UnitedHealth Group Incorporated Management Discusses Q1 2013 Results - Earnings Call Transcript

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Executives

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

Jeff Alter - Chief Executive of UnitedHealthcare Employer & Individual Business

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

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

Bill Miller - President of Provider Solutions

Stan Dennis

Kathryn Hopkins

Dirk McMahon

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

Steve Nelson

Daniel Schumacher

Jack Larsen

John S. Penshorn - Senior Vice President

Analysts

Ralph Giacobbe - Crédit Suisse AG, Research Division

Sarah James - Wedbush Securities Inc., Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Albert J. Rice - UBS Investment Bank, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Scott J. Fidel - Deutsche Bank AG, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Michael J. Baker - Raymond James & Associates, Inc., Research Division

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

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Steven P. Halper - Lazard Capital Markets LLC, Research Division

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

Operator

Good morning. I will be your conference facilitator today. Welcome to the UnitedHealth Group First 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 the non-GAAP to GAAP amounts is available on the Financial Reports and SEC Filings section of the company's Investors page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated April 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. Today, we will review our strong start to 2013 and update you in broad terms on the environment we expect for the balance of this year and into 2014.

As you could see from our release this morning, first quarter revenues grew more than 11% to reach $30.3 billion. We continue to grow market share and increase the number of customers and consumers we serve across every 1 of our businesses to make up the 2 core platforms of UnitedHealthcare and Optum. Our results reflect the consistent combination of fair and steady pricing disciplines, fresh innovation in our products and approaches, the capacity to address the changing needs of many of the key health care markets with comprehensive and integrated solutions, and the fundamental values of consistent, responsive and compassionate service in everything we do. These elements all play to the steady top line growth we have been fortunate to realize this year and over the past 3-plus years, as UnitedHealthcare has added a net 5 million U.S. consumers, virtually all organically over that challenging economic period and Optum has emerged as the distinctive enabling platform for advancing change across the health care system.

First quarter net earnings were $1.16 per share and were driven in particular by stronger earnings from Optum. Cash flows from operations for the quarter of $1.1 billion represented 85% of net income, a 9 percentage point improvement from the first quarter last year. Our balance sheet remains strong with $3 billion free cash and quarter ending debt-to-capital ratio of 36%. We repurchased more than $0.5 billion in shares for the quarter consistent with our annual plan, paid $216 million in dividends, a 29% increase year-over-year, and our return on equity for the quarter was about 15%.

Turning to UnitedHealthcare. In the commercial markets, we work closely with one of the largest fully insured customers in the nation to convert its coverage arrangements from risk to fee status. While bottom line impact of this conversion is negligible, revenues are impacted significantly in this business by $2.5 billion annually.

Looking through this jumbo 1.1 million member conversion, our organic consumer growth is pacing ahead of our plan for the year with first quarter commercial membership growing 375,000 overall, self-funded benefits up 480,000 people and risk-based benefits down a better-than-expected 105,000.

Commercial pricing yields are tracking well with our expectations, and the commercial care ratio for UnitedHealthcare came in at a solid 78.3% for the quarter. We are lowering our full year commercial medical care ratio target by 80 basis points from 82% to 81.2%, plus or minus 50 basis points, in large part, to reflect the large case funding conversion.

Growth across our Medicare offerings was even stronger. We added a net 300,000 seniors to Medicare Advantage, 145,000 to Medicare supplemental benefits and 485,000 to stand-alone Part D drug benefits. As expected, Medicare & Retirement margins were down in the first quarter given the Medicare ACA rate reductions, the shift of our traditional level of first quarter Part D profits to later in the year with the introduction of our enhanced plan design, the strong level of new growth in Medicare Advantage and significantly, from unusually high levels of reserve development in the first quarter of 2012, which we were never expected to repeat in '13. And sequestration will now add further margin pressure over the balance of the year.

In Medicaid, we grew a net 65,000 people, representing organic growth of 125,000, offset by a divestiture impacting 60,000 beneficiaries, and we see no end to the growth opportunities. We've been privileged to expand services in Arizona, New Mexico, Nevada and Florida. We look forward to the significant opportunities to grow and serve additional states and seek further in-state expansions, as the Medicaid proposal pipeline remains robust.

And lastly, we are pleased with the very strong growth of more than 200,000 commercial lives at Amil in the first quarter.

In all of these broad categories, commercial, Medicare, Part D, Medicaid and international, we are trending to the high end or above our growth outlook for 2013.

Looking at UnitedHealthcare on an all-in basis. The first quarter operating margin of 5.8% was well within the range of our expectations. As we also expected, reserve development levels of $280 million for the quarter were sharply less than the unusually high $530 million in development in the first quarter of 2012. The first quarter of 2012 also benefited from a care ratio rebate true-up of $130 million.

First quarter 2013 saw greater positive development in the commercial business than in the government-sponsored program, but overall, our cost estimates are proving to be quite accurate. Operating cost management across UnitedHealthcare continues to be a strength even as we continue to spend to meet the extensive requirements of the new health care regulations.

Turning to Optum. The growth pace accelerates further. First quarter earnings from operations nearly doubled. Revenues were $8.4 billion for the quarter, a nearly 15% year-over-year top line growth performance. Every Optum segment grew organically and benefited from the continuing efforts to integrate and simplify the organization, focus on the customer and pivot to growth. Revenue growth was exceptional with OptumHealth growing revenues 26% to $2.4 billion, OptumInsight growing 15% to revenues of $773 million, and OptumRx growing 10% to revenues of $5.2 billion.

For Optum, margin restoration and expansion was an area of intense focus in 2012, and it remains so. The progress has been impressive with Optum's operating margin at 5.9% for the quarter compared to 3.4% for the prior year quarter and with each of Optum's businesses meaningfully strengthening its margins.

OptumHealth doubled its margins from 4.7% to 9.3% for the quarter. OptumInsight advanced from 13.3% to 19.3% first quarter margin, and OptumRx expanded from 1.5% to a 2.3% margin even with continuing costs associated with the significant current year in-sourcing efforts.

The market needs and is looking for the enabling capabilities Optum offers. We anticipate further client developments in coming quarters, and we will illustrate just how strongly Optum is maturing, holding its focus on execution and customer service and pivoting to growth.

As we assess our position and our outlook now informed by the events and perspectives of the first quarter, we remain in a strong overall position with our unique diversified businesses growing and performing well. That's in large part because we are serving customers well. We're steadily advancing our agenda of value and innovation and strengthening and readying our businesses to both navigate the coming market changes and then maximize the market opportunities with the right timing.

As we move beyond the successful TRICARE implementations and migrations of more than 12 million consumers to the OptumRx platform, we will redeploy energies and resources to advance new areas. The early themes of these new areas have been discussed with you before. They include: the comprehensive new basics services model, a deep and commitment to the rising importance of the consumer in health care, repeatable innovation disciplines and capability; deeper service and experience integration using simpler enabling technologies; and the acceleration of One Optum.

The businesses themselves are positioned to grow and perform well in service to their markets. UnitedHealthcare businesses are growing well across the board. Customer retention remain strong, and the new military and veterans platform is in place and operational. 2.9 million people from military families joined us on April 1.

In relation to the exchange markets that will begin in 2014, our views from last quarter remain unchanged. We will be very selective in where we participate and do not believe the exchanges will be a significant factor for us, either plus or minus, in our 2014 commercial market outlook.

Amil is off to a strong beginning with its seasonally strong first quarter and has the potential to exceed its earnings plan for the year. We see this market in Amil's market-leading offerings well positioned to grow and diversify in the traditions of both Amil and UnitedHealth Group.

Optum's momentum in growth and margin expansion should accelerate as it becomes increasingly capable and mature. Optum is now tracking to reach or exceed the upper end of its earnings outlook for 2013 and is establishing its own reputation for fundamental execution, service and innovation.

While we are performing well, we are doing so in a challenging economic regulatory and health care climate. The headwinds we have discussed in our past sessions with you remain very real. By far, the most impactful headwind is the Medicare Advantage rate picture for 2014. While the final guidance was improved from the negative 8% all-in starting point, it is still a significant challenge. The cumulative net effect of the SGR resolution, the mandated ACA rate reductions, the strong negative impact of the risk recalibrations and the insurance stacks still leaves the Medicare Advantage program significantly underfunded, a more than 4% net reduction against the typical industry forward medical cost trend outlook of 3% or more for 2014.

These rates will undoubtedly impact the more than 14 million Medicare Advantage beneficiaries across the nation and will cause UnitedHealthcare to reduce benefits and pull back access in certain markets and will affect the growth prospects and earnings potential for our overall Medicare Advantage offerings across all our markets for 2014.

We do not expect the fastest-growing, most popular and most effective of the Medicare benefit options serving America's seniors to be underfunded to this extent in 2014, particularly with the backdrop of the already existing ACA mandate and sequestration. We will take the time to fairly assess the implications to our 2014 UnitedHealth Group growth outlook and whether our growth expectations for 2014 can be sustained in light of the continuation of both sequestration and a significantly greater rate setback than anyone could have expected.

Coming back to 2013, our original outlook did not factor in sequestration, which began on April 1. It has the potential to burden us in a range of $250 million to $300 million over the balance of 2013. We plan to absorb that within our $5.25 to $5.50 per share earnings outlook range for this year, which keeps us oriented to the midpoint of that range for now. And as always, we are committed to delivering to the absolute best of abilities for you.

Our balance sheet is strong. Our cash flows from operations are expected in the range of $7.2 billion to $7.6 billion this year. We have already targeted returning up to $4 billion of that to shareholders through dividends and share repurchase.

We expect the general narrative of UnitedHealth Group's story for 2014 to be largely the same as 2013. Our commercial benefit businesses, international businesses, Medicaid and military businesses should all continue to perform well. Medicare will likely experience market exits, as well as in-market membership contraction, as we reshape Medicare networks and benefits to respond to the continuing underfunding of this program. We will continue to manage operating costs and improve both service and productivity for this program. Optum will continue to grow and contribute more to our overall performance, as virtually every Optum business and product line is growing and performing well and is expected to continue in that path. We remain optimistic about the capacity and capability of our enterprise that serves society and to create the value for the people and customers we serve, as well as for the health system at large.

Despite the great attention paid to rules, regulations and political maneuvering in health care, we keep sight of the fact that health care is about people, patients, individual consumers, physicians and other care professionals. If people are served well with appropriate quality care provided in a respectful and compassionate manner at a cost that's reasonable and if the professionals who provide that health care are treated respectfully, then our health care system and our enterprise will move forward.

UnitedHealth Group has built as a living evolving set of businesses focused on working, serving and innovating on behalf of the people we serve in the communities where they live, putting capital to work to create a distinctive return to investors while simultaneously advancing the health care system for a distinctive and constructive return to society. Our strategy, market positions and consistent execution for customers differentiate us, and we are committed to responding creatively and aggressively to these more intense headwinds.

Now we'd be happy to take your questions this morning. [Operator Instructions] Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Ralph Giacobbe with Crédit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Just wanted to go back to the conversion. Maybe you can help us size the headwind from an earnings standpoint. And then are there many more accounts over this large that are still risk based? And any comment on sort of incremental appetite to shift ahead of 2014?

Stephen J. Hemsley

Yes, I think Jeff Alter will -- the impact, as we said, was really illegible, but Jeff Alter can really take you through this.

Jeff Alter

Yes, I think it's important to keep in mind that this was a very unique case, 1.1 million fully insured cases. I think it's probably the largest fully insured case in the industry. It was full insured for decades. We've been partners with this municipality for a very long time really because of regulatory constraints, and the conversion shouldn't be seen as anything just playing out a decade-long processes of putting this case into a self-funded condition where most cases these size have always been. There aren't any, as you can imagine, a case of this size and really isn't any earnings headwind. It was a long 3 -- almost 40-year relationship with this client. So the earnings are stable, is really just a plain funding conversion.

Ralph Giacobbe - Crédit Suisse AG, Research Division

And then what about on the smaller side?

Gail Koziara Boudreaux

Just -- yes. This is Gail Boudreaux. Just to follow Jeff Alter's comments to the second part of your question, overall, actually, our conversions to self-funded have been relatively consistent. There's been a long-standing movement from fully insured to self-funded. But we didn't -- we have not seen any acceleration in that to your earlier question. It's been pretty stable.

Operator

And we'll take our next question from Sarah James with Wedbush.

Sarah James - Wedbush Securities Inc., Research Division

Can you speak broadly about 2014 headwinds and tailwinds? I'm interested here in the growth in some of the unique businesses that United has, such as Optum and Amil but also in the core U.S. risk businesses, particularly given the incremental information that you've received since the last time we spoke on changes to the risk coding calibration and counting rebasing for Medicare and provider contracting for exchanges with better clarity now on the unit cost basis you'll be using.

Stephen J. Hemsley

Sure. So I think we'll parse these between -- a little bit between Optum and UnitedHealthcare. I'll start out with Optum, and I think our focus in UnitedHealthcare really will be around -- we will kind of be restating comments we made from our formal commentary about exchanges in Medicare. I think, really, Medicare is the principal headwind on '14. The rest of it, I think, we were trying to make it clear that our businesses are very strong and our growth is very strong including Medicare. But Larry, do you want to start with Optum?

Larry C. Renfro

Sure. Sarah, it's Larry Renfro. I think you're probably aware of the 3-year business plan that we put together last year. We call it One Optum, and we are -- as we finished 2012, we were in a situation of pretty good momentum that is carried forward in the first quarter. I think also, what we're experiencing with what's going on with rate cuts, there is obviously increased pressure in the market. And as a result, Optum is actually having a lot of opportunity that's presenting itself to us. So what I'm going to do, I'm going to ask 3 people. I'm going to start with Bill Miller and go to Stan Dennis and then to Kathy Hopkins to talk about their individual businesses within Optum, so you'll get a better flavor for everything.

Bill Miller

Thanks, Larry, and thanks, Sarah. This is Bill Miller. I would say, on the behalf of OptumInsight, Larry is right that a lot of the growth certainly is expected based on all the work that we did in 2012 for establishing some sustainable new levels of performance. But alongside of that and particularly in Q1, these pressures that Larry spoke about have showed up in Insight in 2 pretty simple ways: one, in our payer market and provider market is anything that our businesses do around operational performance, quality and efficiency, anything where our clients are feeling those pressures, those are opportunities that often flow to Optum. That's true in our payer market arrange things like payment integrity, and in our provider market, it often shows up in some of our efficiency businesses and revenue cycle businesses. The other thing I would stress that have been key areas of the growth, as this environment within higher compliance requirements, particularly in our payer business, our provider business, we're seeing the uptake of all of our compliance businesses pretty dramatically over 2012 but also going into 2013. And we expect that trend to continue as the heightened awareness about compliance is here to stay. So that's where I would characterize our big growth areas. There are others, but those are 2 critical ones. And I think they're brought on by some of the environments that both Steve and Larry have discussed. But Stan?

Stan Dennis

Thanks, Bill. Sarah, this is Stan Dennis, and I'm going to comment on the physician businesses that are principally organized within Collaborative Care and specialty networks. I'm going to then hand it off to Kathy Hopkins, and she's going to talk about our consumer-facing businesses. So we had a strong start to the year for this group. The Q1 performance is grounded in the solid plan that Larry referred to, created momentum coming into the quarter across all of our business units, and we remain committed to its execution. The results are driven principally by a healthy balance between growth and cost management discipline. I can't point the one business that drove the results for the group, as all the business units across the group are performing at the upper end of their range. Collaborative Care asset has a broad and growing footprint with solid performance. In a measured way, we are integrating these practices, which is part of our simplification plan, in doing so in a way that it adds value to improving care and affordability in the communities that we serve. We have several lines of business in our specialty networks division, all with strong performance. And the performance of our military reserve readiness business is solid as well. So we had a strong start to the quarter. We have our head down. We're going to continue to focus on executing on this plan, pivoting to growth. And as we do so, we believe these businesses will continue to scale nicely and perform well. Kathy?

Kathryn Hopkins

Thank you, Stan. Good morning. This is Kathy Hopkins, and as Stan mentioned, I will speak to Optum's consumer-facing businesses. We're seeing strong demand for our care management, financial and distribution services, and as Larry mentioned, we're performing solidly against our 3-year plan. We're enjoying the benefits of our cost management program that we put in place in the last year and expect these benefits to carry forward. We're also enjoying the benefits of scale and simplification of many of our business lines. We remain focused on execution and continuing to further develop our products and services that help consumers as they choose their benefits, navigate the health care system and make good decisions about their health. These programs are being well received in the marketplace. And as Stan said, I don't think I can point any one aspect of our business that contribute to be the driver, but we are really performing well across all aspects of our business.

Stephen J. Hemsley

Comment on Amil.

Bill Miller

You may comment here, Dirk.

Dirk McMahon

As from PBM perspective, we had a nice growth year, and over the last 12 months, we've grown a little over 1 million members. What I would say, our value proposition remains strong. We talked about it before in New York. Really, it's all about optimizing health outcomes and minimizing costs, and we do that by using our clinical engine to bring together all the pharmacies, the lab, the medical data, the behavioral data to have appropriate intervention, again, to minimize costs and optimize health outcome to that. Value proposition continues to resonate with the marketplaces.

Stephen J. Hemsley

So pretty positive across the board. And then maybe Gail, you want to talk about UnitedHealthcare. And maybe Dave, at the -- and comment on Amil?

Gail Koziara Boudreaux

Sure. Two questions, I think, you had embedded there, all focus on exchanges and Medicare. First on the exchanges side, I think Steve -- as Steve said in his opening comments, we don't see the exchanges on the commercial side having a significant positive or negative impact in 2014. We do think that there's still long-term growth opportunities in the exchanges, so we're still positive over the long term. Overall, our position on exchanges hasn't changed, as we gave you a broad range at the last call. As we think about the contracting side, again, I think I shared this last time that we see the contracting base on a market-by-market assessment and the economics needed to participate effectively in that market and an exchange. So those rates are going to vary from commercial to something less. We've had a pretty long history of having value-based networks and have been successful with that. And I would tell you, at this stage, our contracting for the exchange market is going very well, so we feel positive about that. Turning to Medicare. That is the most impactful headwind that we face heading into 2014. Again, I think in Steve's opening comments, as we think about a 4%-plus rate impact plus the impact of sequestration against the backdrop of a 3% trend in Medicare, that's a cumulated impact that is more significant than we would have expected. So that is -- we are in the process right now of doing our bids. We're doing a market-by-market assessment of what those imply by each of our markets, again, as part of the accumulated underfunding, but we do feel we have a very strong Medicare business. And as part of that assessment, we will be using our clinical assets and looking at optimizing our network to provide the broadest base support and consistent benefits for seniors because that's been part of what we've been looking to do. So that would, I think, define the headwind in terms of Medicare for '14.

Dirk McMahon

And the rest of the business line is all strong.

Gail Koziara Boudreaux

Yes, and the other good point on that, the other businesses, I think as you saw in our growth, this year, really positive about how our products and services are tracking. We're really pleased to have brought TRICARE on this year and feel very positively about the growth trajectory that we've seen not only with this year but over the last several years.

Stephen J. Hemsley

On Amil?

David S. Wichmann

And Sarah, Dave Wichmann on Amil. Thank you for your recognition of it. It's a very strongly positioned enterprise in Brazil. The brand, the value proposition from its own delivery components, its strong service reputation and the value that they provide to the various communities inside Brazil is, I believe, unmatched. Coupled with that are the market dynamics, which are such that they support meaningful growth in that market similar to what we're starting to see shape up here in 2013. So a combination of those 2 things should provide a good avenue for both revenue and earnings growth in 2014 and beyond. As we step into 2014 and into the future, we also see the potential to access meaningful new markets in Brazil that are not or are underserved by Amil today. And in addition, we see a great opportunity to address services offerings. As you might expect, there is -- there are very little capabilities as to the extent that we see with Optum, and we see great opportunity for that enterprise in the future.

Operator

And we'll take our next question from Christine Arnold with Cowen.

Christine Arnold - Cowen and Company, LLC, Research Division

Could you elaborate on 2 issues related to your commentary on 2014, the collectibility of the Medicaid premium tax? And when you're saying you don't expect the exchanges to impact your commercial businesses, are you including the potential impact of any margin compression in small group? And can you address that potential issue as well?

Stephen J. Hemsley

Sure. So Gail, do you want to discuss that, and then maybe Steve Nelson can talk about Medicaid?

Gail Koziara Boudreaux

Sure. Let me start with the first question, which was around the tax on -- insurance tax on Medicaid. Just -- so we've been in a constant dialogue with our state Medicaid directors around the impact of the tax. And we are including that in our rate exhibits as we talk to them. It's recognized at a cost to the program. I think what's important there is Medicaid is a little bit different than commercial and that our rate negotiations occur not just at a single point in time, but they're ongoing. So they occur beginning of the cycle, throughout the cycle, and that's a pretty common occurrence. It's early in the process with them. We are including them again in the rate exhibit. And we think that there has been a positive dialogue about that. In terms of the impact on exchanges, our assessment is that at this stage just given the overall impact, not necessarily commenting on margins in small group, but our overall participation in the exchanges, we have a very robust product offering outside of the exchanges. As I mentioned, one of the tools that we're using are to build value-based products. We've seen most of our small group growth in those products already, so we think we're very well positioned to also have a robust offering outside of the exchange.

Stephen J. Hemsley

Steve, do you want to add anything further?

Steve Nelson

Sure, just one point. It's Steve Nelson. I have wanted to just add to Gail's comments. We have a very active and robust rate advocacy process and are engaged continuously with the states. And as you know, it's a challenging rate environment, but so far, as Gail mentioned, early, it's early in the year. But those conversations seem to be effective and very productive.

Christine Arnold - Cowen and Company, LLC, Research Division

Oh, so my hearing that you don't expect an impact on small group margins because you've got these value-based products, and you think that you can convert people to them?

Steve Nelson

Yes.

Stephen J. Hemsley

Yes, I think that's right. Gail, do you want to?

Gail Koziara Boudreaux

No, I think we have a whole portfolio of products, Christine, and I think, our -- we've always had a strategy of offering employers a multitude of options that's been pretty consistent, at least over the last 4 or 5 years. And while there are different pressures, clearly, it's a very competitive market in small group. We work really hard to make sure that we put our clinical and network assets to work to offer employers a broad range. But at this stage, we're not commenting on margins specifically there.

Stephen J. Hemsley

If we take a look at the growth that UnitedHealth has been able to achieve in the commercial markets that has been in the newer products, that has been in a wide variety of products. So I think that we've been deployed in this posture for a few years now.

Operator

We'll take our next question from Matt Borsch with Goldman Sachs.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Yes, I apologize if you mentioned this earlier, but can you -- are you prepared to reiterate your view of overall earnings growth for 2014? And if you could, maybe a dovetail into that, what about Medicare Advantage enrollment? Do you -- directionally can you say if you think that's going to be up or down based on everything that's changing?

Stephen J. Hemsley

Well, I thought that in our prepared comments that we had addressed that, so maybe I could restate a little bit for you, Matt.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Well, yes. I'm sorry. I probably -- I just missed it then. You did, okay.

Stephen J. Hemsley

It is -- I'll be happy to touch on it. But we were comfortable last quarter with the overall '14 earnings growth outlook before the 2014 Medicare Advantage rate actions were taken. So I think, then, as you stand back and look at the basic overall funding in terms of MA, it has been pressured the last couple of years and is already absorbing ACA mandates in terms of a rate reduction. And then if we believed that sequestration would come on top of that, we would never have expected a beginning point of an 8% net reduction in 2014 rates to occur. And then when they -- basically, as that process cleared and some relief was provided, you still stand back and look at a net reduction of 4% or more against an overall 3% cost trend in the program. So taken together with the other pressures, that's really not sustainable funding in our view, and it will cost us to reconsider our overall '14 growth rate in this program to evaluate market exits, to address benefits, to reshape our networks in those markets. And that was not really the premise as we basically lead into 2014 from a growth outlook point of view. So we are evaluating that at this point in time given the finalization of those programs, really, on a market-by-market basis, to the extent they are actions that we can take to mitigate this continued program and the underfunding and assess whether '14 can absorb that change and still grow earnings. So our long-term view on Medicare is unchanged. We're very strong in terms of the efficacy of the program. The underfunding has been a challenge. And we are reassessing that '14, based upon the rate actions that were taken, And that's why, as we discussed in the previous question, that really, our focus, when we look at headwinds for 2014, is around Medicare.

Operator

And we'll take our next question from Justin Lake with JPMorgan.

Justin Lake - JP Morgan Chase & Co, Research Division

My question is on the government side. Can you -- 2 things, one, can you tell us how much the Part D seasonality impacted the quarter versus the typical that you'd previously seen because of that shift of the enhanced plan? And then you mentioned the pressure on Medicare margins due to rates. It's clear Medicare margins, while they came down, MLR up this year, going to do somewhat similar -- you got pressures in '14. You've talked about a 3% to 5% margin. Can you tell us how -- are you there yet? Are you close to it? Do you expect to be there next year? Just to give us some idea on how to size that headwind going forward from Medicare.

Stephen J. Hemsley

So Dan?

Daniel Schumacher

Dan Schumacher. So your first question with respect to the Part D timing and the implications of that on the quarter, as you look at in the context of our overall UnitedHealth Group loss ratio, you can think of that in terms of about 50 to 100 basis points impact to our overall group loss ratio in the quarter. Basically, our revenue is recognitions being shifted out later in the year, so it's a big impact in the first quarter, moderates in the second, and then it recovers in the third and the fourth quarter. With respect to the margin performance in our government programs, our target margin is in the 3% to 5% range, and some years, we perform in excess of that. And we were -- we are near that range now in our performance.

Justin Lake - JP Morgan Chase & Co, Research Division

So overall, you feel like you're near that range now?

Daniel Schumacher

Yes.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. And if I could just slip one other in on the recalibration, can you give us an idea what you think that is? I mean, if I did the math right from what you said, you thought it was 8 before, now it's 4. You got 5% back from the SGR effects. Are you saying you think that's about 100 basis point headwind from the risk or recalibration, the new model there? Or do you think it's more or less than that?

Stephen J. Hemsley

No, it think it's more than that, Justin, substantially more, which is why we're commenting on it. Dan?

Daniel Schumacher

Yes. I think, Justin, as we look at the impact of that across the industry, we would size the recalibration more in the order of magnitude of around a 2.5% impact.

Justin Lake - JP Morgan Chase & Co, Research Division

And I would assume it's higher on maybe HMO plans that code better have higher acuity. Could it -- I've heard industry experts say it could be as much as 500 basis points for a real good IPA-based HMO versus maybe even less than 250 for a PPO that's maybe less well coded? I mean, is that about right?

Daniel Schumacher

I'm not going to comment on specific product offerings, but I will tell you, you're right. There is certainly variation as you look across products and geographies in terms of the impact of recalibration but not to -- not likely to the order of magnitude you're talking about.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. So not as wide a spread.

Operator

We'll take our next question from A.J. Rice with UBS.

Albert J. Rice - UBS Investment Bank, Research Division

Maybe just take a minute to talk about the OptumRx situation. Have you sized the cost that you're incurring this year to transition that in-house? And does that spread evenly over the course of the year? And is there early commentary on the selling season for them and what that looks like?

Dirk McMahon

Well, I would say a couple of things. So first of all, how is the transition going? We migrated 400,000, in the first of the year, 400,000 members converted. We -- I'd actually also add that 500,000 new members to the platform beginning of the year. On 4/01, we just added 2 million members, so we've migrated 3 million members so far. From a run rate standpoint, it'll be $200 million in operating profit. On a run rate basis, we still have some ramp-up costs and development costs in 2013. We haven't specifically sized those externally yet, but we'll -- that's where we sit.

Albert J. Rice - UBS Investment Bank, Research Division

But you'll likely...

Stephen J. Hemsley

That was Dirk McMahon by the way. And you'll likely carry those into the third quarter as you go through that, and then they'll start to peel down in the fourth quarter and into '14.

Dirk McMahon

Yes, that's important point. We have development and ramp up personnel costs throughout the first half of the year. And as Steve said, they'll field down [ph] . And we'll hit our full run rate in 2014.

Albert J. Rice - UBS Investment Bank, Research Division

Any comment about the selling season so far? Or are we still a little early?

Dirk McMahon

We've had some -- we sold some cases already of course. What I would say is our proposal buying is up. It is a little bit early. We've seen an increase in proposals over last year, and I guess I -- that's all I'll comment at this point.

Operator

And we'll take our next question from Chris Rigg with Susquehanna.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

I just wanted to come back to the revised commercial MLR guidance. I want to make -- is the 80-basis-point decline entirely due to the risk to ASO conversion? And then with regard to the quarter specifically, year-to-year, the MLR was down 40 bps. We don't have the prior year development by segment. I'm just try to get a sense for, one, in the change in your guidance, is that all related to conversion? And two, what would the MLR have been without the conversion in the quarter?

Daniel Schumacher

Chris, it's Dan Schumacher. So with respect to the commercial loss ratio and the impact of the funding conversion, it was around 80 basis points in the quarter and on the full year. So that's why we've revised our full year medical care ratio guidance to 81.2%, plus or minus 50 basis points, so down 80 basis points from our Investor Day guidance. As you look at the influencing factors year-over-year in the commercial loss ratio. Certainly, that played a meaningful role in it. We also had the absence of leap year, which is more pronounced in the commercial business and then pushing the other way would be the change in development, as well as the large rebate true-up that we recognized in the first quarter of 2012. So those are the major impacts in the commercial loss ratio in the quarter.

Operator

We'll take our next question from Dave Windley with Jefferies.

David H. Windley - Jefferies & Company, Inc., Research Division

So I wanted to stick with commercial loss ratio. The couple of hospitals have come out and talked about low volumes in the first quarter. Would you say that -- lower than they expected anyway. Would say that they were more in line with what you expected? Or is it too early to see enough development in the claims to reflect those low volumes in the first quarter?

Daniel Schumacher

Dan Schumacher again. As we look at our medical cost performance in the quarter, we were very pleased with it, and it paced out as we expected. So as you look at both the composition of it from a unit cost and utilization perspective, as well as the elements by cost category, we're not seeing any meaningful change in that from what we talked in Investor Day.

David H. Windley - Jefferies & Company, Inc., Research Division

So you're cost trend guidance and the buckets within that guidance are essentially unchanged. Is that -- do I understand that correctly?

Daniel Schumacher

Correct. And we really aren't necessarily standing on claims. We have good visibility with respect to particularly inpatient settings and so forth, so again, unchanged, but we're not sitting and waiting for claims data. That's the only thing I'd like to correct to that.

Operator

Our next question comes from Ana Gupte [ph] with Dowling & Partners.

Unknown Analyst

So coming to the quarter, you've talked a lot about the headwinds for the next year. I'm trying to get an understanding of what is your strategy for 2013 and 2014 on the share versus margin trade-off in '13 and how that might play out into '14. Is this...

Stephen J. Hemsley

I didn't hear this clearly. Could you just restate it again?

Unknown Analyst

Yes. So the notion of the share versus margin trade-off between commercial versus the government businesses, you've expand margins in commercial. I understand it's largely leap year and MLR true-up and all that. But the surveys are showing that you and other companies are pricing up in commercials. So you're certainly moving toward margin over share. If you look at Medicare, on the other hand, Part D, you came out with a $15 product on Part D. You've outsized share gains Part D, outsized share gains in MA. And what is your target margin? And why should it be 3% to 5% in Medicare when with an 85% MLR and the MLR flow rate, you can do better than that at a 10% SG&A?

Stephen J. Hemsley

Well, that's a very good question. But I also would maybe level set this a little bit that we try to keep our pricing and our approaches to the marketplace in a consistent, stable approach year-to-year, so pricing essentially to our cost, trying to innovate and advance a variety of products to meet the different needs of the marketplace. So it is maybe more broad and more balanced than your question suggests. And we are out to optimize the performance of our business and the performance of our margins no matter what the circumstances are, in the context of maintaining sustainable products and sustainable offerings in the marketplace. And I agree with your point that we should be able to get above target margins at full scale and at full operating performance in mature markets. And I think in many respects, we do that both in the commercial and Medicare sectors. And now after that kind of commercial announcement, I'll hand this over to Gail and Jeff and so forth to kind of respond to the pricing. Jeff?

Jeff Alter

Jeff Alter. Yes, I think Steve said it well. We have a very long philosophy around commercial pricing, which is we price to our forward cost trend and really don't play too many games around that. And that has served us well over the years, and we believe it will continue to service well, maybe in service in a much better way as we get into the '14, '15 time frame. So I don't think we really are discussing a tradeoff. We just -- we have a disciplined pricing methodology that serves as well, and we continue to employ that as we go forward.

Stephen J. Hemsley

Well, we always have to pay attention to it. The fact is we've had very steady consistent growth in both self-funded and actually, on a relative basis, market share gains in the risk base because of the level of contraction in that marketplace and maintaining margins. And then on the Medicare side?

Gail Koziara Boudreaux

Well, I think we shared, I mean, the issue on Medicare, as we shared on this call, is really the underfunding of the program, and we work very hard on both the clinical side, as well as the network optimization. And then finally, our cost structure, that's been an area of focus. So as I think about all of our government programs and our target margins there, we work to be extremely efficient while improving service, so the operating cost is a lever, and then our clinical programs are important to delivering value to the beneficiaries.

Stephen J. Hemsley

And I'd just throw in basically, these are very well-established, well-penetrated programs in the marketplace, almost 30% market share in Medicare Advantage. And the underfunding pressure is really more intense in the Medicare Advantage product line. So it's not like Medicare across-the-board supplemental offerings. Part D offerings are really different. It's the funding, overall funding philosophies of the Medicare Advantage platform that are -- that need to be strengthened.

Unknown Analyst

So just one quick follow-up on that. On MA, as you're doing your product bids, which need to be submitted in June and all this underfunding you're alluding to in 2014, should we expect that you will be, as we're modeling out 2014, that your margins will get better because you bid more conservatively at the expense of enrollment growth? Or will it go the other way and that you're willing to -- in your optimization, you're willing to gain share and keep losing margin?

Stephen J. Hemsley

Maybe I will start out by saying, first of all, it's like anything in health care, it's a market-by-market proposition, which is why we need to be very thoughtful about how we go forward in this. In some markets, we'll take actions that will be more conservative and more pulling back. In other markets, we may not be -- feel necessary to do that. It also brings in dynamics of network positioning and so forth, so it is a much more multifaceted than simply want our benefit would be in a particular market. And I think that's why it takes time, and there isn't kind of a single gear response to your question that we'll price like X and calculate market share. Although I would say that based upon the funding level, you'd had -- we've been clear we will be pulling back from markets, and so we don't expect the growth in the MA product line in 2014 to be as robust because the actions we're going to have to take to, as you point, preserve margin.

Operator

And we'll go next to Scott Fidel with Deutsche Bank.

Scott J. Fidel - Deutsche Bank AG, Research Division

I just wanted to stick on MA and just interested if you can talk a little bit about utilization trends observed so far in the new membership that you've added so far this year relative to the more mature MA membership that you already have. And then maybe just touch on the life as you've added in California and particularly relative to some of the PPO products that members are previously enrolled in -- with competitors and how you're seeing the utilization trends in those members.

Stephen J. Hemsley

Dan or Jack?

Daniel Schumacher

Sure. Dan Schumacher. With respect to our utilization in MA, I will tell you that it's pacing as -- about as we expected. Certainly, our new growth tends to have a higher first year loss ratio, and that improves in the second year. And that improvement comes on the maturation of the revenue as we get more complete diagnoses , as well as our clinical programs begin to take hold and those results begin to emerge. So from a utilization perspective, it's pacing as we expected, but obviously, our new growth comes with a higher loss ratio.

Jack Larsen

Yes, and I would say -- Scott, Jack Larsen. The overall portfolio or profile, I guess, of the membership we got was very much in keeping with our expectations as you pointed out in your question, it's only been 2 months, really, of development with these new members. And so far, the I don't think we're seeing anything unanticipated.

Scott J. Fidel - Deutsche Bank AG, Research Division

Okay. Then, just as a quick follow-up. Just not sure if you can maybe give us some initial comments just on the CalPERS contract that were announced, and then maybe just talk about some of the changes that CalPERS might have made with the new structures that make you more comfortable about participating in CalPERS risk business given that historically, when the public plans that participated used to be a pretty volatile book of business.

Jeff Alter

It's Jeff Alter. It's really hard for us to comment on CalPERS right now. We're pleased. We thought we had a very strong offering for that RFP. We're pleased that we were selected as 1 of the 4, and we're actually in the second phase right now of negotiations, so very hard for us to comment on that.

John S. Penshorn

John Penshorn here. [Operator Instructions]

Operator

And we'll take our next question from Carl McDonald with Citigroup.

Carl R. McDonald - Citigroup Inc, Research Division

Was hoping you'd walk through the mechanics of sequestration, touching specifically on how much you're assuming you're going to be able to pass through providers that you're talking about and how long do you think it will take to fully offset the impacts. In other words, on that last piece, is it going to even is going to be as big of an impact in '14 as you think it's going to be in '13?

Stephen J. Hemsley

Sure.

Gail Koziara Boudreaux

Sure. Carl, it's Gail Boudreaux. So as you know, sequestration results in a lower reimbursement of 2% for our Medicare Advantage and Part D program. We've shared this before. We have some natural hedges to that. In Steve's opening comments, we talked about the impact. Our goal, what we're going to be doing is we'll be offsetting our reimbursement where our payments are tied, and indexed to fee-for-service [ph] Medicare, that will be offset. And then our lower payments to capitated providers. Those that are not as tied to that will be working, obviously, to manage through that as part of the overall program. But obviously, given the time to implement, that's why we've identified the $250 million to $300 million impact in 2013.

Stephen J. Hemsley

Some programs don't have any, like Part D [indiscernible] ...

Gail Koziara Boudreaux

And Part D doesn't have any in there. So that's part of the issue.

Stephen J. Hemsley

And we'll get more absorption as this goes on. We'll get this more absorbed into the marketplace. So the impact, going forward, should dissipate.

Operator

And we'll take our next question from Josh Raskin with Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

I don't want to belabor all the other points. I guess just a question on the repurchases. I know this is in the Q, but could you give us an update on maybe the monthly repurchase numbers and maybe more specifically, how much was done after February 15?

David S. Wichmann

Josh, it's Dave.

Stephen J. Hemsley

This is maybe the first question we've ever been ask on monthly repurchase activity.

Joshua R. Raskin - Barclays Capital, Research Division

It was an important quarter, I think.

David S. Wichmann

Well, as you -- we repurchased about 9.9 million shares in the quarter. And as you would expect, we try to repurchase our mechanisms or such that we repurchase more when the stock price is down. And so as it tailed off, our repurchase activity accelerated. I won't go into specifics about what we purchased in the last half of February or through March, but ...

Stephen J. Hemsley

It's a little methodical with respect to...

John S. Penshorn

So we're very methodical about what we do. And certainly, as our stock price goes down for more heavily in the market.

Joshua R. Raskin - Barclays Capital, Research Division

But you guys have discretion on that, right, based on your corporate outlook and things like that? That's just not a mechanical calculation based on the stock prices.

David S. Wichmann

That's right. We do have discretion with respect to that. As you recall, Josh, given the Amil transaction, we were trying to meter to bring in the set of equity [ph] at 35% by the end of the second quarter of the year. Overall, we said we do $2.5 billion to $3 billion of share repurchases. So we're edging up towards the [indiscernible] end of that range for this year. And so that, obviously, mathematically, would increase our repurchase activity for the balance of the year.

Stephen J. Hemsley

So it -- we are on plan, and we are the levels that we would anticipated for the quarter. We are regular and methodical in the marketplace. And I would say when we -- what changes is the pace of it. So we pace it in terms of that. But we are basically at this on a regular basis. And this is a methodical program. The pacing of it changes.

Operator

We'll take our next question from Michael Baker with Raymond James.

Michael J. Baker - Raymond James & Associates, Inc., Research Division

I know you commented on the exchanges. I was just wondering in terms of that, as you continue to evaluate them, how much of a factor is it as it relates to some states now considering taking the Medicaid expansion and running through the exchange. Is that a factor for you guys or really not meaningful in light of the broader picture?

Stephen J. Hemsley

I'll -- maybe I'll have Steve Nelson comment on this. But what the beauty of our diversified model is, is that we basically cover all the markets. And we've said, actually, probably as much as 2 years ago, when it became clear that this kind of a marketplace channel would become established that we really are covering on both sides from the Medicaid side and the commercial side so...

Steve Nelson

Sure. Michael, Steve Nelson. States are evaluating a lot of different alternatives to -- the struggling with how to cover your uninsured, bring down the cost of Medicaid program. So exchange is one alternative that they're considering alongside a right of things. And we're very engaged with the conversations with the states and bring a lot of capabilities in the advantages. As Steve mentioned, we have broad capabilities not just in Medicaid program, but across all of our products. And So the exchange decision and conversation is one that is outside of just Medicaid or commercial. So let me just ask Jeff to comment on the exchange strategy. And with respect to Nevada, I think is it's one in particular that has required us to participate in exchanges as part of our Medicaid contract.

Jeff Alter

Sure. It's Jeff Alter. Yes, as we've said in the past, we're going to gauge our participation based upon how we assess each one of those local markets. And I would say that part of that assessment is our commercial teams working very closely with the -- our Medicaid teams coming up with the value proposition for not just one or the other, but for both. And that is part of our decision-making process, as we pace through market-by-market decisions. I will reiterate, though, that as we said in the past, we believe that there's going to be some pacing with exchanges, and it's not just the '14 event. It is a market that will develop and mature and be part of the distribution of small business, as well as covering individuals and perhaps, in some states, in some markets, Medicaid population. And as of that market evolves, we will make those decisions together.

Operator

We'll go next to Sheryl Skolnick with CRT Capital Group.

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

I'll try to be quick with this question. One of the things that I think the market's focused on and appropriately, as you have is the issues around MA. But some of the commentary and I think some of the concern we're seeing is the perception that MA is the single either largest only growth driver in the business. Perhaps you can help us to put this in the appropriate perspective and view it with the appropriate level of concern, which is, is it one component of growth? Is it the only component of growth? Can you parse out the growth for us that you're seeing, if not in 2014, then the year like 2012 or 2013, help guide us in our thinking about the potential impact of changes in MA versus the performance of the rest of the business?

Stephen J. Hemsley

I think we tried to suggest that the performance of the rest of the businesses is really quite strong. That the business, the Optum businesses not only exceeded expectations for the quarter. The momentum is growing there, and it wasn't in isolated Optum businesses. It was just across the entire expanse of that portfolio of businesses and offering. And we see them as a meaningful growth element and an increasingly growth element for us in 2014 and beyond. And that is really unchanged. And I think what's -- what we will have been pleased with is how rapidly this has gotten traction and the substance of it, how solid the business is maturing. The Amil business is another platform that we think has significant potential and where we would be looking to continue to align our combined capabilities and potentially, continue to invest to build that to be an even more meaningful platform. Going forward, 2014 and the years become, and then the UnitedHealthcare businesses, just take a look at the growth, which is why we came back to the $5 million over the last 3 years. And the broad base of it, growth in every single offering, meaningful growth. We think market share gains across each of them. And it's not just a current year phenomenon. This is 3 years or more. And that doesn't even include the $3 million that we'll be reporting next quarter on the TRICARE business. So the focus is to optimize those businesses across their expanse, and that was the whole purpose of the diversified business model in the first place. And Medicare is one that is getting more than its share of attention because of the fundings the posture that it's experiencing. And that one is really focused to Medicare Advantage. We will work through that as well. It is just a more severe funding posture than we would have anticipated given all the elements that have hit the Medicare Advantage program over the last year or so. So does that put it into perspective?

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

It does. I guess, what I was kind of hoping for was something more quantitative than that, which might help us think through how much might be at risk. But I don't suppose I'm going to get that, am I?

Stephen J. Hemsley

Well, I think if you were going to get it, I would have put it in -- carefully put it in the prepared comments. So what I did carefully put in there is that we are assessing this very seriously in terms of evaluating to what extent we can overcome the headwinds of Medicare Advantage with all the other elements of our business and produce growth in 2014. And that's our goal.

Operator

Next, we have Kevin Fischbeck with Bank of America.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

I wanted to stay on this MA side of things because I'm still a bit confused, a couple of points here. I think it really it really comes down to maybe expectations. It sounds like, versus what we were expecting anyway, the MA, MLR, was disappointing. But when you talk about it, the things that you highlight as far as lack of development, as far as Part D seasonality, as far as PPACA cuts, it sounds like all those things, you actually highlighted last quarter, and so they were all known things. Did you think that Q1 was in line as far as you feel on the MA side of things and then maybe it's just a perception side from our side of it? Or was Q1 a little bit weaker than you thought on MA particularly? And then 2, the comment about 2014, although I understand the rate for 2014 is not a good rate. It is it more or less what I think everyone thought it would be back in January? Obviously, we got hit with a worst proposal, and then it got fixed, kind of back, I think, to where we all thought it was going to be. So I'm really trying to understand why the tone has changed so much from the view about 2014 growing, when to me, really, the only thing that's changed in the MA red is really the coding adjustments. If the coding is just really big of an issue as far as being the unexpected part of the final role versus where we were before to cause you to say, "Yes , MA, were not going to be able to grow it and maybe our whole earnings number is at risk for 2014.

Stephen J. Hemsley

So that's a quite an involved question, but -- so let me see if I can provide a simpler response and answer. We're very happy with our MA business. We have a very good growth. We have very good products. We have great positioning into the marketplace. It is perhaps affected by contrast to the prior year quarter where we had meaningful reserve development and never anticipated we would ever -- we didn't anticipate it the first quarter of '12 to have that level of reserve development. We certainly didn't expect it to repeat in the first quarter here. So I think the health of our MA business is quite robust. Our concern is the forward looking. And that may be an expectation issue because when you take a look at all the elements of -- that have hit the funding experience of the MA program, I think the very significant factor was lieu of that background, starting out with a negative 8% and then basically coming out with a final, which is, in essence, a relatively negative 4%, maybe even a touch higher against the 3% overall trend, strikingly higher than -- So the year before was 1.5% in that zone. That would have been more manageable. So it is really overcoming that funding posture going forward that then begins to cascade through a variety of things. To respond to that, you need to think about benefit adjustments that are more dramatic than what we have typically liked to manage in the marketplace, network adjustments that are more dramatic. And so I think the difference is, I know that some people were relieved that the SGR came through and that focus on that element. But when you stand back and look at the total funding status of that program, that the down 4%, and that is significant.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

But that's not what you were -- down 4%, but we were kind of assuming the number would be if you thrown in all in. But you're saying that you -- when you made that comment, before, you were thinking maybe similar to the way it's been the last couple of years, which is maybe down 1.5%.

Stephen J. Hemsley

If you are thinking of supporting the program, if you think about that as perhaps the best to offering Medicare in the marketplace, the one that seniors have high satisfaction with and strong growth and strong response and one that manages costs, the posturing of funding, that is what we're taking, is what we're discussing. Think of it as expectation, Kevin.

Operator

And we'll take our next question from Steven Halper with Lazard Capital.

Steven P. Halper - Lazard Capital Markets LLC, Research Division

Yes. As you look at the development of the state exchanges, understanding that you're being very deliberate in pursuing those opportunities, can you sort of update us on where you think the whole program stands? I know it's a general question. But my specifically, the federal government looks like they're under increasing pressure to get this thing done. And do you foresee any scenarios where the administration has to back off and say, "We need to another 6 months or 1 year to get this done." And just your views on that?

Stephen J. Hemsley

We really don't have any insight on that. We are presuming that these programs and these capabilities will go into market as scheduled. That has been the posture throughout. And we are acting to be ready to respond to those. So we are not seeing more believing or suggesting anything to the contrary. We're presuming that it is, going forward, as planned and as scheduled.

Operator

We'll take our last question from Peter Costa with Wells Fargo.

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

Most of my questions have been asked and answered. But can you just go over the operating cash flow. It's was fairly very weak in the quarter. When do you expect to reverse itself in the second quarter? And what exactly caused the weakness this quarter?

Stephen J. Hemsley

Dave?

David S. Wichmann

It's Dave Wichmann. Thanks for your question. The operating cash flows were actually stronger this quarter than they were in the comparative quarter last year. And they came in line exactly as we expected. The cash flows at UnitedHealth Group at least are seasonally down in the first and second quarters, and they are stronger in the third and the fourth. The thing that really affect that are the timing of a risk adjustment payments, which generally come in the third and then also the Part D timing, as an example. So that's -- we're -- we expect to follow pretty much a pattern similar to last year. Operating cash flows for the year should be in the range of $7.2 billion to $7.6 billion, which is 1.3x or more times net income.

John S. Penshorn

This is John Penshorn. Dave, I think last year, we also had some timing differences around some of those government receivables in the second quarter. They came in early. So it may even be a little more second half biased. Is that fair?

David S. Wichmann

That's right.

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

Okay. And then you didn't change the guidance on your consolidated Medical loss ratio. I assume that's really just the offset of sequestration versus the commercial account conversion. Is that correct?

John S. Penshorn

That's right, Peter.

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

Okay. and then you talked about recalibration been 250 basis points. Was that over 2 years? Or was that over 1 year?

Stephen J. Hemsley

No, that's 1 year. So that's your 3-part 1 question limit, Peter, so thank you very much.

So wrapping up our call today, I'd like to recap just a couple of points. Our enterprise is performing well. In the first quarter, we delivered significant growth in people served, in market share, in revenue across all of our businesses and internationally. UnitedHealthcare's commercial benefits, Medicare, Medicaid, military businesses, as well as Amil, all continue to diversify and steadily grow. Optum's momentum and is accelerating, as the market for health services expands, and it's expanding, we think, at kind of exponential levels. And we believe no other company has the positioning, the resources, the people to take on the challenges of health care and succeed in this marketplace and in our mission. So thank you very much for joining us today. We'll see you next quarter.

Operator

This does conclude today's conference. You may now disconnect, and have a wonderful day.

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