makes me wonder if there's something underneath there. I guess answer that specifically, and if I'm barking up the wrong tree, if there's anything else you might highlight as a headwind.
Well, I might just, again, might respond thematically. First of all, I think if you take a look at our year-to-date performance, it actually is a pretty solid performance, good top-line growth, and strong translation of that to bottom-line performance. I think we maintain a healthy respect for medical cost trends. I think as indicated before, medical costs, while within our expectations, outpatient continues to be strong and robust and growing. Specialty pharma continues to be strong. We haven't really talked much about that this morning, but none of those things have gone away. We remain respectful of medical costs. Also the fact that they have been moderate
For quite some time, I don't know if you can assume, we do not assume for pricing that they will stay that way. I think as Dan indicated, as we got into the exchanges, we were thoughtful about making sure that as we price for next year, that we used the broader industry experience as opposed to our own, we really had a pretty favorable experience in the first half of the year in terms of the exchanges, and they have matured more in line with the industry. Is that right, Dan?
Yes. I think that's fair.
You might point to that and continuing to be watchful of that. We continue to make investments in Medicare Stars is a look-back process, so really the results that you're seeing are really the results of prior periods, and we have intensified our efforts to make sure that we are really going to be a market leader with respect to Stars. That's what we had indicated before. We continue to make investments there, things like that, and we're going to continue that. Things like that. We mentioned Medicaid and Medicaid expansions, continued rate pressures there. I think we have to be respectful of all those elements, and the strong performance we're achieving, I think that's why we're kind of measured with respect to keeping our outlook the same and being serious about a range when we do.
Also being very optimistic about where we see our business and the fact that we expect to grow even more strongly than we did this year. I just think it's being measured and trying to be responsible about all the elements that play into our business.
Okay. That makes sense. You're being conservative. You're still optimistic. I guess one clarification, because I think last quarter you talked about how you thought the United's earnings might accelerate on a core basis. Is that still the message that you're giving now? You mentioned a lot of puts and takes earlier on. I just wasn't sure if they all sum up to the core business is accelerating or whether that's changed at all.
Yeah, we did. We basically very much said that and said that in terms of we are expecting our earnings per share and so forth to grow at a faster rate next year than this year.
Okay, great. Thanks.
Next question, please.
We'll go next to Sean Wieland with Piper Jaffray.
Thank you very much. My question is on ICD-10. Was it a headwind or a tailwind in the quarter for Optum? Over the past couple of weeks, have you seen any changes in denial rates? On a go-forward basis, what does ICD-10 do to your business in Optum?
Bill, you want to comment that, Bill Miller?
Yeah, Sean, I'll talk to it on behalf of Optum, particularly where a lot of those services sit in terms of helping health systems, payers go through the changes with respect to ICD-10, particularly on, and understand we're in this for a few weeks here, but already we're seeing a certain uptake in a lot of our services and a lot of our products and a lot of our content as the market is preparing and now acting in response to the changes. There is some seasonality in the back half of our business, and it's being enhanced, I think. We can see that in the numbers in terms of the uptake of our content in the back half of the year. Overall, from a services perspective, delivering value to the clients, ICD-10 has been a lift for Optum across the board.
Dirk, do you want to comment on the UnitedHealthcare side?
Yeah, sure. From an operational standpoint, overall the implementation is going pretty smoothly. What I caution is that we're only 15 days into that. Having said that, we've spent years getting our systems ready, working them with the provider community to ensure success. The overwhelming majority of providers in the marketplace are submitting claims consistent with the ICD-10 requirements. Our claims submission rates so far are consistent with expectations. For those limited number of providers who are having difficulty, we're able to identify them and get after them quickly so that they submit consistent with the requirements. So far so good.
Thank you. Next question, please.
Next will be Gary Taylor with J.P. Morgan. Please go ahead.
Hi, good morning. Thank you. Actually, just two quick ones. First, would you guys quantify where your health exchange enrollment is today?
Sure. Dan?
550,000 lives.
Okay, the 11 new markets for next year, I guess we don't know what markets those are, the size. Can you give us a sense of magnitude of, you get the same sort of share, what type of growth that might have on the 550,000?
We are not really giving guidance out for next year until our investor conference. I really wouldn't want to shoot from the hip on this. We do expect we'll grow, and we've taken some of the learnings from this year as we have entered those markets. I think we're going to save guidance with respect to specifics on next year for our investor conference.
Okay, great. One more quick one if I could. We look at your statutory filings through the first half and understanding all the vagaries and nuances, we do see a very compelling trend in the commercial business that I think ties with your comments around the commercial cost trend, expecting to be lower into that trend. It did look like Medicare and Medicaid MLRs deteriorated somewhat in the 2 Qs. I don't know if you'd be willing to offer any specific commentary on a product basis. Thanks.
Dan, I don't know if you can comment on that.
I would tell you that there are meaningful differences between our GAAP financials and our statutory financials and how those get reported and how they flow through over time. From my perspective, I wouldn't read through anything on the statutory statements specifically. Thank you. Next question.
Next will be Ralph Giacobbe with Citi. Please go ahead.
Thanks. Good morning. I did want to go back to the Star spending. When did that spending start? Was it disproportionate to the third quarter? Your commentary about it sort of sustaining into next year, is it going to level off, or could it be lower where the initial spend is higher in this quarter, having a more sort of magnified impact? Why not quantify the spend in that area to sort of help on understanding more of quote-unquote the core? Similar to your last answer to the question, maybe even directionally, can you help us think about MLR trends by end market? Thanks.
Dan, you want to comment on it? Sure, Ralph. On the Star spend, I would tell you that we have been making investments. We really started in earnest in the 2014 timeframe in the middle of that year, we have increased that in 2015. I'd tell you, the relationship between the second and the third quarter as an example. We put programs in place, what we had mentioned is that we've seen an acceleration in the take-up. We had the programs in place, we had an expected outcome for it, frankly, we're having more people that are accepting house calls, that are getting annual care visits, as Steve Nelson mentioned. Part of that's due to our service model.
We've been taking that interaction point and really trying to leverage it and help facilitate connecting people to care, that's showing up. Also we have member and provider incentives, as those burn into the market, we're seeing the take-up rates on those increase. We had spending in 2014, we increased it in 2015, we have seen an acceleration in the take-up rate as we moved from the first half into the second half of the year. In terms of the sizing, maybe one way to help orient your thinking around it, as you've looked at our consolidated medical care ratio on a year-over-year basis, there was a couple of things that contributed to that. You can obviously see the change in development as one element. Stars and quality investments is another element, mix as a third is kind of the three principal drivers.
In terms of the share and contribution to it's within a reasonable range on each of those. That gives you some sense for the kind of sizing on it. We expect the investments to carry into 2016, we're seeing nice progress on our performance in 2015, which will lend itself to better Star outcomes for 2018 payment year. Exchange steps could be part of your blend commentary, right? Yes. Thank you. Next question.
We'll go next to Ana Gupte with Leerink. Please go ahead.
Thanks for taking the question. Good morning. I was wondering what the directional trends were for the commercial loss ratio this quarter. I know you say utilization is weak, which is great, but when you combine it with the overall pricing environment and then the balancing out with mix shifting, small group exchanges, and the like.
Daniel Schumacher? Jeff Alter? Sure. As you look at the care ratios, Ana, in the quarter, we saw an increase in our care ratios in our principal health benefits businesses, so Medicare, Medicaid, and commercial. Offsetting that, as we talked about kind of the full-year themes in the investor conference, we're seeing improvement in international offsetting that sum. Directionally up.
Going into 2016, as you say, some of the headwinds get into become tailwinds. What does this look like from a pricing perspective, specifically overall? In the New York market, the small group definition has now been changed to only 50 and below. How does that impact it? Finally, with risk corridors not being fully reimbursed, might you see a better pricing environment with plans that could have lost money like the Blues not-for-profit?
Well, it'll take us a couple minutes to sort out that four-dimensional question, but Jeff, you want to?
Hi, Ana. It's Jeff Alter. Good morning. I'll try to answer it in a sort of a general term. We said last quarter, I think we see it continuing, the market is firming a little bit on pricing. For our pricing in 2016, as Steve said, we are respectful of the slow trend environment perhaps changing. I think we took very prudent actions in the pricing that we have for our individual exchanges for 2016. As Dan mentioned, we have not changed our forward pricing philosophy. We are very disciplined about that, but also respectful of trend in outpatient specialty drugs, new drugs coming to market. Our pricing I think is strong for 2016. New York market, your question around the 2-50, the 2-99. New York will be a 2-99 market, as will a couple of other states.
We had assumed in our thoughts for our enrollment growth for the rest of this year and for next year that there would be some transitional relief. The change last week really isn't much of a surprise to us because we were already preparing for large parts of that market to go through some transitional relief. Our pricing in 2016 is in alignment with the change in the law last week.
Great. Thanks so much.
Thank you. Next question, please. We'll take maybe two more.
We'll take the next question from Christine Arnold with Cowen. Please go ahead.
Hey there. I'd like to switch the focus a little bit to Optum. You said that you were seeing some interest in innovative services by the federal government, that this seems like a pretty big opportunity as well as some international markets. It's always struck me that the fee-for-service Medicare program doesn't have a lot in the way of care coordination and some of the other things that Optum provides. Might there be an interest in that in terms of Optum capabilities with the fee-for-service Medicare population? If not, I'm thinking about that incorrectly. How should I be thinking about that?
Larry, you want to comment?
Sure. Christine, I think you're spot on in terms of what we're trying to do with the federal government. As you know, we've had some involvement with CMS in previous programs and so forth where Optum's been involved on healthcare.gov. As we are putting our programs together, we're constantly working with them and talking about the different services, the different data analytics, and really pretty much everything that Optum has to offer. Your suggestion is a good one we know about, and one that we're actually working on. These are large RFPs, as you can imagine. We're pretty much aware of how they work and when they're going to be coming down the road. I think we're fully engaged and understand what we need to do.
We're better positioned today than we might have been in the past because of the situation that we had with healthcare.gov. We've kind of stepped out of that now, and that was one of the reasons that we did it, so we would play in more of the RFPs.
Medicare, the VA, Department of Defense, Federal Employee Benefit Plan, state programs, and then Larry commented on kind of the international versions of all the above. I think all those are going to be areas that are going to try to improve performance and that Optum's perfectly positioned for that.
With respect to timing, should we thinking about that as something we'd see in the next year? Or is this something that takes five years? I just don't have a good sense for your workings with the government.
I think that some of the areas that Steve just talked about, there's different timing. There's some that's real within the next, I would say, six months. Some of them could go out two years. It's a variety of situations or when the RFPs are due. As I would kind of comment on it, I think I kind of said this, we have a lot of people. We now have an organization that's dedicated to the government business, just as Steve said, whether it be state or federal, and it could also include the VA and what we're doing with the DoD.
It's not just like a set time that I could give you, but I would say that if we looked at our qualified pipeline in terms of how we're looking at the business, that is somewhere we're seeing around $20 billion, and a substantial piece of that would fall in the government business.
Great. Thanks.
One last question, please.
Our final question comes from Tom Carroll with Stifel. Please go ahead.
Hey, guys. Good morning. Yeah, do you believe that the market, and particularly large self-insured employers, perhaps will give United a stronger look than usual, if there is such a thing, in 2016 as your large competitors are involved in some pretty sizable M&A?
Well, I would hope they would give us a look because of the values that we deliver and the quality and consistency of our services and the breadth of the things that we bring. I would say also the innovative dynamic. We are well known for being kind of in the forefront of innovation. We have really compelling cost structures and probably deeper into and more diverse in care management to the commentary this morning. I would hope that they would be looking at us for those elements. If they're concerned about other dynamics in the marketplace, I can't comment on that, but I would hope that it is for the former. I'll kind of leave it at that. I do think the marketplace will be strong and robust in the next couple of years. Jeff, you agree?
Yes, Steve. Just a reminder, we already serve a overwhelming majority of that marketplace. I think the value that Steve described is seen by those clients today, and we hope that that reputation continues to help us grow into the marketplace that we don't currently have.
I think we're looking at a strong national outlook for next year.
Yeah. As we mentioned last call, our 2016 national account season has progressed very nicely towards the end right now, and we see a better 2016 season than 2015, which was better than 2014. The momentum and trajectory is something that we're very pleased with.
Great. Thank you.
Thank you. We are pleased to have delivered good performance year-to-date. We'll continue to improve the quality of our products and services to our last commentary, and we remain optimistic about 2016 and look forward to sharing more information with you about the future of UnitedHealth Group, Optum, and UnitedHealthcare at our investor conference on December 1st. Thank you for your attention today.
This does conclude today's program. Thanks for your participation. You may now disconnect.