UnitedHealth Group Inc. (UNH) CEO Discusses Q2 2013 Results - Earnings Call Transcript

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UnitedHealth Group Inc. (UNH) Q2 2013 Earnings Call July 18, 2013 8:45 AM ET

Executives

Stephen J. Hemsley - Chief Executive Officer, President and Executive Director

Jack Larsen

Gail Koziara Boudreaux - Executive Vice President and Chief Executive Officer of United Healthcare

David S. Wichmann - Chief Financial Officer, President of Operations and Executive Vice President

John S. Penshorn - Senior Vice President

Dirk McMahon

Daniel Schumacher

Larry C. Renfro - Executive Vice President and Chief Executive officer of Optum

Analysts

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Albert J. Rice - UBS Investment Bank, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

Sarah James - Wedbush Securities Inc., Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Ana Gupte - Dowling & Partners Securities, LLC

Carl R. McDonald - Citigroup Inc, Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

Operator

Good morning. I will be your conference operator today. Welcome to the UnitedHealth Group Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

Here are some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings.

This call will also reference non-GAAP amounts. A reconciliation of non-GAAP to GAAP amounts is available on the Financial Reports and SEC Filings section of the company's Investors page at www.unitedhealthgroup.com.

Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated July 18, 2013, which may be accessed from the Investors page of the company's website. [Operator Instructions]

I would now like to turn the conference over to the President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.

Stephen J. Hemsley

Good morning, and thank you for joining us this morning to review our first half 2013 and the longer-term future we continue to build at UnitedHealth Group.

The performance of the quarter and the first half of this year reflect many of the themes we are focusing on with intensity across UnitedHealth Group: growing by serving more people with higher and more consistent quality with compassion and a better, more modern and personal consumer experience; making health care more affordable by enabling the health care consumer, the care provider and the system itself to become a more effective system of health and wellness; advancing the performance and value of this enterprise for shareholders through operating and capital disciplines in both growth and strategic diversification, as well as dividend and share recapture.

We see several of these elements in our first half performance in a number of ways such as the consistent, broad-based growth across each of our market-facing business groups; medical cost trends that have remained in check and will help to keep health benefits affordable; the increasing pace in product innovation and adoption as nearly 6 million consumers now embrace our incentive product design and our rapidly growing portfolio of consumer tools; the rapid acceleration of deeper and more integrated performance-based payment relationships with care providers that will reach above 25 billion by this year end; and the increase in our dividend to more than $1 billion annually even as we sustain $3 billion in share buyback.

We have a great deal more to do. We are far from performing to our potential. Although we are seeing steady advancements on many fronts, we are redoubling our commitment to consistent execution in the core fundamentals of our businesses. We are determined to accelerate the pace of innovation and the adoption of simpler and more modern approaches and technologies and ever better approaches consistently delivering higher-quality care and access and to make health care more understandable and affordable for both the individual consumer and for our society.

Our performance in the first half of 2013 was characterized by this growing business momentum, continued service expansion and diversification across the enterprise.

In the second quarter, UnitedHealth Group earned $1.40 per share, up 10% year-over-year with revenues over $30.4 billion, up 11.5% year-over-year. As expected, the consolidated operating margin decreased slightly year-over-year by 30 basis points as the consolidated medical care ratio increased to 20 basis points to 81.5%, reflecting our continued strong growth and diversification into government benefit programs. And accelerating growth from our services, international and fee-based businesses produced a 90 basis point rise in the consolidated operating cost ratio to 15.9%. The level of services growth has become so meaningful that it continues to outstrip steady efficiency gains from our multi-year initiatives enhancing quality, simplicity and system-wide productivity, as well as our concentrated focus on cost management across UnitedHealthcare, Optum and UnitedHealth Group.

While this ratio has increased, it remains largely a reflection of the ongoing growth and diversification across UnitedHealth Group. Cash flows from operations were $1.5 billion in the quarter and $2.5 billion through 6 months. We decreased our debt-to-total capital ratio by 160 basis points during the quarter to 34.6% at June 30 and ended the quarter with $1.2 billion in available cash.

Last month, our board increased our dividend by 32% to an annual rate of $1.12 per share and renewed our share repurchase program with a fresh authorization for the repurchase of 110 million shares. These decisions reflect confidence in the strength and consistency of our underlying earnings and cash generation capacities into the future.

In the current quarter, UnitedHealth Group continued its pattern of steady, consistent growth and market share gains, and we see more growth to come in the next few years in areas such as commercial and consumer benefits through public and private exchanges, Medicare Advantage, state Medicaid expansions, Medicaid long-term care, dual-eligible MMEs, military and veteran benefits and services, the emerging Brazilian market and the continuing maturation of Optum's broad range of services for consumers, care providers, payers and other participants in the health system as a whole.

Let's review second quarter business results, starting with UnitedHealthcare where the story remains one of remarkable growth and continued market share gains. Over the past 12 months, UnitedHealthcare has been the fastest-growing health benefits company, increasing the number of people served by more than 9 million. This includes more than 2.9 million people in TRICARE and another 4.7 million people from Amil in Brazil, both new markets for us. Overall growth has been driven by offering distinct and innovative consumer benefits and services shaped to respond to local market needs and affordable price points for consumers.

UnitedHealthcare has designed a comprehensive system of capability that aligns modern, incentive-based benefit designs with easy and convenient consumer empowerment tools that engage effective clinical care wellness programs, which in turn channel naturally into incentivized, performance-based care delivery access. This aligned system leverages better informed and incentive consumer and care provider behaviors to produce sustainable cost and performance advantages and deeper, more innovative relationships with consumers, care providers and plan sponsors across all market segments. Effective incentive alignment with consumer benefits through the care provider rewards is a critical component to sustainably improving broader accountability and effective payer to care provider integration.

We are the market leaders in consumer value plans with nearly $6 million high deductible or consumer incentive plans in force. We are leaders in consumer transparency tools with innovative mobile applications that enable effective use of information specific to each consumer. We're further along in value-based care provider contracting than any other company and our pace is accelerating with more than $50 billion in accountable care performance contracts expected by 2017, if not sooner. These programs offer varying levels of integration with care providers, depending on their ability to affect health outcomes and assume financial risk. Year-by-year, these programs are helping transform how health care is delivered, paid for and rewarded.

This quarter, UnitedHealthcare's organic growth was led by the initiation of services for TRICARE in the West region for 2.9 million members in the military and their families. This is the first time this contract has moved to a new service provider in more than 15 years and we encountered challenges as we engaged in this complex and massive transition. We have learned from these initial challenges and regret any disruption this may have caused to men and women we are privileged to serve, and we're deeply grateful for the collaborative working relationship with the Department of Defense, the TRICARE Management Activity, the TRICARE Regional Office West and the surgeon generals of the respective services, the military treatment facilities and their fine leaders.

Having quickly advanced from these initial challenges, we remain committed to consistent excellent service and the value of innovation in going forward for these programs.

UnitedHealthcare's Employer & Individual business added a net 235,000 people year-to-date and is performing strongly across-the-board. Growth continues to be strong across the government benefit markets as well. Through the first half of the year, UnitedHealthcare remains the largest, and once again, fastest-growing Medicare Advantage participant. And Part D and Medicare Supplement both continued to perform strongly. Medicare Advantage products have grown to serve 355,000 more people through the first 6 months, and our full array of Medicare product offerings has grown to serve over 1 million more seniors this year.

Medicaid growth stands at 110,000 people through the first 6 months despite a divestiture impacting 60,000 people earlier this year. Care for chronic and complex populations remains a distinctive capability for this business and a major forward growth driver with recent awards to serve long-term care and dual-eligible beneficiaries in Arizona, Florida, New Mexico, New York, Ohio and Washington State.

For the second quarter, UnitedHealthcare generated operating earnings of $1.9 billion with solid contributions from all businesses. The commercial medical care ratio improved 10 basis points year-over-year. We are performing slightly better on outpatient costs despite the continued migration of clinical services from inpatient settings. We continue to experience lower hospital inpatient usage as we expected, and inpatient costs are in line with our projections.

Overall, 2013 full year commercial cost trends are tracking in line with our initial projections of 5% to 6% with unit prices remaining a core driver of increases.

UnitedHealthcare's results include Amil, which is now 90% owned. With Amil, our international business has grown to serve 260,000 more consumers in the first half of the year, remain solidly ahead of its growth and financial plans for the year and is well-positioned to continued growth and market share gains, driven by its distinctive market offerings and clinical engagement model.

We continue to be gratified by the growing response to Optum's market-leading offerings and capabilities. Each of Optum's businesses posted double-digit top line gains. And overall, Optum revenue rose 21% over last year. Operating margin expanded 170 basis points to 6.1% despite the increasing mix of pharmacy services revenues. As of today, we are more than halfway through our pharmacy migration. And since January 1, OptumRx serves a total of about 8 million new consumers, including these migrations and new business.

For the first 6 months of the year, total Optum operating earnings rose 80% to just over $1 billion. Optum's strong first half 2013 performance is proving that the broader health system and its constituencies create a natural end market for services, a market we have sized at more than $500 billion annually.

Historically, this market has been fragmented and served primarily by smaller single-point solutions. We see the opportunity to bring together the services and capabilities we offer and provide broader, more integrated solutions to larger, more diverse clients while continuing to deliver even more effective stand-alone products and services to our traditional customer base.

We are focusing our investments on roughly 10 product families and freeing up resources through this more disciplined focus and the related productivity gain to fund further development and innovation on behalf of the clients and consumers we serve. These actions are driving stronger and more consistent margin performance across all Optum's businesses.

The collective performance of our diverse UnitedHealthcare and Optum businesses ultimately comes through in UnitedHealth Group's strong overall results. As we indicated earlier in our commentary, UnitedHealth Group consolidated revenues grew 11.5% and net earnings grew 10% to $1.40 per share in the second quarter.

We expect full year 2013 net earnings in the tighter range of $5.35 to $5.50 per share. Our second half earnings performance will benefit from the timing of Part D earnings and contributions and Optum's continued performance gains. Our balance sheet is strong and our cash flows from operations are expected in the range of $7.2 billion to $7.6 billion this year. We already targeted returning up to $4 billion of that to shareholders, and our recent dividend increase now puts us in an annual dividend payment pace of more than $1 billion.

Looking forward, our outlook remains consistent, strongly positive in the long term with familiar near-term challenges coming in 2014 and 2015 as we indicated last quarter.

We expect pressure on the pace of revenue growth next year, given both rate and membership pressures in Medicare Advantage. We see further business and product integration advances, further medical affordability gains and intense focus on driving lower operating costs to improve and sustain our competitive positions serving key health benefit markets and continuing strong cash flows.

The next phases of the Affordable Care Act should bring growth and expansion in the Medicaid business, as well as to Optum and some meaningful financial challenges as well. For instance, on the Medicare side, the challenge is intensified meaningfully and include nondeductible taxes combined with the continued significant underfunding of Medicare Advantage. We remain committed to Medicare Advantage as the most valuable and fastest-growing Medicare benefit offering available to American seniors.

By 2016, Medicare Advantage will, in effect, be reimbursed at parity with original Fee-for-Service Medicare. And at the same time, it will continue to deliver better benefits at lower costs because of effective medical cost management and far better consumer-focused services and technologies, none of which are present in the current Medicare Fee-for-Service system.

2016 should represent a final baseline pivot for Medicare growth for years to come, and America's demographic trends are compelling. Well more than 3 million people will enter Medicare each year, and UnitedHealth Group is uniquely positioned to emerge as the market leader. These long-term growth trends informed our approach to our 2014 Medicare bids, which will remain under review by CMS through the summer. Our decisions for 2014 focus on balancing program sustainability, margin protection and cash flow generation of our MA business measured on a long-term multi-year basis. We are aggressively and consistently addressing the operating and marketing costs of our Medicare programs without compromising the exceptional support and services we offer to the seniors we are serving through these important benefits.

The depth of the underfunding of these benefits to seniors is causing us to exit certain market areas, reduce the number of plan offerings and reduce benefits in the majority of the local markets we serve commensurate with our review of the competitive position and long-term sustainability of our services for each individual market.

We are shaping our networks to ensure we are delivering health care with local care provider partners who deliver high-quality care and provide a sustainably low medical cost structure and to increasingly share in the results of collaborative efforts to bring greater quality and consistency of care to seniors, including the most elderly and those with chronic conditions.

These steps can be expected to moderate member growth in 2014 in contrast to our strong growth experience over the last few years. We will engage our members further by increasing our use of in-home health reviews and in-home services. Even with these actions, we expect pressure on 2014 Medicare Advantage margins. The severe underfunding of the MA program for 2014, combined with the ACA tax impact and continued sequestration effects are too significant a burden to ask seniors to bear alone and still expect this important franchise to remain attractive to them.

Beyond Medicare Advantage and some remaining unknowns focused around ACA implementation in the individual and small group markets, we expect the general narrative of UnitedHealth Group's performance for 2014 to be largely the same as 2013. Our commercial benefits, international, Medicaid and military businesses should all continue to perform well. Optum will continue to grow strongly and contribute comparatively more of our overall performance as virtually every Optum business and product line is growing and performing well and is expected to continue on that path.

We will continue to be good stewards of shareholder capital, continuing to balance investments across our businesses and returning more capital to shareholders in both dividends and share repurchase.

From 1999 through the end of 2013, we have returned more than $40 billion to shareholders through dividends and share repurchase even as we have grown and enriched the capabilities, the market positions, the value and the forward potential of this enterprise.

We remain optimistic about our capacity to serve society and to create value for the people and customers we serve as well as for the health system at large. And we look forward to an expanding discussion of our strategy, growth and performance at our investor conference, which this year will be on December 3 in New York.

As usual, this morning, we have a full complement of leaders here and would ask the operator to open the call to our questions. Only one per speaker, please. Thank you.

Earnings Call Part 2:

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