Good morning. I'll be your conference operator today. Welcome to the UnitedHealth Group first 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 April 16th, 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, Mr. Stephen Hemsley. Please go ahead.
Good morning. Thank you for joining us today. This morning, we are going to continue in our efforts to keep our formal remarks brief, allowing more time to respond to your questions. We're also going to freshen things up a little and share portions of today's formal commentary between Dave Wichmann, our President, and Larry Renfro, our Vice Chairman. I'll start out with a recap of the quarter. Net earnings in the quarter grew 33% to $1.46 per share on revenues of $35.8 billion. What is important is what lies inside these results. Higher revenue growth, more consistent performance in operating disciplines, and margin strength across UnitedHealth Group's broad, strategically diversified set of businesses. Operating cash flows were $2.3 billion for the quarter, 1.6 times net income. Revenue and earnings performance from UnitedHealthcare were the biggest contributors to better than expected first quarter cash flows.
This quarter builds on the second half 2014 momentum we discussed with you before. We expect that momentum to continue, with second quarter earnings per share growing nicely from this past quarter's results and being modestly above current consensus estimates. At this range, we see second and third quarter earnings being more even, stronger in the second quarter and lighter in the third than current consensus would suggest. This pattern would better fit our current business trends and outlook. We are advancing our 2015 full year outlook, taking revenues to $143 billion, a $2 billion increase and a nearly 10% year-over-year growth pace. Net per share earnings advanced to a new tighter range of $6.15 to $6.30 per share and an 11% year-over-year gain at the upper end.
Despite absorbing $0.10 per share and attributed to Catamaran transaction costs and the impact of reducing our level of share repurchase going forward. The increase in revenue and earnings modestly improves our outlook for cash flow from operations by $200 million on the lower end of a new range of $8.2 billion to $8.4 billion. I'll ask Larry to review Optum, then ask Dave to pick up with UnitedHealthcare and some UnitedHealth Group enterprise items. Larry?
Thanks, Steve. Optum's revenues grew 14.7% to $12.8 billion in the quarter, with operating margins stable year-over-year at 5.8%, despite more than 30 basis points of acquisition costs. Optum's earnings from operations grew 14% to $742 million in the quarter, with every reporting unit producing double-digit percentage earnings growth. Catamaran acquisition costs reduced Optum's year-over-year earnings growth by seven percentage points in the quarter. Setting aside these transaction costs, Optum would have produced 21% earnings growth for the quarter. We expect Optum to post strong earnings growth in 2015. After fully absorbing Catamaran acquisition costs, we continue to forecast operating earnings within the range of $3.75 billion to $3.85 billion. This will be growth of at least 50% over two years from a base of less than $2.5 billion in 2013. We continued to build our capabilities in important ways this quarter, particularly our relationships, starting with Catamaran.
The proposed Catamaran combination brings obvious benefits to the markets and customers we serve. It will create a competitively scaled channel-agnostic PBM focused on growing and serving all prescription market segments. It will advance the next generation synchronized PBM, where all clinical data points are connected and drug considerations are fully integrated with clinical care processes to produce better outcomes and better overall cost trends. This will be important as the age of specialty pharma emerges, along with their inevitable biosimilar counterparts. People will be served better. Benefit and program sponsors will benefit from both the more progressive synchronized care offering, as well as from sharing the meaningful savings achieved from combining these two enterprises. Integration disruption can be avoided since the two companies already share a common technology. We believe this can quickly become the next generation, clinically informed, clinically anchored PBM.
Looking forward, our Optum team is driving meaningful growth in customer pipeline for all Optum business segments. Optum's external revenue backlog grew 24% in the quarter to drive overall backlog to over $9 billion. Optum continues to develop broader relationships with more sophisticated clients who need end-to-end solutions to the complex challenges they face. For example, Optum360 has added sizable and distinguished new partners, most notably North Shore-LIJ Health System and the Mayo Clinic. In the U.K., Optum International became one of the very few organizations to be accredited to serve under the NHS Lead Provider Framework as the NHS procures an expected $1 billion of commissioning support annually. Optum Labs recently added Yale University as a partner, and research from the lab has now been accepted for publication in the Journal of the American Medical Association and the British Medical Journal.
Finally, this quarter, we launched an important new brand campaign for Optum to help further build understanding of our services and innovation. Now let me turn it over to Dave.
Thank you, Larry. Turning first to UnitedHealthcare. First quarter revenues grew 11.5% to $32.6 billion. Its operating margin improved 100 basis points year-over-year to 5.8%, reflecting strong performance in all businesses: commercial, Medicaid, Medicare, and global. Each of the first quarter care ratios improved year-over-year and were better than our plans for the quarter. The combination of strong growth across a well-diversified benefits business and even more effective medical and operating cost performance produced a 35% increase in UnitedHealthcare's quarterly earnings from operations to $1.9 billion. The headline for UnitedHealthcare in the quarter is growth. Growing organically to serve 1 million more people in the U.S. in the first quarter alone and 1.6 million more people year-over-year, with notable strength this quarter in the seniors and commercial businesses.
We are increasing our projections for organic growth and domestic medical benefits by about 600,000 people from our investor conference outlook to approximately 1.4 million people in 2015. The increased outlook is driven by stronger market response to our expanding commercial benefits product portfolio. In the first quarter, UnitedHealthcare's commercial business grew nicely, serving 680,000 more people. Growth included 570,000 public exchange consumers, well ahead of our expectations. In our earnings outlook, as we have said before, we do not expect meaningful financial contributions from these customers in 2015. On the international side, UnitedHealthcare is underwriting and pricing to create both sustainable customer value and sustainable margins and is scaling to deliver results. Amil, our Brazilian healthcare company, produced improved financial results on a better mix of business, with revenues growing 12% year-over-year on a local currency basis.
Medicaid membership exceeded plan even with the expected decreases in Tennessee, where the state introduced a third plan into the market. UnitedHealthcare grew its Medicare businesses in the first quarter by another 380,000 people, split pretty evenly between Medicare Advantage and supplemental benefits. Two weeks ago, CMS issued its final Medicare Advantage rate notice for 2016. While these rates will help provide some needed stability for seniors who continue to enroll in Medicare Advantage in record numbers, the rates simply did not keep up with the pace of medical cost increases. We will continue to make the case on behalf of the millions of seniors we serve for sound and stable approaches to Medicare Advantage funding in the future. Before we sum up, let me run through a short punch list of non-financial highlights for the quarter for UnitedHealth Group as a whole.
During the quarter, we invested in brands and reputation broadly across UnitedHealth Group, including the brand campaign Larry mentioned for Optum and the successful introduction of UnitedHealthcare's own fresh branding effort. Both have generated favorable responses, and we will build on these throughout the year. We are getting scaled market traction on several innovation efforts. Rally, our digital consumer health platform, now reaches nearly 9 million Americans across a broad spectrum of employers, health plans, and associations and is improving consumer engagement. We plan to expand to nearly 30 million people by this time next year, including consumers in Brazil. Link, a secure cloud-based workspace for care providers, now reaches nearly 425,000 care providers and expects to reach 600,000 or more by this time next year. We continue to advance higher quality, lower cost care with our delivery system partners on behalf of those we serve.
Medical spending under value-based arrangements grew nearly 30% year-over-year to a nearly $40 billion annual run rate. This was an active quarter in terms of acquisition and capital deployment. We will fund these efforts from internal resources and debt, and we have maintained our credit ratings. Lastly, the United Health Foundation continues to engage in a focused manner with communities in need. As examples, the foundation recently announced substantial support for an innovative community care program in Maricopa County, Arizona, pioneering medical education and services in the Rio Grande Valley of Texas. A technology initiative in Tennessee that connects patients with care professionals through community health centers via telemedicine. OptumRx has crossed the $10 million milestone in prescription drugs donated to community health clinics in Kansas. Steve?
Thanks, Dave. As we look forward, I hope you sense an acceleration on a broad and disciplined set of initiatives. Sorry, I didn't have my microphone on. As we look forward, I hope you sense and an acceleration on a broad and disciplined set of initiatives in our consumer capabilities, brand, and reputation for both UnitedHealthcare and Optum, payment reform, and progressive services to better support care providers, innovation and its more meaningful, larger scale market deployment, strategic M&A, large far-reaching next generation strategic relationships, information-driven research, and social and philanthropic efforts aligned to the communities we serve. On all these fronts and more, we intend to pick up our pace with thoughtful urgency and improve performance and consistency.
As we grow, we become a more effective enabler of a better healthcare system and serve more people with better outcomes through the prudent use of society's healthcare resources. Now to recap. Our 2015 outlook for $143 billion in revenues accelerates our revenue growth rate to nearly 10% this year, with improvements coming from both UnitedHealthcare and Optum. Our earnings outlook of $6.15-$6.30 per share includes $0.03 per share of transaction cost this quarter from Catamaran and an additional $0.07 per share of pressure over the balance of this year, principally due to repurchasing less than half the UnitedHealth Group shares we had targeted before this combination. For 2016, we continue to project core earnings growth and that the Catamaran combination will be $0.30 per share accretive to those earnings, even while carrying $0.20 per share in amortization expenses.
Savings and accretion are expected to grow further in 2017 and 2018, improving value for customers and earnings visibility for shareholders for a multi-year period. Today, we continue to have strong access to capital in both the equity and debt markets. We believe we can continue to participate positively and fully as both the health benefits and health services markets continue to evolve, both domestically and internationally. We remain focused on developing and expanding our capabilities and businesses, both for UnitedHealthcare and Optum, as market opportunities present themselves. We expect to maintain our approach to advancing our dividend to more market-based levels exactly as we have discussed this area of capital allocation with you previously. No changes are contemplated in that respect. With that, I thank you, and we will now open up for your questions.
At this time, if you have a question or comment, please press star and one on your touchtone 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 limit yourself to one question per person so we can get to as many participants as possible. We can take our first question from Scott Fidel with Deutsche Bank. Please go ahead.
Thanks. Good morning. Just interested if you could give us some perspectives on what you're seeing in terms of PMPM healthcare utilization in the quarter. We've seen with MLRs improving across the segments that it remains well-controlled, but it's clear there's been some conflicting data points out there showing that there maybe has been some broader market increases in utilization. ACA pre-announcing yesterday, for example, with strong admission volume. Just interested in your perspectives on what you're seeing with utilization and how to sync across some of those different data points we're seeing.
Sure, Scott. I think Dan Schumacher can best respond to that.
Good morning, Scott. Thanks for the question. I guess I wouldn't comment specifically on PMPMs, but I would say that in the quarter, we were very pleased with our medical cost performance. As we talked about at the investor conference, as we formulated our forward trend outlook and we thought about how we priced and positioned our benefits for 2015, we thought it made sense to assume a moderate increase in underlying utilization. I'll tell you, in the first quarter, there has not been any acceleration in underlying utilization. I think we've done well as an organization through our focused medical cost management initiatives. Also, I think we're seeing benefits from greater consumer responsibility as well as we continue to drive greater concentrations, as Dave mentioned, in value-based reimbursements.
As we look at the balance of the year, we expect our full year commercial medical cost trend to be in the range of 6% plus or minus 50 basis points. I would orient you towards the lower half of that range.
I think we have pretty good visibility on that. We have daily census. I think maybe some of the things that are coming forward might have something to do with the fact that 18 million people have coverage and are using the system in a more structured way in the past. I think that may be a factor in what you're seeing, Scott. Next question, please.
We can take the next question from Michael Baker with Raymond James. Please go ahead.
Thanks a lot. Given the pending purchase of Catamaran, was wondering if you could give us a better sense or more color around your approach to differentiate on specialty pharmacy management, and then any willingness by the PBM consultant community to change their approach to scoring vendors given the change from pharmacy benefit management to drug benefit management?
Sure. I think that's a great question, and I'll have Larry pick it up. Particularly, the strength of OptumRx's synchronization efforts to really be able to connect data, target individuals, engage them, particularly as specialty pharma emerges, it really is a tremendous opportunity for us to distinguish ourselves. The cost of that category is such that it would be hard for us to believe that the customer community, as well as the consultant community, will not be sensitized to that category of cost. Larry?
Hi, Mike. It's Larry Renfro. I'm going to start, and I'm going to turn it over to Tim Wicks, who is currently the CEO of OptumRx, soon to be the President of the new OptumRx, and I'll have him comment on specialty. Maybe I can start by giving you a little bit of our thought process as we put the two companies together. We really looked at where the value was going to be, and we really had 5 categories. Number 1 would be scale. Number 2 would be enhanced technology. Three would be distinctive capabilities, such as specialty and synchronization, and we'll comment on specialty as you ask. Number 4 would be, we end up with a well-rounded management team from both a, what I'll call, relationship sales as well as operations, customer service. The complementary businesses that kind of line up all together.
That's kind of how we went at this. Obviously, specialty is a very important aspect of going forward in the future, as we talked about earlier in the script. I'm going to hand this off to Tim now, and he'll give you some thoughts.
Great. Thank you, Larry. Michael, first of all, we welcome scoring related to drug costs as opposed to simply straight up pharmacy discount rates. What differentiates us in the specialty pharmacy area and why we're competitive, first of all, it relates to trend management and the work that we do around trend management, and it really gets to all of the levers around synchronization in what we do to integrate medical, clinical, and lab data with pharmacy data. To be able to bring that to bear, to surround the consumer with all of those capabilities that help them make better decisions, help them be adherent to their drug regimen, and to be able to engage in programs that will help them improve their health.
We also think that the approach that we take to site of care and being agnostic as to whether the specialty drug is managed in the medical benefit or the pharmacy benefit is very important. We also take advantage of site of care management so that we're agnostic to that as well, and we drive it to the best place of care for the consumer.
Thanks for the update. Thank you. Next question.
Our next question comes from David Windley with Jefferies. Please go ahead.
Hi. Maybe a follow-up on the Catamaran thought process. Larry, your 8% margin goal for next year, I think you and John have talked about there may be some variance in how you progress toward that goal, depending on the mix of business. Obviously, Catamaran brings in a pretty significant shift in the mix of that business. Could you talk about how that affects your thoughts and your trajectory toward that 8% margin goal?
Sure. That's a good point. I'm going to ask John to speak to this as well. We had this goal of 8% by 2016 , there were some various factors or components that we needed to really make as part of that overall goal. First thing was, what you're commenting on, the 8% by 2016. We also said we would double 2013 earnings of $2.5 billion by 2018. We said we would have eight to 10 large and more complex relationships, that we would have double-digit top and bottom-line growth through 2016. I'm going to define that as kind of our core business on kind of pre-Catamaran. I would tell you that everything from a financial standpoint is in line or ahead of expectations.
We're going to continue to track our core business that way, as far as the 8% by 2016 that we set. Now, as you know, the blend has changed with what we've done in this transaction. We're going to be handling a lot more pharmaceutical business. That's going to change the mix, I'm going to let John talk about that.
David, this is John. As Larry stated, our 2015 performance to date would show us solidly tracking to that 8% by 2016 , we are very much committed to that 8% by 2016 goal as we put up, as we think about our base businesses and how that configures. When we plan as an organization, we plan for organic growth, that is how we configure our objectives and how we point the organization. Clearly, that 8% by 2016 i s very much focused on our core business' organic growth. We are tracking to that, we are still completely committed to that. Certainly, your point is well taken. Adding in excess of $20 billion of pharmacy care services revenue changes the mix
I would expect that to change in mix as we think about kind of the 2016 and where that lands. We as an organization are completely committed to 8% by 2016 on the core businesses, and that's where we'd be tracking on the core base, ex the impact of the additional pharmacy care services revenue.
The merger will dilute that down, you will stay on track for your core commitments on the core business.
Correct.
Great. Thanks for that question. Next one, please.
Our next question will come from Sarah James with Wedbush Securities. Please go ahead.
Thank you. I was impressed with the guidance boost, particularly after absorbing the Catamaran costs. I think it's the first time United's boosted guidance this early in the year since 2012. Can you talk about the level of confidence you have heading into the year, if it's maybe greater or there's less unknowns than the last few years that led you to an earlier guidance boost, and any headwinds or tailwinds that you could point out for us would be helpful. Thank you.
Yeah. I am somewhat confused. I don't think we're doing anything differently in terms of this. We, I think, update our outlook every quarter. We have seen enough strength and growth in the businesses across the board to improve that guidance slightly and to absorb the costs associated with Catamaran and the adjustment to our share repurchase given that transaction. We thought that that was appropriate to include in the update. Beyond that, I don't think we are changing anything else along those lines. Typically, if we see that consensus estimates don't necessarily line up exactly with the way we are seeing our quarter-by-quarter rollout, we typically comment on that and have again done that this quarter. I don't think we've done anything differently this quarter along those lines. If we did, if you're picking up anything, we didn't intend anything beyond what we said.
Can you help me with what you think has changed?
I just thought the EPS increase was bigger this year than first quarter for the last few years. Maybe if you could just point out the headwinds and tailwinds as you see them for 2015.
Sure. Well, I think that in terms of our business, I think our outlook is actually pretty positive. I think that we are seeing growth across our businesses. I think we had nice momentum as we came out of 2014 and have kind of carried that into 2015. When we take a look at the strength of the businesses, I think our Medicare offerings are stronger this year, and we've had, I think, what we expected to be in terms of first quarter growth there. The Medicaid business continues to be very strong, maybe a little stronger than what we had thought in the beginning. We knew we were going to lose a portion of the state of Tennessee, but our other growth has kind of pulled that to virtually even. Strong growth in the commercial business.
We have had nice growth across UnitedHealthcare, and we've had continued strong growth across Optum. Amil is showing some initial signs of strengthening and recovering. They've done a nice job down there, and they have really done, I think, an exceptional job of embracing some of the best of breed of what both organizations do. Along those lines, I think we have mostly positives. We had hoped for stronger MA rates and funding. I think that will be a consistent theme. We continue to work on improving our business and our business discipline, but I do think we're making very good progress on medical cost management, operating costs. Across the board, as I go through the inventory, I think we are probably in a stronger place than we have been in some time, and the first quarter results pull that through.
We have updated that outlook, and I wouldn't suggest it's anything more than that. Thank you. Next question.
Our next question comes from Andrew Schenker with Morgan Stanley. Please go ahead.
Thanks. Good morning. You clearly saw good success in exchange enrollment beyond your initial expectations. Maybe you could just discuss the factors around pricing and product design in your minds that led to the enrollment success, and also maybe any early reads on those exchange lives versus your expectations. Thanks.
Sure. It's still early, but I'll have Jeff Alter maybe comment on that. Thanks.
Morning, Andy. It's Jeff Alter. As we kind of took you through our plans starting back in 2013 of how we were going to view the exchanges and look at 2014 as a year of learning and then build kind of quickly, rapidly as the market developed, I think the results that we saw in our initial enrollment year of 2015 were a result of that longer-term strategic plan. As we mentioned during our investor conference, really looked hard at how people bought, what they were buying, what was successful, and designed product and networks that could create price points that were sustainable over the long term. I think as you look at where we got our membership, it would tie very nicely to where we said we thought we would get our membership, and maybe we just got slightly more in those markets.
I think it was a result of a long-term strategic plan around this emerging market and
The results of a lot of hard work to create the product and the networks that could support price points that people were looking to buy at. That's something that drove the first quarter. I'd also say that what also drove our first quarter results were stronger performance in our key account block, particularly around persistency or retaining existing clients as we went through our fourth quarter and into our first quarter. We retained more clients than we had in the past. We've also expanded our product portfolio around some of the work that we did for exchanges. We also did stretch that into newer, lower priced product offerings for our small business and some of our 51 to 99 business. We saw those results begin to emerge in the fourth quarter of 2014 and strengthen into 2015.
I think a balanced performance overall and in the exchange, right products in the right markets, pretty much as we expected. We knew back in January that the market was responding positively, it's played out nicely. Next question, please.
We'll take our next question from Joshua Raskin with Barclays. Please go ahead.
Thanks. Good morning. I appreciate the call. Could you guys talk a little about the $0.20 of guidance, sort of exclude the $0.10 of cost that you guys are absorbing, but the $0.20 of core earnings, and what the drivers are of that increase? How much of that is the benefits business versus Optum? I guess within that, how much of that is commercial versus government? I guess, further within that, how much of that is MLR related and what you guys are seeing by the segments?
Sure. Dave, you want to?
Hi, Josh, it's Dave. Thank you for your question. It's a very good one. We've increased our guidance by 10% on average, then we're including an additional $0.10 of costs associated with the transaction with Catamaran, then also the impact of reduced share repurchase. I'd say the number one contributor to our performance improvement expectations here is growth. I think it shows through pretty strongly across all of the benefits businesses, with a particular emphasis on the over-performance in commercial. What you probably don't see in that is, you see the lives on the insurance exchange, but what you probably don't see is the over-performance on the off-exchange business, which has been very strong as well. Jeff and his team have done a very nice job there. I'd kind of edge that more towards commercial.
Then in terms of the other profit contributors, it'd be our performance on MLR. We expected to improve our MLR during this year as we set forth both in the investor conference as well as on the fourth quarter call. We have clearly outperformed that this year as well. I'd say that that's due to the strength of the performance on several fronts. Our clinical engagement strategies and our ability to manage medical costs, the trend components that Dan referred to earlier as well with respect to how we're performing on inpatient management overall I think was a key factor as well.
Then you can also see in Larry's prepared remarks that Optum prepares to, or expects to over-perform as well, absorbing the cost of the Catamaran transaction and still hitting the expected range of performance that they had laid out in the conference as well as in the fourth quarter call. I think overall, you're seeing a strong performance, and it's coming from multiple different fronts supporting the $0.20 improvement in our overall guidance.
Is it fair to say, Dave, maybe two-thirds of the improvement is the benefits business and a third is Optum?
I'd say that sounds fair, plus or minus overall. I think that's fair.
Two-thirds, 64. We couldn't calibrate it, but what's great is that it is balanced, and I think that's the strength of the kind of the diversified model. All the businesses are contributing to that advance, and if we continue to execute appropriately, we're hoping to do better. Next question, please.
We'll take our next question from Sheryl Skolnick with Mizuho. Please go ahead.
Good morning. Congratulations to everybody. By my count, this has been rather an extraordinary quarter with double-digit revenue growth and strong operating income growth across all of the business units. We've been kind of talking about them separately with really key important factors that I'd like to focus on being the retention, the cost management, and that you have mentioned and you have talked about, as well as the synergies and synchronization of the business, the opportunity to do that on the Optum side. What I'm getting at is that there was a change in the company back in November. There's been change building over the last several years. Now we're seeing results. I don't think that was an accident. I think those things are two very clearly related issues. I'm sensing you're at scale. I'm sensing the business is transforming.
My question, therefore, is can you talk about what's changed in the way you manage this business to get all of these many parts and pieces that are so strong to work together now better perhaps, and also in the future. Does that mean that this sort of performance should be more sustainable?
Well, I'll start and see if my colleagues can join in on this. I would say thematically that we have been endeavoring to perform at these levels, and at this level of consistency for some time. It is not just a factor of internal efforts. I think there are external market factors that bring pressures to bear as well. We bear some of the responsibility for if we sort of optimize our performance, and some of it is due to kind of external market dynamics and pressures. I think that for the last couple of years, we have been endeavoring to really make the business work together on a more optimal level across the enterprise. It has been a function of trying to drive a better culture.
It has been a function of trying to achieve a strong chemistry among senior management and a kind of effort where we are working together and helping each other with both their challenges and opportunities. I do think this is a very strong group of people who are committed to working together and to optimizing the performance, that are really focused on serving customers, consumers, care providers, really focused outside in making sure that we are delivering on the promise of enabling a better healthcare system and really helping people live healthier lives and get the access and services to facilitate that. I just think that has come together, and it is an effort, so it is not sustaining. It is making sure that we keep doing this.
I do think that there is a stronger chemistry among the team today and an emerging, maturing leadership group across the board, and I'd say it's broad-based. I would say it's not three or four people. I would say it's 75, 100 people across the board. I think people make a difference, and I think that's been part of it. I think we've also been focused on a culture to make sure that we are collaborating effectively and focusing on serving the markets. I think those things have played into it, and I will look around and Dirk, Wicks, Dan, would y'all like to chime into this?
Thanks.
Sheryl, hey, it's Dirk. How you doing? What I would say is a good example is the Advocate4Me call model. That was a joint effort across Optum and UHC, with Optum handling the clinical pieces. If you look at what we're doing with our service offerings, making sure our digital offerings get consistent, making sure all of our customer communications are clear and concise and simple. I mean, those things are coordinated across the enterprise with a lot of quality. That's a good example of a case where we're managing across.
I think the decisions, the way we go about making decisions, and how we choose leaders in the organization are really built on a more focus on collaborating and being ambitious to make sure the enterprise performs for those who we serve. I think a lot of factors that are maybe intangibles have contributed to that, and I think you're just seeing some of the effort start to emerge, and I think we can do better. I am hoping you're seeing the beginning of what we can do going forward, but we have to keep working on it. Thanks for the question. Next, please.
We'll take our next question from A.J. Rice with UBS. Please go ahead.
Hello, everybody. I might follow up with another Catamaran consolidation question. I guess the $0.30 in EPS accretion that we're looking for next year, I assume that's after plowing back some of the opportunity for the underlying customer base. I assume that the overall opportunity from putting the two together is more than will be reflected in the $0.30. Can you give us some flavor of what might be plowed back to the combining of these clients? I know one of the issues that's been raised, and I want to just have you comment on it, is that Catamaran has a lot of health plan members or clients, and I know in Optum, like OptumInsight has a lot of business with other health plans. Can you just comment on how that relationship works?
I know there seems to be some concern that people may view as a competitor, how has your experience been in Optum working with other health plans?
Sure. Well, there's several in there. It is premature for us to get specific about elements related to a transaction that is still really subject to approval and so forth. Kind of thematically, I would offer that the accretion is really more a function of the transaction itself, the capital we deployed relative to the cost of that capital against the earnings stream of Catamaran as it is. We are clearly focused on driving the overwhelming majority of the benefits and synergies that arise from this back to customers, improving the value proposition, improving and progressing a PBM model that is distinctive in the marketplace, and we are really focused on the customers benefiting principally from that, of which UnitedHealthcare is a customer as well, but also, as you point out, very important customers that are other payers in the marketplace. Very good companies.
Those relationships are clearly important and vital to this model going forward, and we are committed to delivering on all commitments related to that and really developing and delivering a supporting capability to their PBM strategies so that we produce for them a distinctive capability and advantage into the marketplace, and to meet their specifications as they see it and become a very trusted partner in this category. I think we are a trusted partner for a variety of payers and care providers across the spectrum in Optum, and our business has continued to grow and evolve there. Now, Larry, I don't know if you want to comment.
Sure. Hi, A.J., it's Larry. Good points that you made, good question. We live this every day. I'll reiterate almost everything Steve just said. I have spoken to quite a few of the customers, what you want to think about a little bit is frame what we do today. If you look at Optum Health and you look at Optum Insight, you would find that if we have internal and external customers, that's pretty balanced between the internal and external breakdown. If you look at what's really happening with the Catamaran transaction, it will get very close to being balanced as well.
Some of the things that we heard as we talked to the existing clients and so forth, that fits with what Steve said, is that the reason we bought and entered into this combination with Catamaran was because we needed scale, we needed enhanced technology, we needed specialty and synchronization programs. We needed a well-rounded management team, this was all complementary business. That's the same reasons that people want to do business with us. They have those same interests, that's why we believe we really marry up really well with this new model. Some of the things that we're going to have to do is we're going to have to execute. We're going to have to execute day one as we get involved with new customers.
We're going to have to live up to commitments that have been made, we know that, we're pretty good at that. There's going to have to be total transparency. Today, we do business with 300 health plans. We do business with 4,500 hospitals. We're used to really working with a lot of people having to have transparency, this is just going to be another aspect of it. Obviously, privacy and security around information and data, we're going to have to come up with a way that we believe is going to be pretty easy for no disruption because we are on the same technology platform, we've been on that platform for about 10 years. Overall, we feel pretty good about this transaction.
I think if you went back and you looked at what we do in Optum Health, you would find that a lot of these clients are already clients of ours, they already work with us on various intervention and prevention and wellness programs. You would find the same with Optum Insight. Overall, we kind of know this model, I would say as long as we execute, as long as we execute, as long as we execute, we should be fine.
All right. Great. Thanks.
Thank you. Next question, please.
We'll take our next question from Kevin Fischbeck with Bank of America. Please go ahead.
Great. Maybe if I can ask a similar question in a little bit different way. When we think about the accretion of $0.30, my understanding is that it's versus not deploying the capital elsewhere, but you've already kind of talked about a $0.07 headwind so far this year from cutting back on share repurchase. I guess if you do that again next year to bring leverage back down, how do you think about kind of the net accretion versus what if you had continued your previous capital deployment plan in 2016? Then I understand the concept of returning the overwhelming majority of the benefits back to the customers. Usually, we don't think of year one as being the high water mark from an accretion perspective. Where does that $0.30 number go to in year two and year three?
First of all, we're not providing that level of guidance, particularly at this early stage. We think that this deployment of capital is compelling relative to the market opportunities and, I think the capabilities we can bring to the marketplace. We think that this business will continue to grow. We think that it will become more effective serving customers, and it will become more effective as a business, and particularly in the market dynamics that we see ahead as specialty pharma continues to emerge in the marketplace, where there's going to require greater information, greater clinical engagement. We think this is a very good use of capital. It will be an important business broadly for the marketplace, serving all sectors of the markets where prescriptions are engaged. We expect this to grow. We don't expect this accretion to flatten out or trend.
We expect the business to actually improve year by year. We would expect that contribution to grow, and it would grow, we think, much more than would be a share buyback, if that's what you're using it as an example. Our orientation to deploying capital is to find growth opportunities aligned with our strategic capabilities. That is our priority in terms of deploying capital, paying dividends, and share buyback is really when we really have excess capital, if you will, to bear. We are very pleased with this, and we'll continue to look for investment opportunities not only in this area but in our other Optum services and in our benefits businesses where we think there would may be opportunities down the road. I don't know if that gets to your-
Larry? Sure. Kevin, I'll get a little bit more granular, and maybe this is not where you were going, but I'm being held responsible here for that $0.30 in 2016. The way that I look at it, you've got some factors that we have to pay attention to very carefully right now. Such as client retention, such as sales, such as our operating leverage, our customer service, and our management. All of these things that we really have control of inside of Optum and how we manage the business. With the combination of Catamaran, who has a strong management team, who has strong experience, strong relationships, this is a very strong management team. We feel confident there are a lot of levers that we can use and pull to go towards that $0.30.
I'm not even talking about network discounts, and I'm not talking about drug spend at this point in time. As we talked about, some of these categories will go back to others and our clients as we work with them. We're confident from what I'll call an operating plan standpoint, what we have to do by 2016.
Thanks for the question. Next question, please.
We'll take our next question from Christine Arnold with Cowen. Please go ahead.
Hi there. At your Investor Day, you indicated you expect to achieve your long-term earnings growth target of 13%-16% in 2016. Recognizing now that the 2015 EPS is going to be higher than you expected, is that objective still on track? As you look into 2016, you mentioned that rates aren't keeping up with cost trends and Medicare. Could you comment on your other lines of business and how you see headwinds, tailwinds? Thanks.
Sure. On the other lines of business, I'll ask Jeff Alter and Steve maybe to respond in terms of our overall. We are not changing our outlook with respect to our long-term growth trends or no intention of suggesting that. We still feel confident that in the long term, that our businesses are capable of producing growth in that range. We are hopefully seeing our performance start to recover back into that range. As it relates to the individual businesses, maybe I'll start with Steve Nelson.
Sure. Thanks, Steve. Hi, Christine, Steve Nelson. With respect to the Medicare business, it's really well positioned for now and will even increasingly improve for 2016 to serve more seniors, which is really our objective, provide not just better benefits, but great health outcomes and a better healthcare experience. I'll just tell you how we think about that as we are in the, as you know, in the midst of our 2016 benefit planning period. We have now shaped our networks in a really meaningful way. We have added premiums, so just under half of our total membership has a premium, which was an important transition and something that we needed to do and executed that this year. Making great progress on Stars.
We have really strong clinical programs and customer service innovations and improvement that not only, as I said, provide good benefits, but create a better healthcare experience for our members. We have great market share and brand position. When you couple this with the growth of the population and an increased propensity to choose Medicare Advantage over fee for service, it's a really strong position and very positive outlook.
Jeff?
Morning, Christine. It's Jeff Alter. I think the commercial business shares a very positive view of the future. We've been through a tough couple of years with a lot of headwinds, a lot of disruptions from the ACA, which tended to, I think, mute our ability to manage trend better than some others. I think as we go into 2015, 2016, and beyond, the combined power of Optum and UnitedHealthcare working together to keep trends lower, keep our pricing lower. I think you should expect the growth that we've had over the last six months or so to really be what distinguishes us going forward, and that's delivering more and more value to the marketplace.
Through different product designs, but more important over the long run, better management of costs and delivering that better management back through lower pricing and growth to the marketplace.
Austin?
Sure. Good morning. This is Austin. Strong momentum continues in our Medicaid business. We're very honored to continue to see strong growth. We look for that growth to continue throughout the year and into the future, really built on very strong relationships with our state partners, strong clinical programs focused on getting better outcomes, high quality outcomes for the constituents. Overall, I think we've been able to demonstrate over time, in partnership with those states, value. That sustained value, we think is what really continues to create that momentum moving forward.
I think pretty solid across the board in terms of the Optum business continues to be strong. The pipeline in Optum continues to grow, and the revenue backlog continues to grow, actually at a faster pace than what we're actually showing in our reported results. Pretty positive in that regard. We'll take maybe two more questions. The next one, please.
Okay. We'll take our next question from Ana Gupte with Leerink Partners. Please go ahead.
Yes, thanks. Good morning. I was wondering on this Optum-UHC better together, is that strengthened or less strong, if you will, post the Catamaran transaction? How would that be informed by your 2016, 2017 selling season, and are there any other milestones that might inform one decision versus the other?
Well, I would say just broadly that, kind of coming back to an earlier question, that I think the chemistry and the operating dynamics across the businesses continue to mature and get better. I think we have a very strong generation of leaders here, and they are working together. In terms of this particular transaction, a lot of work done at the corporate level in terms of the actual development and execution of a transaction of this caliber, and then working with the Optum team and the OptumRx team. That has been probably the orientation at this point in time. I would say, as it relates to that transaction, I think we have really good capabilities in our corporate development organization, our treasury organization and so forth, and then they take the business expertise from the Optum team, really where our PBM resides.
That flavor was probably played out more in that. I would tell you that the better together dynamic across our businesses has never actually been better. As I said earlier, I think, and certainly it's our intent that this is just the beginning. Next question, please.
Okay. We'll take the next question from Sean Wieland with Piper Jaffray. Please go ahead.
Thank you. Long time listener, first time caller. Thanks for taking my question. This week you said that Optum360 and Mayo is getting together. Mayo, as you know, is also embarking on their implementation of Epic, so that's a lot of cooks in the kitchen. Can you comment on the value proposition to Mayo, given their simultaneous rollout of Epic and how you're going to manage this? Also, can you tell us what the organic growth was in the Optum Health business? Thanks.
Well, welcome, Sean, and maybe William Munsell can touch on Mayo, and John, perhaps your last question.
Yes, Sean, this is Bill. I'll answer the implementation work going on down at Epic. It's a very insightful question because that is a lot of things going on, and it was instrumental and part of our discussion as we arrived at our relationship with Mayo, because what we will do is work in concert with them with respect to their rollout of Epic. As they evaluated that and they looked at our tools, the combination of our tools working with their existing systems and the systems that they're going to install, they felt like they wanted to move ahead because they were independent and the best in the market as they saw them.
There were other things that we're going to work on collectively that I think enhance Mayo's position around patient engagement and some of the things that they want to solve for from a consumer perspective, which we're going to work with them, particularly in the context of revenue management. They are comfortable with the so-called cooks in the kitchen. We'll collaborate in that context, and there is not that much overlap in where they are. Where there is, we've accounted for it in the project plan. We feel very comfortable about going forward.
John?
Yes, Sean, this is John Rex. Optum Health did have a very good top-line growth in the quarter that you noted, 27% top-line growth. I would say all the businesses contributing. If I were to call out certain businesses in terms of where we saw particular strength that I want to note on the call, I'd call it the Optum Care businesses. Those are the care delivery businesses, certainly one of the big five drivers that we talked about extensively at the investor day back in December in terms of where our focus was over the next five years. Driving that growth, it was really a growth in patients served in our existing markets. It was also de novo expansion, new market expansion, really heavily along those areas in terms of driving the vast majority of growth with Optum Health in the quarter.
Just to sum up the quarter, the story is really, again, about growth in revenues and earnings based on more consistent performance for customers, growth in the number of people we partner with and serve across the healthcare system, and growth in the scope and diversity of our businesses. We thank you, and we'll see you next quarter. Thank you.
This concludes today's program, and we thank you for your participation. You may now disconnect. Have a great day.