UnitedHealth Group Incorporated Presents at Barclays Global Healthcare Conference, Mar-12-2013 10:45 AM

Seeking Alpha

UnitedHealth Group Inc. (UNH)

March 12, 2013 10:45 am ET

Executives

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

John S. Penshorn - Senior Vice President

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Okay. So before Dave, before you get started, we're going to hit the audience response system, first. So we're going to try and get some questions. Those that are coming in, run in and grab a handheld because we're going to go through some questions and I'm going to do this super quick, so as not to waste any time. Let's get the first question out there. Do you think health reform will be a positive or a negative for the company? 1, being very negative, 5, being very positive. Grab your handhelds and go for it.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Did we get the vote? I'll let -- there is one specific question that John's going to answer, and I know this answer already. All right, so not -- I don't know where -- I don't know what to make of that one. Let's go to number two. I'll check it out when I get back on. Do you think the company's got a contract rate on exchanges that are closer to Medicaid on one end, commercial on the other? 1 through 5, what do you think?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. I'm decided, let's go with that, yes. So I should have given Dave one of the areas and tracked his responses. So let's do the next one. Utilization trends in '13, significant increase, hit 1, significant decrease in 5, somewhere in the middle for number 3. What do you guys think?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right, slight 5 for the increase. I think that makes sense. Next, how do want to see these guys deploy capital? What -- tell Dave how to do his job for the next 7 seconds or so. M&A, repurchase shares, you got to pick your favorite one, you can't put more than one. So let's go for it.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. All right, not so pretty high. That's what I would have guessed. Again, that's in core business, that's probably consistent. One more -- I think we have 2 or 3 more. Is the company going to grow earnings? Let's define this as EPS in '14. Are they going to grow earnings -- EPS in '14, yes or no?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. Optimistic. I like it. Next, I think we have 2 more now. Do you currently own shares of UNH?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. Split. And then last one, just on sentiment here. More as your current bias on the stock, more positive, negative or 2 for -- in the middle there.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Okay. Positive. That's good. I think that's it. We've already taken up 3 minutes of Dave's time, so I'm going to introduce that EVP and CFO of UnitedHealth Group, I'm proudly speaking of Dave Wichmann who's had a bunch of different hats at United, really knows pretty much everything. He's still got operations reporting to him as well. I probably don't have to tell you who UnitedHealth Group is. I hope you guys have been listening for the last 14 years on what I've been saying. So I'm going to turn it over to Dave. We may do 1 or 2 questions here from me in the room and then we're going to hold Q&A in Poinciana 3 after. Dave?

David S. Wichmann

Great. Thank you, Josh. Good morning, everyone, and thank you for spending some time with us today. Before I begin my remarks, I need to remind you that our presentations will carry forward-looking statements, so statements contain risks and uncertainty, and actual results may differ materially. Factors that could cause results to differ materially can be found on our cautionary statement on our SEC filings. Financial data, including forward estimates, are presented as of our January 17, 2013 earnings release. We're not updating these data today, which is consistent with our policy.

With that, let's move ahead. It's a good moment for us to be meeting, given the breadth of changes ongoing in health care today. I want to share with you today how we -- how and why we think UnitedHealthcare is well and uniquely positioned to add value and grow in this environment. Before I do, so my colleague, John Penshorn, advises me that I risk severe bodily harm if I don't at least touch on Medicare Advantage and reform implementation here from the outset. So let me give you my bottom line summary on each of these, keeping in mind that we are the midway point between the initial announcement of rates on MA and the final rates which will be announced somewhere around April 1.

On the M&A rate decrease, it's not final, as you know, and we're actively focused on helping key policymakers and stakeholders to understand the significant and harmful impact of benefit cuts on the American seniors we serve. This level of overall rate reduction is unprecedented and much deeper than anyone anticipated. Unless dramatic changes are made by the administration, we expect there will be significant disruption to the 14 million seniors currently enrolled in MA and for the Medicare program overall. If the proposed rate stands, significant adjustments will need to be made to continue services to seniors. Unfortunately, these changes will necessarily include sharp benefit reductions and premium increases. We estimate those seniors who use high levels of health services [indiscernible] and the people suffering from chronic disease or serious medical conditions could see their out-of-pocket costs raise by $3,000 to $4,000 per year. MA serves some of the most vulnerable seniors in our population. 41% of the people who have chosen MA earn $20,000 or less per year. The next result will be a severe narrowing of networks which would reduce doctor and hospital access, and finally, you'll see plan access and market pullbacks. This will leave seniors with little choice but to return to high-cost, uncoordinated fee-for-service original Medicare, a suboptimal system already headed towards bankruptcy.

Bottom line, all these items will be very negative for the growing number of seniors relying on MA's strong value proposition today. MA organizations are leading the way in program-wide delivery reforms that focus on quality and value. It's well-documented that MA organizations continue to reduce unnecessary hospital admissions and readmissions and improve access to primary preventative care. We will work to continue to improve our cost structure and serve our customers with simple, high-quality, affordable products and services, but we will also be very strong stewards of our capital. We will exit MA markets where we cannot see a realistic path to earn sustainable returns.

Turning to the insure sects. Simply said, we're billing for the tax. For Medicare, our intention is to address it through actions to preserve as many benefits seniors enjoy as possible, and as well as participate in as many markets as possible. Regarding the exchanges, as we said in our last earnings call, we will participate so long as exchanges are viable and sustainable. The timing and extent of our entries will be measured. Lastly, on Medicaid expansion. As you know, with the value we already provide the states, we expect to grow here. Particularly now, that we're seeing more states planning to participate in the expansion.

These are all very key issues, of course. Our engagement with them reflects distinctive characteristics of our company. We are a highly adaptable and high-performing organization that was built for change and built to last. The more change you see in health care and the health care market, the more opportunity there will and has been for UNH to grow. And that, for you today, is message point number one. This organization is built for change. We are in a growing sector and there's no one better prepared for growth in the changing environment than UNH.

Our global market share gains have been unprecedented. We deploy a buy, build and partner strategy and that has created a leading market position in nearly every health benefits and health services category in the Americas. Including federally sponsored products, now included TRICARE, and across all commercial markets. We offer the strongest and most diverse health services platform, with emerging integrated care delivery and PBM businesses, the world's largest health bank, and the leading health intelligence business all at Optum. And then there's Amil, the largest, most diverse and fastest-growing health care company in Latin America, which when combined with our existing international business makes us #1 in international markets vis-à-vis our traditional competitors. And that's message point number two for you today.

We have a track record of success with superior market positions in the 2 largest private health care markets in the world, the United States of America and Brazil. We support that unmatched positioning with strong cash flows. Our conservative balance sheet with nearly $30 billion in cash and investments, a 35% leverage ratio and interest coverage ratios in the mid-teens. I hope you can see why, given reasonable market concerns around reform, we have a great deal of confidence in our company and its outlook for years to come. Thus, we find it interesting, to say the least, that you are a peg ratio at a 35% discount to the S&P 500 and Fortune 50. And that's message point number three. Our cash flows are exceptionally strong, our balance sheet is flexible, and we want to help you share in the confidence we have in our own company.

Health care has gone through an extensive period of active policymaking. These changes have led and will lead to higher costs and faster-growing health care market, a market with growing affordability and access challenges. The private sector will continue to be essential to improving access and cost in health care. If for 1 only reason, and that reason as no one else has the innovations or the capabilities to make necessary improvements. We expect the market will continue to rely on the private sector, innovations to solve health care affordability, working in partnership with the government as a payer. For example, Medicare and Medicaid, we do not think the market will go backwards to fee-for-service, with indemnity-like benefit designs, no networks, no care protocols, no population health management, old technology and little use of data in information. For as long as I know, our business has pursued one mission and that's to help people live healthier lives and to make the health care system work better for everyone.

To that end, we have cultivated 3 core competencies that underlie everything that we do. Our view's simple, if you're the best at these 3 things, you're the best at managing the cost and quality of health care, at scale, and you will win and take share. Those 3 competencies are pretty straightforward. The first is around clinical management. This is the deep practical know-how in clinical care management, coordination and delivery of health care in local communities, integrated with skills and consumer engagement and enabled by information and technology. The second competency is information. That's the capacity that translate massive stores of data into intelligent insights and action at the point where critical care decisions on health care are made. And the third is technology, enabling a variety of interactions at enormous scale and complexity, helping to connect all participants in health care. We apply these competencies through things like benefit administration, risk arrangements, both through care delivery as well as insurance while thinking consumer engagement, institutional home-based and telephonic population health chronic care and wellness services, health administration and information exchange, data management and related services, information technology, consulting in every form possible, including delivery system transformation, quality improvement, compliance and computer-assisted coding, performance measurement and improvement for doctors, employers, governments and people, and many more. I've got a very long list. This is a very well-diversified company, but I also am going to take mercy on you.

It's a remarkably simple approach. Data drives intelligence. Intelligence is leveraged through services. Those services are developed from deep clinical insights and delivered by our 26,000 physicians, nurses and other care practitioners who work everyday with our network delivery partners and aim at every constituent in health care and apply that industrial scale through the use of technology. I'll break it down as follows. People buy what we have to offer because it consistently improves quality. It improves the quality of the health care that's delivered, the quality of health care administration and the quality of people's lives. And they buy because our offerings reduce cost. That's why this company has achieved success in the last decade and that's why we believe it will deliver similar results for decades to come.

UnitedHealthcare added some 4.5 million consumers served in just the past 3 years. And our distinguished growth, beyond UnitedHealthcare, comes from our services platform, Optum, and our international platform, Amil, which are just beginning to take off. As I said before, the ACA has efforts underway to address the expansion of access to health care, but has a less-achieving higher quality and affordability to the private markets. Those markets were evolving before the ACA and will continue to evolve. Many of those changes, especially around the increasing assumption of risk by care providers, are driving interest in our Optum health care products and services. At Optum, we serve tens of thousands of customers, from payers to hospitals and medical practices to governments, as well as the clinical and financial health care needs of millions of consumers.

In 2013, you will see Optum advancing an increasingly integrated product platform to support our customers with broad solutions that address multifaceted challenges facing health care today. We believe significantly expanded -- well, we have significantly expanded OptumRx, our PBM, over the last 12 to 15 months. We continue the ongoing work of rationalizing our Optum-wide operating cost structure and improving productivity. As a result, Optum's results have been very strong. They include 45% year-over-year operating earnings growth in the second half of 2012. And targeted earnings growth approaching or exceeding 40%, this year, on revenue growth of about $7.5 billion. We are well on track to double Optum's operating earnings from 2011 to 2015 to $2.5 billion, while raising Optum's return on invested capital to 15%. And we're just getting started.

On the international front, we welcome Amil as a new platform. Amil is the largest invested, best-positioned health care company in Brazil, the strongest health care market outside of the United States. Amil's distinctive clinical model is a jewel, with approximately 30% of their medical costs flowing through their own high-quality private market delivery assets. On its own, we believe Amil will double in 5 years. Imagine what happens when we tap the nascent health services and ancillary health care markets in Brazil, as well as other Latin American opportunities that will likely emerge over time. Needless to say, we believe these markets represent a future opportunity for significant growth.

And just to wrap up. Indeed, a very consistent strategy in this business, one that's proven durable over time. Products, demographic and geographic diversification, a track record of success and a strong and stable base has left UnitedHealthcare well-positioned and well-prepared to seize the growth available in the global health care market for this decade and for those decades to come.

With that, I hope I've convinced you to share a little bit more in our confidence in our enterprise, and I thank you for your kind attention. John Penshorn and I are here today to take your questions this morning. And I'll turn the podium back to Josh.

Question-and-Answer Session

Joshua R. Raskin - Barclays Capital, Research Division

Great. Thanks, Dave. So I'll ask a couple of questions for the team here, if you got everything. And then we'll take a broader set of Q&A from the group. So one of the comments today, is I wanted to follow up on Dave, that you talked about, that I think unfortunately, we're not seeing or we're not hearing from others that are presenting here, is that the market share gains that you're seeing across all of your businesses, you believe are going to be driven by improvements in quality and outcomes, as well as a reduction in cost. And it doesn't seem to be a common theme, per se, across all the Health Care Services spectrum. So how do you incent your partners vertically across the delivery channel to embrace a value-based model, as opposed to what has traditionally been seen as a volume-based model?

David S. Wichmann

Well, first of all, there -- those are the 2 most important things in health care to manage. Driving better quality, which the nation, I think, has generally abused the quality of health care, is strong here, but can certainly improved, and then driving a more affordable value proposition for health care broadly across the space. So that's what we come to work to do each and every day. And we leverage those 3 core capabilities in our business. One of the things we are doing, Josh, and I think that is fairly distinctive, is the level of contracting that we're doing with physicians really around shared incentives. We have a very strong base in place today, some $20 billion of our spend is contracted in a manner that aligns incentives and drives a higher quality and lower cost to health care. And as we've indicated, we're looking to expand that to about $50 billion of our spend over the course of the next 3 years or so. We believe that alignment is essential to really drive the kind of cost and quality improvements that are necessary in the marketplace.

John S. Penshorn

In order to achieve that alignment, the system has to be capable of performing well in those types of gain-sharing, risk-sharing, performance-based arrangements. It's driving tremendous demand towards Optum. When you look at OptumInsight, one of the Optum businesses, one that's focused on technology, their backlog, 12/31 was $4.6 billion, up $600 million year-over-year, that's a component of the backlog growth we're seeing. Lots of pipeline activity, lots of conversation, as the delivery system, in total, tries to transform itself to be able to prosper under these types of relationships across all payers, including UnitedHealthcare.

Joshua R. Raskin - Barclays Capital, Research Division

Great. Second question, as I sort of think back over the last 1.5 decades or so that I've been watching you guys, United tends to be the #1 market share player in the markets that they think are attractive, and that tends to be almost everything in the benefits world. Come one, you guys have arguably the #1 share across the benefits world. You've been pretty explicit around avoiding exchanges and forget about #1 market share, I'm not even sure you're going to have relevant market share based on the commentary we're hearing. So what exactly is it around exchanges that are so, I don't want to say, so unattractive? Is it just simply the uncertainty and we'll get there over time? You don't feel like there's a necessity to grab the land today? Or is it just simply, structurally, you're not convinced that that's a market that United has to participate in?

David S. Wichmann

Well, first of all, I mean, our position on exchange is that our ancillary will be measured. So if you think about exchanges in total being about 100 exchanges, 50 states on the individual front, 50 states on the small-group front, we said that we'd be in the range of 10 to 25 initially. We also indicated that over the long haul, we see the exchanges as a viable market, and one in which we will participate. Our entry is more measured initially, in part because there's a lot of dynamics that play with the individual exchanges. And what we want to make sure is that those exchanges will be viable and sustainable for the long haul, that they'll provide a viable, sustainable business to United that will enable us to be able to earn returns in excess of our cost of capital. So that's what we've characterized as something being viable, is that the way they're constructed is in a manner that they'll be sustainable and at the same time, where we can earn sufficient returns on the capital that we need to deploy in order to support them.

Joshua R. Raskin - Barclays Capital, Research Division

Next question on the Optum strategy, or more broadly, the UnitedHealth Group diversification strategy. That thing about you guys have talked about, this doubling of earnings over a 4-year period in Optum. I think Larry said at the -- Larry represented at the last Investor Day, that you guys were on pace to at least achieve that, he certainly seemed to be putting a positive connotation around the potential projections for 2015. And yet, as a percentage contribution to the overall enterprise, it's not meaningfully different as a percentage, relative to where we are today. And much of that this is just due to some of the acquisitions you guys are doing on the product side -- on the benefit side, as well as a mantra growth and obviously, the business that you guys are providing. So a good problem to have. But do you think about a required sort of nonregulated earnings contribution, or some sort of targeted business mix? Do you think you're too big in government or too small in government? How do you sort of think about that overall mix and where does Optum ultimately get to?

David S. Wichmann

Well, I don't know though, yes, the specific position on what the mix between Optum and UnitedHealthcare will be. And obviously, Amil is in place now as well. The -- what they think you underscore, by virtue of the question, is the tremendous amount of opportunity that exists. I mean, Optum is roughly a $30 billion company inside a $500 billion services marketplace. And it's also a place where we've established very, very strong momentum, and we see enormous opportunities in market demand for that business. So while it might not be as big of an earnings contributor today, just that statement alone shows you how much opportunity we really have to make it a bigger earnings contributor in the future. And I would expect it to be. I think it's going to be one of the strongest growth vehicles we have in the business. You take that along with the strong and stable benefits business with the clear distinctive confidence it has and the market opportunities that exist in Brazil with Amil as a starter set. That's why we feel pretty bullish about the company's ability to grow.

Joshua R. Raskin - Barclays Capital, Research Division

One last one for me. You've touched on pieces of this in a couple of your answers, but the vertical integration of the delivery system, you guys have obviously been active in provider groups, not only primary care, but also on the specialist side. How do we think about where the gates are in terms of how far up or down that chain you will go? And do you feel as though it's more geographic-specific? Or do you think this is structurally the way the delivery of health care goes and maybe this ties into the value just...

David S. Wichmann

Yes, I appreciate the question. We get a lot of questions, and it's a great opportunity to contrast our approach with that of some of the other folks in the marketplace. To be clear, Optum today is serving about 1 million patients and they serve those patients on behalf of 35 payers. So we're involved in open-market integration. We're providing services at a local level, designed improved cost and quality at that local level for the benefit of those who participate in the market, which includes UnitedHealthcare. We've identified target markets and then put capital into those markets, and the best returns on capital will come from leveraging those across the population sets that are there on behalf of the payers in those marketplaces.

Joshua R. Raskin - Barclays Capital, Research Division

We're a minute into penalty time. So I'm going to move us to Poinciana 3 for a broader breakout session. Thank you, Dave. Thank you, John.

David S. Wichmann

All right. Thank you, Josh.

John S. Penshorn

Thank you, all.

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