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United Healthgroup (UNH) Earnings Report: Q1 2016 Conference Call Transcript

first quarter 2016 earnings conference call. A question-and-answer session will follow UnitedHealth Group's remarks. As a reminder, this call is being recorded. Here's some important introductory information.


This call contains forward-looking statements under US 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, include the cautionary statements included in our current and periodic filings. This call will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amounts is available on the Financial Reports and SEC filing section of the Company's Investors page at Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated April 19, 2016, which may be accessed from the Investors page of the Company's website. I would now like to turn the conference over to the Chief Executive Officer of UnitedHealth Group, Mr. Stephen Hemsley. Please go ahead. Stephen Hemsley (CEO): Thank you and good morning. Thank you for joining us today to review our results for first quarter 2016. UnitedHealth Group businesses have steadily strengthened over the last several years, and this trend continued in the first quarter of 2016. Our momentum is evident in the highest levels of customer and consumer retention in our history, combined with new customer acquisitions driving strong revenue gains across the enterprise; growth in the size, scope and diversity of products and services within our client base, as well as the number of new customer opportunities we are pursuing; steadily improving metrics for brand and reputation and steadily rising net promoter scores across our businesses. Customers buy value and expect results, and we are sharpening our performance focus, driving the highest quality customer experiences, helping us become the go to choice, the must have partner for everyone looking to improve performance and sustainability in health benefits and health services. When we combine higher quality from consistent excellent execution with practical innovations at scale, our opportunities to grow and serve continue to expand. Our intensified commitments to quality performance and to growth on the strength of that quality positions UnitedHealth Group to look forward toward what we believe may become our best decade of performance and growth yet. Turning to the results we are reporting today. Our first quarter revenues grew 9% prior to acquisitions and over 24% overall, to $44.5 billion, with broad strength across the enterprise. In health benefits, medical costs were well managed and controlled, as is evident in the consolidated care ratio of 81.7%. Prior year reserves developed favorably by $360 million in the quarter and medical days claims payable increase 4 days year-over-year to 51 days. Cash flows of $2.3 billion, or 1.4 times net income, continued at a strong and reliable pace. First quarter's operating cost ratio decrease 110 basis points year-over-year to 15.2%, due to a combination of business mix, technology driven operational efficiencies, and the cumulative overall effects of revenue growth. These efficiency gains were partially offset by continued investments in our businesses. Our tax rate reflected early adoption of the new accounting standard for stock-based compensation, adding roughly $0.06 per share in the quarter. You should expect it will add considerably less in coming quarters, due to the natural pattern of equity-based compensation activity for our Company. First quarter adjusted earnings, $1.81, per share grew 17% year-over-year; and our full-year revenue and per share earnings outlook is strengthening, as Dave Wichmann will describe shortly.


Since we know exchanges are in the minds of many of you, let me take a quick minute for an update. As you know, we have been evaluating public exchanges on a state-by-state basis. We have maintained our regular public dialogue with you since November about the individual exchange market and how our own experience and performance have been unfavorable in these markets. The smaller overall market size and shorter term, higher risk profile within this market segment continue to suggest we cannot broadly serve it on an effective and sustained basis.

Next year, we will remain in only a handful of states and we will not carry financial exposure from exchanges into 2017. We continue to remain an advocate for more stable and sustainable approaches to serving this market and those who rely on it for care. With that, I will now ask Larry Renfro to review Optum's exceptional performance, and then Dave to cover United Healthcare and provide UnitedHealth Group comments. Larry? Larry Renfro (Vice Chairman & CEO Optum): Thanks, Steve. Optum is off to a strong start again this year, consistent with the ambitious plans we shared with you at our investor conference last December. Optum will again grow revenue at more than 20% and earnings from operations at above 30% this year. We continue to estimate Optum will contribute 42% or more of enterprise-wide operating earnings this year, even considering our ongoing investments to support the future growth of this young business. Optum's performance reflects the large scale opportunities we are pursuing and the tremendous efforts our 100,000 employees make to deliver differentiated services and capabilities to those seeking to solve complex challenges across the healthcare system. Our first quarter revenues of $19.7 billion grew 54% year-over-year, or 11% prior to acquisitions. OptumRx revenues grew 72%, to $14.3 billion, while OptumHealth and OptumInsight together grew revenues to $5.7 billion, which is growth of 21% over the first quarter of 2015. Our first quarter operating margin of 5.6% includes the continuing increase of pharmacy care revenues, as you have seen in the past two quarters. Overall, Optum produced $1.1 billion in earnings from operations. As you may know, we identified five drivers for Optum's growth over the next five years. They are pharmacy care services, care delivery, technology, government services, and international. Last quarter, we spent some time on a more detailed review of care delivery. Today, we will focus on pharmacy care services, then follow up briefly with data analytics. Pharmacy care services is a high priority area for us. This focus goes back some five years, to the original decision to undertake the largest and arguably most complex business in sourcing ever attempted. It required significant investments, precise execution, and flawless delivery. As you know now, it has been a real success. Last year, we took another step, our combination with Catamaran, led by Mark Thierer, who now heads our entire OptumRx platform and serves as a senior member of our overall Optum leadership team. This combination was a significant advance in scale, and today the business is running at over 1 billion scripts annually, up from 350 million in 2012. Eight months in, the greatly expanded OptumRx is advancing a meaningful differentiated solutions for clients in the marketplace, with distinctive capabilities around patient-centered data analytics, new capabilities in specialty pharmacy, such as home infusion, and workplace-related resources. Since we came together, our retention rates have persisted in the high 90%s and we are building our largest ever pipeline of opportunities. We were pleased this quarter to announce an innovative partnership with Walgreens, through which we are creating a 90-day at retail pharmacy offering. This is all about meeting consumers where and when they want, whether that means home delivery or walking into the local Walgreens store. Together, we will provide choice and cost savings to our clients, as we work and benefit together in a meaningful, more collaborative way. We are enthusiastic about the potential of the extension of our relationship with Walgreens, the largest retail pharmacy in the US. Overall, this year we expect OptumRx to generate more than $58 billion in revenues and manage nearly $80 billion in pharmacy spend for our customers, including $30 billion in specialty drug spending. Pharmaceutical spending comprises 12% to 15% of the overall cost of health benefits and has been the traditional focus of the pharmacy benefits industry. We find that focus much too limiting when it comes to improving health and healthcare overall. The impact OptumRx has on healthcare and its costs has the potential to be profoundly broader and deeper. Here you have the most frequent consumer touch point in all of healthcare, one that provides great visibility into the full healthcare continuum.


An individual's engagement with OptumRx becomes more impactful when we break out of the one-dimensional procurement and formulary arbitrage model of today and open up to providing consumers integrated medical and pharmaceutical services.

In the process, we help reduce unnecessary overall systems utilization, including ER visits, hospital admissions and readmissions, and provide more effective and timely interventions to improve adherence and health outcomes. That's the value proposition of the future we are focused on. Employers using our integrated and technology enabled approach can save in excess of $120 per member per year across their combined medical benefits. In summary, our objective for the impact of this business goes far beyond traditional pharmaceutical management, to where the potential to influence both the consumer and the health system for the better is much greater. That is why pharmacy care services are core to our growth and value story over the next decade. Optum also is delivering differentiated value from our work inside the health system, a second core to our growth, our unrivaled existing capabilities in healthcare data science and analytics. Companies new to this space are excited about the potential that some day these forces will evolve healthcare into a new age. Well, for Optum's customers, that some day is today. We are meeting their critical needs right now. We are the leader in using advanced technology and predictive analytics to connect stakeholders across the care continuum with the insights to better manage the health of populations and the resources they depend on. Our continuously updated integrated and curated clinical and claims data asset comprises more than 80 million lives of robust clinical data and 170 million lives of claims data we can see from both sides. Beyond the 250 million clinical and administrative lives, our diverse and comprehensive data set includes 8 billion lab results, 4 billion determinations, and 3 billion medical procedures. We can provide a real-time clinical and financial picture that is fully integrated and spans years of longitudinal detail. Our health data resources continue to grow securely and responsibly every day. Today our analytics products are helping thousands of care providers and ultimately, the millions of consumers they serve, translate date into actions, and action into better medical outcomes. Today, not some day, we help our customers step up from reacting to challenges to designing and implementing actions that reliably lead to better health delivered at lower costs. Today we are delivering the wealth of information, analysis and positive benefits of big data with results that include double-digit improvements in critical performance factors, like utilization and chronic disease control, which in turn empower care providers to adopt and succeed in new models of care and related new revenue streams. Today we lead the way in implementing predictive analytics in healthcare, because healthcare is all that we do. Healthcare technology and data analytics have been our specialized focus for years. So while others learn to crunch large amounts of static data, Optum is fully integrated into the live flow of healthcare transactions, enabling us to provide up-to-date, useful information that makes the healthcare system more intelligent and enables it to act that way. Now let me turn it over to Dave. Dave Wichmann (President & CFO): Thank you, Larry. As we open 2016 United Healthcare's momentum continues. Strong new customer growth and historically high retention levels reflect the competitive value United Healthcare offers in the marketplace. Quarter by quarter and year by year, we continue to gain new customers and retain valuable established customers who choose the combination of our more engaging consumer experience, distinctive service, product innovation, and integrated clinical and network value. People using our modern consumer-based benefit designs are supported by actionable information available at their fingertips, enabled and delivered by advanced analytic capabilities, as Larry just described, increasingly channeled through consumer and care provider friendly mobile technologies. Employers continue to be drawn to well-managed competitive cost trends, physician and consumer engagement, and value-based arrangements for care delivery. We partner with our largest customers to benchmark performance and design customized plans that help them advance year-by-year along the continuum of ever improving benefit performance and heightened consumer engagement. And we are serving individual patients and overall populations with more complex medical conditions. Our coordination of services and ability to close gaps in care significantly increase the value we bring to consumers and customers. Simply put, the greater the level of patient needs, the more we can help. As a result, we continue to deliver exceptional organic growth. Our US-based benefits businesses grew organically to serve 1.3 million more people with medical benefits in the first quarter and that brought organic growth to 2 million people in the past year.

Looking at commercial markets, we are up about 700,000 people in the quarter and 1 million people since March, 2015. First quarter 2016 delivered diversified growth across self-funded national accounts, public sector, small group, middle market businesses, and individual.

Turning to exchanges, as we expected when we spoke with you in January, we grew roughly 300,000 lives through the first quarter and serve 795,000 people on public exchanges as of March 31. We expect that level to decline to around 650,000 by December. Through this first quarter, we have seen no change in our estimates of costs from the 2015 exchange period. This quarter, with the majority of our 2016 exchange members new to us, we have been appropriately cautious in our reserve estimates, reflecting an additional $125 million in full-year 2016 exchange losses. These were fully absorbed in this quarter and fully considered for the year in our guidance range; and as Steve mentioned, we do not anticipate financial exposure to exchanges in 2017. In Medicare, the value of our Medicare Advantage offerings continue to resonate, differentiated by the stability of our benefits, networks, membership and distribution systems. We offer seniors clear value and a consistent, modern consumer experience, all of which drive new growth, as well as strong consumer retention. This strength is reflected in our first quarter membership growth of about 300,000 seniors. Medicare is a consumer business, with seniors receiving a variety of outreach approaches focused on better and more consistent care, such as receiving home visits and benefiting from our personalized, compassionate and education focused consumer service. In 2015, we helped close 9 million gaps in care for seniors we serve. And we expect nearly 65% of our members to be in a four-star plan by 2017, with further improvement in that percentage in 2018 to 80% or more. We believe our Medicare prescription drug benefit business will be much better positioned for 2017. We pulled back in a number of markets this year to reposition products and added membership in the new product potential via a modes acquisition in the first quarter. Our Part D membership decreased 70,000 people in the first quarter and should decline by another 200,000 or so by year end. This suggests we will serve 4.7 million to 4.8 million people by year-end 2016, considerably better than what we projected last December. And we expect to return to growth in Medicare Part D in 2017. Switching to Medicaid. Managed care serves as the most effective, proven tool to ensure budget sustainability for our state Medicaid programs. This financial predictability, along with the ability of managed care to expedite systems transformation, comprehensively integrating care while addressing social determinants, has resulted in an unprecedented level of procurement activity. Of special note is the significant increase in the volume of opportunities for populations with more complex needs, such as people served by long-term services and support programs. The recent award of Nebraska's Integrated Health behavioral and pharmaceutical model reinforces these expected trends and procurement to include more populations with more complex needs and to look to integrated solution to address states' needs. Our expectation for continued expansion of opportunities to serve all Medicaid populations was reinforced by our recent award in two California counties, and across our community and state business, the addition of 145,000 people in the first quarter. Let me now touch on the outlook for UnitedHealth Group as a whole. Building on the strength of our first quarter, we expect full-year revenues of approximately $182 billion, up from our prior outlook of $180 billion to $181 billion, led by strength in Optum RX and United Healthcare employer and individual. Strong first quarter results, combined with a slightly lower tax rate for the balance of the year and the impact of recently completed acquisitions, allows us to increase our...