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Edited Transcript of UNH earnings conference call or presentation 15-Jan-20 1:45pm GMT

Q4 2019 UnitedHealth Group Inc Earnings Call

Hopkins Jan 17, 2020 (Thomson StreetEvents) -- Edited Transcript of UnitedHealth Group Inc earnings conference call or presentation Wednesday, January 15, 2020 at 1:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Philip Witty

Optum, Inc. - CEO

* Brian Robert Thompson

UnitedHealth Group Incorporated - CEO of UnitedHealthcare Government Programs

* David Scott Wichmann

UnitedHealth Group Incorporated - CEO & Director

* Dirk C. McMahon

UnitedHealthcare, Inc. - CEO

* Heather Rachelle Cianfrocco

UnitedHealth Group Incorporated - CEO of UnitedHealthcare Community & State

* Jeff Putnam

UnitedHealth Group Incorporated - CFO of UnitedHealthcare

* John Prince

OptumRx, Inc. - CEO

* John F. Rex

UnitedHealth Group Incorporated - CFO, Executive VP & Member of the Office of the Chief Executive

* Timothy John Noel

UnitedHealth Group Incorporated - CEO of UnitedHealthcare Medicare & Retirement

* Wyatt W. Decker

UnitedHealth Group Incorporated - CEO of OptumHealth

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Conference Call Participants

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* Albert J. William Rice

Crédit Suisse AG, Research Division - Research Analyst

* Gary Paul Taylor

JP Morgan Chase & Co, Research Division - Analyst

* Joshua Richard Raskin

Nephron Research LLC - Research Analyst

* Justin Lake

Wolfe Research, LLC - MD & Senior Healthcare Services Analyst

* Kevin Mark Fischbeck

BofA Merrill Lynch, Research Division - MD in Equity Research

* Lance Arthur Wilkes

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Michael Anthony Newshel

Evercore ISI Institutional Equities, Research Division - Associate

* Peter Heinz Costa

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Ralph Giacobbe

Citigroup Inc, Research Division - Director

* Rivka Regina Goldwasser

Morgan Stanley, Research Division - MD

* Sarah Elizabeth James

Piper Sandler & Co., Research Division - Director & Senior Research Analyst

* Scott J. Fidel

Stephens Inc., Research Division - MD & Analyst

* Stephen Vartan Tanal

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Steven James Valiquette

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the UnitedHealth Group Fourth Quarter and Full Year 2019 Earnings Conference Call. A question-and-answer session will follow UnitedHealth Group's prepared remarks. 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 in our Form 8-K dated January 15, 2020, which may be accessed from the Investors page of the company's website.

I will now turn the conference over to the Chief Executive Officer of UnitedHealth Group, David Wichmann. Please go ahead.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [2]

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Good morning, and thank you for joining us. 6 weeks ago, we had the privilege of spending the day with many of you at our annual investor conference, providing an in-depth look at the accelerating opportunities we see to serve more people more deeply and to grow strongly into 2020 and well beyond.

As we conclude 2019 and step into the new year, the performance of our business strengthens our confidence in the themes, opportunities and outlooks of that day, as evidenced by today's results. We remain highly focused on driving affordability emanating with consumer and customer responsive products and services, improving operating performance and advancing NPS. Full year 2019 adjusted earnings per share were stronger than our Investor Conference outlook, growing 17% for the year to $15.11 per share. Full year revenues exceeded $242 billion, growing $16 billion over 2018 with notable gains in our Medicare, care delivery and pharmacy care services businesses. Full year cash flows were $18.5 billion or 1.3x net income.

We finished the year encouraged by continued performance improvement in Medicaid, early market interest in our new innovative line of employer-sponsored benefit offerings and 2020 individual Medicare Advantage annual enrollment results, which were our strongest ever. Within our Medicare Advantage offerings, including dual eligible growth, we expect to serve nearly 700,000 more people in 2020, the upper end of the range of performance offered at our Investor Conference.

Our fourth quarter medical and operating cost positions continued to improve meaningfully enterprise-wide with ample opportunity for further progress on both of these fronts. And our NPS improved nicely in 2019 across our businesses, particularly within network care providers, (inaudible) within Medicare Advantage and Dual Special Needs Plans as well as patients served by our OptumCare and pharmacy care services businesses. Improved costs and higher satisfaction propelled by meaningful innovation allow us to contribute more comprehensively to the development and deployment of the kind of next-generation health system needed in the U.S. and globally. A more forward-looking modern health system built around the people we serve, seamlessly woven into their lives. Simple, convenient, transparent and compassionate, a health system that is more affordable creates a better experience for both patients and physicians and improves health outcomes.

The health system we are helping to build will better meet the personalized needs of people. It leverages the next-generation data analytics, such as the individual health record, to empower patients and their doctors with actionable intelligence that drive next-best actions to improve decision-making in real time. We are committed to a future where every person has access to high-quality, affordable health care that meets their unique health care needs and financial means. We're employing specific actions to help achieve this, driving better health outcomes and aiming ultimately to reduce the health care cost trend to general inflation levels even with an aging, more chronically ill population.

Notably, the bipartisan repeal of the ACA taxes in December was a strong step towards improving affordability for Americans. It will greatly assist those who have been most affected by the cost of those taxes, especially seniors, small employers and those who are individually insured. As we continue to do better for those we serve, we will grow, helping improve the health system one person at a time, intensely focused on driving improved consumer and physician experiences.

Looking to the years ahead, our strengthening capabilities and diversified complementary businesses operating in a large growing health care market position us well to achieve our long-term adjusted earnings per share growth rate objective of 13% to 16% while we continue, as always, to invest in the future for sustainable market-leading performance and advancing shareholder returns.

With that, let me turn it to UnitedHealth Group President and Optum Chief Executive Officer, Andrew Witty, to discuss Optum's results and momentum heading into the new year.

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Andrew Philip Witty, Optum, Inc. - CEO [3]

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Thank you, Dave. At Optum, we're encouraged and humbled by the expanding opportunities to grow and serve more people more deeply. There's a distinct energy and eagerness across all businesses as we enter 2020.

In 2019, Optum revenues reached $113 billion, growing 12% year-over-year. Total operating earnings grew 14% to $9.4 billion. OptumHealth revenues reached $30.3 billion in 2019, up 26%, led by OptumCare, our care delivery business. We're steadily expanding into new geographies and expanding the depth and breadth of services in existing regions to better provide patients with the highest quality, convenient and affordable health services.

One measure that helps illustrate how we are serving people more comprehensively is revenue per consumer served, which grew 26% in the quarter. This measure will continue strongly advancing as we further build out our integrated care delivery network.

Turning to OptumRx. Revenues of $74.3 billion grew 7% even with the previously discussed impact of a single large customer transition. The 2020 selling season for core pharmacy benefit services has now mostly concluded, and it was our strongest ever.

Through our other pharmacy care and specialty drug businesses, given our current positions, we see significant opportunity to more fully serve patients' pharmacy needs in their communities and drive better adherence and clinical outcome.

At OptumInsight, revenues of $10 billion grew 11%, and the revenue backlog was up 14% to $19.3 billion. OptumInsight, perhaps more than any of our other businesses, has a dual role, and has both unmatched capability to help distinguish our other businesses and serves as a profitable, growing, externally facing business on its own.

I'd like to spend a few extra minutes this morning on how we view OptumInsight and why we're encouraged by its potential. I'll start with the foundations. First, deep data and advanced analytics are at the core, supporting modern technologies and platforms to make the health system more interoperable, transparent and efficient. Second, research, consulting and large-scale managed services enabled by data analytics and digital and operational innovations made the consumer experience simpler, smarter and more compassionate. And third, clinical expertise, combined with rich data and analytics, drive measurably better patient care and outcomes, reduces friction while lowering the total cost of care.

We're connecting the health system to deliver better outcomes, lower cost and an improved experience for patients and their clinicians. This includes developing the connective infrastructure that integrates clinical systems, revenue management platform and administrative claims transactions to enable critical bidirectional data exchange. Our solutions are harmonizing and organizing billions of transactions while applying considerable intelligence through our advanced technologies, clinical oncology and data analytics capabilities. We want to ensure critical decision support information gets to the right people at the right time with rigorous protocols to protect patient privacy all while offering full transparency of health system performance on both quality and cost.

Our Optum360 business helps health systems and hospitals improve revenue performance and patient experience. We deploy natural language processing for computer-assisted coding and documentation and provide data interchange and information exchange solutions as well as patient access services. Optum360 now manages about $70 billion in annual billings for unaffiliated customers. More than 5 billion pages of clinical documents are processed annually by our natural language processing engines. These are used in a variety of other applications and customer bases to help inform clinical actions and create administrative efficiencies from the more than 80% of the clinical record that is essentially free text, such as physician notes and discharge summaries.

Payment integrity is among OptumInsight's strongest growing businesses. We provide compliance and cost containment solutions, both prior to and following the payment of a claim. We offer a comprehensive portfolio of services for data mining and predictive modeling to help over 250 national, state and local health plans and others ensure appropriate payments for services, saving billions annually.

Within the OptumInsight technology businesses, we apply advanced analytics and deep learning models to health care data covering nearly 240 million people to help optimize clinical outcomes and reduce the cost of care. Key offerings include population health, risk analytics and technology support. And our research and consulting businesses provide thought leadership and expertise that reaches more than 200,000 leaders across the sector. Importantly, this business keeps us at the forefront of how health systems and providers are thinking about and approaching the future and drives deeper, more integrated customer relationships across the broader Optum businesses.

As we turn into the new decade, we stand at a potentially transformative moment where the application of leading 21st century technologies and machine-powered analytical protocols will open up for the first time the opportunity to create ever more precise predictions of individual and system health status and risk. This will accelerate a much more focused set of interventions to improve outcomes. I have no doubt this will be an increasingly critical element of our Optum-wide goal of improving clinical outcomes, quality and affordability.

Now I'll turn the call over to Dirk McMahon, UnitedHealthcare Chief Executive Officer.

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Dirk C. McMahon, UnitedHealthcare, Inc. - CEO [4]

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Thank you, Andrew. UnitedHealthcare is deeply embedded in every aspect of the health system, from how to finance and pay for health care to engaging people and aligning incentives to promote healthier behaviors and better medicine to improve overall health at lower costs.

UnitedHealthcare revenues grew by more than $10 billion to $194 billion in 2019. Operating earnings increased by 13% or $1.2 billion to $10.3 billion, led by the strength in our Medicare and Dual Special Needs businesses. As Dave noted, we're off to a strong start in Medicare Advantage this year.

I'd like to quickly share how we are helping to build a better health system: first, improving affordability; second, engaging and serving people; third, advancing product innovation; and fourth, serving through hands-on data-driven clinical care.

Let's start with affordability because that is the gating factor for greater access to care and improving the consumer experience. One of our goals is to engage more deeply with the highest-performing physicians and other clinicians to advance both quality and affordability. We know these high-performing providers achieve considerably better health outcomes while lowering the total cost of care.

Our medical cost trend over the last 5 years has strongly outperformed the national average. We are committed to driving significantly lower rates of health care spending growth than the industry. We see billions of additional dollars in potential savings for consumers and customers from areas such as our site of service initiatives and more deeply embedding digital tools to reduce the administrative burden for physicians.

We are also using digital and physical strategies to engage consumers in new ways to simplify their experience, reduce their financial burden and lower the total cost of care. For example, for the nearly 0.5 million people enrolled in our Motion program, we offer incentives for increased individual mobility. People can earn more than $1,000 a year when they achieve defined walking frequency and intensity targets. People enrolled in Motion are achieving better health at a meaningfully lower cost. That is why we're expanding this program and extending product designs that reward stronger consumer engagement and align incentives with their doctor.

The third area is product innovation. We are seeing early signs of customer interest in our innovative new offerings and consumer-centric products that better align to the unique needs and financial means of people while engaging them in managing their health. Some examples are: Harmony, a new collaboration with OptumCare providers, unites high-quality care and coverage creating a more integrated and effective consumer experience with as much as 20% savings for our fully insured customers. All Savers offers small employers with highly flexible, affordable health plans and reduces employee out-of-pocket costs with low or no preventative and primary care coverage. Next is ACO, enables large employers to offer a single ACO-based plan nationwide, incentivizing employees to choose high-performing providers and driving better outcomes through care coordination. Bind provides first-dollar coverage and allows people to add coverage on-demand for planned procedures offered by high-value providers following rigorous care pathways based on best known science while costing approximately 15% less than comparable plans. And finally, our virtual first product is attractive to the digital-first generation. This new product offers $0 copay, 24/7 virtual care support at a lower price than traditional products. These are some examples of our innovation focus and health benefits, and you should expect more as we redouble our efforts to engage consumers in more impactful ways and accelerate our growth in this category.

Lastly, we are deploying relevant information at the point-of-care to improve the way care is received and managed. Point Of Care Assist is a tool that puts real-time patient information at the fingertips of doctors and their EMRs, providing a seamless clinical workflow experience. This improves adherence to clinical protocols, facilitates real-time authorization approvals and helps refer the patient to premium designated specialists. The utility of this tool is significant for all as doctors save time and money, consumers avoid cost surprises, and most importantly, health outcomes are improved.

As we look to 2020 and beyond, there is a $900 billion untapped Managed Care market opportunity in health benefits, much of it in government programs where we have grown strongly, and we look to serve more people more deeply across the system.

Now I'll turn it over to John Rex, CFO of UnitedHealth Group.

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John F. Rex, UnitedHealth Group Incorporated - CFO, Executive VP & Member of the Office of the Chief Executive [5]

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Thank you. This morning we reported revenues of $242 billion, up $15.9 billion or 7% year-over-year, driven by double-digit revenue growth in Medicare and across Optum. Fourth quarter adjusted net earnings of $3.90 per share grew 19% and brought full year earnings to $15.11, growth of 17%. Cash flows from operations of $18.5 billion grew 18% over 2018 to 1.3x net income better than anticipated partly due to timing factors.

Our balance sheet and return metrics remain strong with return on equity of almost 26%. We ended the year with a debt-to-capital ratio of around 40%, even with over $10 billion of deployment for business combinations and Capex, $5.5 billion in share repurchases and a 20% dividend increase.

Medical reserves developed favorably in the fourth quarter by $270 million, including $150 million from 2019. Overall, medical costs were well-managed resulting in an 82.5% medical care ratio for full year 2019.

We continue to be highly attentive to operating costs as part of our overall affordability agenda. In 2019, our operating cost ratio of 14.5% improved 50 basis points, reflecting 50 basis points of operating cost productivity and the deferral of the health insurance tax, partially offset by the effect of business mix changes and continued investments in innovation, service and growth.

We enter 2020 with diversified growth momentum, balance sheet strength and financial flexibility. On earnings progression, we continue to expect 47% to 48% of full year earnings per share to be realized in the first half of the year. A point to keep in mind on the quarterly progression. 2019's first quarter has 1 fewer workday than 2018's, resulting in a higher earnings level. This year, the first quarter has a more normal mix, but then adds an extra day due to leap year. Taken together, the day count shifting has a year-over-year impact on the medical care ratio of about 80 basis points. This will result in the first quarter 2020 MCR running higher than the second quarter and earnings per share progressing accordingly with just under 55% of the first half earnings expected to be realized in the second quarter. These impacts, of course, were fully contemplated in the 2020 outlook we provided at the beginning of December.

For full year 2020, we continue to expect revenues to approach $262 billion and adjusted net earnings per share in a range of $16.25 to $16.55. Consistent with our prior practices, we will more formally address these and other expectations after the first quarter.

With that, I'll turn it back to Dave.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [6]

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Thank you, John. As you can tell, we are confident in the outlook for our diversified and growing enterprise for 2020 and beyond. Our businesses remain strong and well positioned for continued balanced growth by delivering even higher levels of societal value. We remain committed to our mission and an intense focus on serving one person at a time at increasing levels of value, more affordable, better outcomes and improved experiences while generating strong returns for you, our shareholders.

Operator, let's open it up for questions, one per caller, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Justin Lake with Wolfe Research.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [2]

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Wanted to ask about the quarter in terms of medical cost. Looks like it came in better than you expected versus the update at the Investor Day. Any color there? Specifically, if you can expand on what's -- how you're seeing kind of Medicaid progress from a cost and risk pool rate perspective as you kind of come into 2020, that would be really helpful as well.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [3]

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John Rex?

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John F. Rex, UnitedHealth Group Incorporated - CFO, Executive VP & Member of the Office of the Chief Executive [4]

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Yes. I think I'd point out a few things. You're correct. It did come in just a little bit better than guidance at the Investor Conference. And a few things I'd note. First, I'd call it broadly across the businesses as we continue to see the impact of the affordability initiatives that we've been very focused on having traction and having impact. So broadly across that. I think it's fair to say also that we certainly did see some continued improvement in our Medicaid businesses. That's a place that we've been focused on for a while here, and that was also a contributor. But broadly, I would say, across our businesses as we saw those affordability initiatives having traction.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [5]

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Thank you, Justin.

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Operator [6]

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Our next question from A.J. Rice with Crédit Suisse.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [7]

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Yes. Just -- it sounds like on the call today, you're reaffirming your expectations around Medicare Advantage enrollment. Obviously, CMS has come out with their January numbers. It looks like in terms of the percentage enrolled in January, you're a little bit lighter than you were a year ago. I don't know if that's a fair comparison. But I wondered, is there anything in the data that -- I don't know if you've looked at what they've put out, that is missing from your perspective. I know it shows you down in group MA and maybe you're going to pick up in group MA. But just flesh out a little further what group MA over the course of the year would -- anything to reassure us about your expectations around MA for this year.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [8]

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Thanks, A.J. We're very pleased with our AEP results. And I'd say, by far, it's our strongest year ever in individual Medicare. We did reaffirm the guidance but nearer to the upper end of that guidance today, so we feel pretty strongly on -- with respect to our overall performance.

Tim Noel, can you add some color on some of the other questions?

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Timothy John Noel, UnitedHealth Group Incorporated - CEO of UnitedHealthcare Medicare & Retirement [9]

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Yes. Thanks for the question. And first off, some of the CMS partial AEP reporting can be a little bit misleading. And Dave said, first and foremost, we want to reiterate the confidence in our full year enrollment growth that we shared at Investor Conference for MA. And just to revisit that briefly, we said 500,000 to 550,000 Medicare Advantage growth in the M&R business, which includes both group and individual MA. And we also said that we'd be up to 700,000 in MA growth, including duals within our Community & State business. So when AEP completes, we'll have grown by 370,000 in individual MA, including the duals that are in CMS. And that's up 140% over last year's AEP and is our strongest performance ever in the annual enrollment period. We expect this to drive full year results, about 700,000 member growth in individual MA. And that split in January net growth versus the rest of the year is roughly 50-50, and that's consistent with historical pacing and also full year supported by the momentum that we've seen in AEP.

With respect to group, you're right, group MA contracted modestly in the CMS reporting. When January all settles out, we expect that to be down about 65 but that will strengthen to flat to down 25 as the year closes out. And finally, all told, really great start to the year, a strong signal of confidence for the full year and our growth guidance shared at investor conference.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [10]

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Thank you, A.J.

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Operator [11]

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We'll go next to Scott Fidel with Stephens.

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Scott J. Fidel, Stephens Inc., Research Division - MD & Analyst [12]

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Maybe just sticking on the membership updates for 2020, and obviously, you just gave some good detail on Medicare. Just interested if there's anything to call out in terms of -- on either the commercial business or the Medicaid business in terms of expectations on membership relative to the ranges that you had provided at Investor Day. Then also just specifically within that, just interested in how you're sort of approaching the North Carolina Medicaid situation just given the budget situation there in terms of what you're assuming for timing, implementation of that and how many lives you have factored in around North Carolina?

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [13]

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Good question, Scott. Dirk McMahon will start and then Heather Cianfrocco can discuss Medicaid.

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Dirk C. McMahon, UnitedHealthcare, Inc. - CEO [14]

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Yes. On the -- thanks for the question, Scott. So we'll be down a little bit in enrollment for the 1/1/20 in both the fully insured and ASO areas. But as the -- throughout the course of the year, we expect to gain membership in both areas, as we previously guided in December. As we look at 2020, we're going to continue with the pricing discipline that I previously talked about as we balance enrollment growth with our margin expectations. We remain focused on delivering a unique value proposition for our customers and the consumer.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [15]

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But I'll tell you, we're optimistic for next year in and fully insured, expect strength in individual products in their middle market as I look at our ASO block, I look at our All Savers, and I look at our middle market as well. And with that, turn it over to Heather on the...

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Heather Rachelle Cianfrocco, UnitedHealth Group Incorporated - CEO of UnitedHealthcare Community & State [16]

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Thanks. Yes. So good question with respect to -- I'll start with membership and then talk a little bit about North Carolina. So in our membership for this year, we do expect growth in Medicaid this year and that's coming from a couple of places. North Carolina is in our 2020 guidance right now. We've got some other things in there. We've got some increases from some markets like our Washington win last year, Texas win, recent Texas win. We're going to see some Nebraska expansion. And then we see another strong year of D-SNP as Tim just talked about for 2020. We think we're really well positioned there with new county expansion, service area expansion. And our AEP is off to a really, really strong start, so really excited about that.

The pressure is obviously North Carolina. So it's in our 2020 membership outlook and our revenue outlook, and we assume it right now to come in about midyear. We're really honored we were selected. We're ready for implementation, and we're eager to start serving North Carolinians. Despite the budget situation there, there is strong support for the program and for Managed Care there. So we're continuing to monitor the implementation date. We'll keep you posted on that, and you'll watch that as well. In the meantime, we've got -- we're excited about the opportunity. It's in our outlook, and we look forward to hopefully getting that on track here as close to midyear as possible.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [17]

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And just to add on to that a little bit, Scott, we're -- also in Kentucky, we're pleased to win. Obviously, that's being rebid now, but we'll hopefully prevail in the end there as well. And it's a strong RFP season for Medicaid broadly, and I see the business having come around to being positioned with its turnaround just in time to compete ferociously for that business. So we're pretty bullish about the opportunity that exists in Medicaid, and I think we're well positioned to grow. Thanks for the question, Scott.

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Operator [18]

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And we'll go next to Peter Costa with Wells Fargo Securities.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [19]

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I'd like to take it up a little bit in terms of looking at sort of the longer-term picture for Medicare. There's a couple of changes in the Medicare program. I'm curious what you think of as being the biggest risks to you in terms of your business. And those are paying for social determinants of health, which is something new for this year; allowing ESRD patients to join next year; and Medicare fee-for-service direct contracting by providers is starting. Can you talk about those 3 items and if they are risks to you?

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [20]

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Sure. We'd be happy to discuss all 3 of those. Tim?

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Timothy John Noel, UnitedHealth Group Incorporated - CEO of UnitedHealthcare Medicare & Retirement [21]

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Yes. Thanks, Peter. So I think I'll take ESRD first, but I also want to caution the long-term outlook, especially with respect to 2021 and really any year, it's a little bit premature to get into some of the nuts and bolts of how we see the landscape shaking out. But on ESRD, we're very supportive of the change that goes into effect on 2021 and encouraged by the opportunity to serve more people. We're not concerned with some of the unknown elements around the reimbursement and payment models. We'll learn those details very soon. We remain confident and expectant that those models will be fair, adequate. And importantly, we believe that these people will be better served in Medicare Advantage.

Also important to keep mind, we serve 40,000 Medicare Advantage enrollees with ESRD today that developed the disease post enrollment, and our focus with the members is both on prevention and also on treatment. So we're pleased to have the opportunity to expand our reach and impact with patients that have the disease at the time of enrollment.

And with respect to social determinants, we continue to have that be a key focus of our business, consistently referring folks in the inside of programs where appropriate. And some of the additional flexibility to apply social determinants and plan design are elements that we're leveraging in some demonstration projects in 2020. We're excited to learn a little bit more about this as the year progresses and look for more opportunities to do things in this area in 2021.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [22]

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What of the last one?

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [23]

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Pardon me?

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [24]

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The last one was physician direct contracting for fee-for-service Medicare.

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Brian Robert Thompson, UnitedHealth Group Incorporated - CEO of UnitedHealthcare Government Programs [25]

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Peter, Brian Thompson here. Yes, we're encouraged by that as well. I think similar to what we've done with the bundled payment program, it's a good opportunity to work on advancing traditional Medicare, and we're encouraged by the thinking and creativity and look forward to participating.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [26]

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And I might add, overall, Peter, that we're bullish, obviously, overall on the outlook for both Medicare Advantage but also the dual special needs marketplace as well. They're both very large today and growing end markets.

MA is clearly outperforming fee-for-service in terms of overall benefit coverages and the quality of outcomes and the returns that people are getting in terms of their overall satisfaction. And so it's no surprise that it is performing as well and seems to be gaining some momentum. So we look forward to continuing to compete, hopefully growing at these levels, if not higher, going forward.

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Operator [27]

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

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Joshua Richard Raskin, Nephron Research LLC - Research Analyst [28]

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A question around the sort of broad space that it's growing around physician enablement. And I'm curious, it seems like there's been a lot of interest, a lot of new competitors that are kind of focused on that. I know Optum's been very early. Do you think of Optum as sort of the market leader? And is this broad movement of physicians taking more risk, is this positive for UnitedHealth Group?

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Andrew Philip Witty, Optum, Inc. - CEO [29]

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Josh, thanks so much for the question. It's Andrew. Yes, we absolutely see physicians very much as a central element of improving care delivery, quality and cost. It's what's really driving OptumCare, which is clearly the central part of OptumHealth. As the physicians move towards taking more risk, we see improvements across the board in terms of resource allocation, prevention, focus, ensuring clinical outcome is maximized. We're very encouraged by that trend. This year alone, we'd expect about 150,000 more patients to go into our physician risk managed programs across OptumCare. We continue to see that trend accelerate. It's very much something that we then anchored the build-out of the rest of our OptumHealth portfolio around. So in a sense, it's that thoughtfulness around how can we then create services, insight, data analytics, which help the physician make the best possible judgment to manage that overall risk profile of the patient. You see that then reflected in the relentless growth of the revenue per patient served across OptumHealth. That's really been driven by this shift. And so you're absolutely right, very important element for us, and it essentially becomes the core around which we then envision and build our support services, our interventions and our analytics to empower the physicians to make the best possible decision on behalf of the patient.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [30]

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I might just add to that just slightly, Josh, that UnitedHealthcare is working on physician enablement as well. This is what the core of Dirk's commentary this morning was around Point of Care Assist. This is why we built and deployed the IHR, and this is why we focus essentially in our Investor Conference around the way in which we engage both the digital and physical realms to AI enable people to be able to operate much more effectively and serve their patients. So thanks for the question.

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Operator [31]

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And we'll go next to Kevin Fischbeck with Bank of America.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [32]

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Just want to go back to Medicaid for a minute. Can you talk a little bit about -- I think you mentioned that during Q4, maybe you saw some improvement on Medicaid. But can you talk about the expectation for the year? I guess, in particular, 2 things. One is the implication of redeterminations and the rate base you'll get relative to that, how the rate up is going, and do you -- are you modeling additional redeterminations as the year goes on?

And then second, just quickly going back to North Carolina. If North Carolina got delayed into 2021, would that impact your EPS guidance? Or is it more towards the revenue number at this point?

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [33]

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I think we're making progress on -- across all dimensions of Medicaid right now on rate, cost and quality. Heather, do you want to take the question?

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Heather Rachelle Cianfrocco, UnitedHealth Group Incorporated - CEO of UnitedHealthcare Community & State [34]

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Sure. Sure. So -- and I'll start with Medicaid performance. So yes, we did -- we're pleased with Q4 results. And when I say that, I really mean there -- it's marching on right within expectations. But what we've really executed on is our affordability agenda. We see strong partnerships with our states to address what was for a period of time due to redeterminations or other underfunding issues, just acuity-related underfunding. So as we look into 2020, I feel good about the progress made through all of '19, and particularly in the second half of '19 with respect to rates and with respect to affordability. And so as we come into 2020, we've got a view into our Q1 rate renewals. They're right in line with our expectations. They're up above what they were at the same time in '19. We've got -- we've delivered on our clinical programs. We're seeing strong NPS, customer service scores and quality. So I feel good about that. As I say that, you still expect us -- our target margin by the end of the year, so that just gives us renewed confidence in what was committed to you already. So expect our Medicaid business to continue to perform along that track, and we'll be hard at work on it.

With respect to North Carolina, yes, and I guess I'll just say, again, we're monitoring it every day right now. I'm going to say that we're continuing to push. And it is a big component of our opportunity in 2020 from a revenue and a membership perspective. But that being said, there's a lot of other growth opportunities that we're measuring, too. We didn't have Kentucky in our guidance, but we also didn't -- and that got pushed, but we also didn't have the Massachusetts lung care bid that we just won. So we're going to be monitoring all those things, and right now, we're going to kind of work for a midyear or close thereto implementation, and we'll keep you posted.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [35]

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So Kevin, Dave again, if I could just add. So if North Carolina were to get pushed to 2021, it would not affect our expectations for the year. Our guidance would stay the same. It has come out of the shoot, it's a relatively modest margin product -- market as is often the case. So we wouldn't expect any material impact on our expectations for the year.

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Operator [36]

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And we'll go next to Lance Wilkes with Bernstein.

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Lance Arthur Wilkes, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [37]

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Yes. Could you talk a little bit about PBM margin for the quarter? I'm interested in the improvement there. How much of that is driven by just the mix shift from the transition of a large client? And how much is other initiatives like cross-sales or sourcing initiatives?

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [38]

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John Prince?

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John Prince, OptumRx, Inc. - CEO [39]

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John Prince. Thanks for the question. As you looked at the fourth quarter, the margin was elevated as expected. So when we gave our guidance at Investor Day, we were expecting an operating earnings margin around 6.3%, 6.4%. So it is exactly what we expected. Why it was elevated is exactly what you mentioned, was the loss of a large client. We lost the revenue, but we didn't really impact our operating earnings. The second driver was the supply chain strength in terms of our -- continue to negotiate with pharma manufacturers as well as the supply chain to get value to pass on to our clients. And so that was the other key driver for it. As we look to 2020 guidance, you should expect our operating earnings margin to fall back to where we've guided at Investor Day with 5.1% to 5.2%, so that should be your expectation. It was more of an anomaly what happened in Q4 as expected.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [40]

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Thank you, Lance.

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Operator [41]

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And we will go next to Ricky Goldwasser with Morgan Stanley.

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Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [42]

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So you reiterated guidance this morning for 2020. Just want to clarify if the guidance already includes any impact from HIT repeal and midyear renewals and also the benefit from the Diplomat acquisition. And then another follow-up on the dual growth. I mean obviously, 15% to 20% is what is the implied growth, which is strong and above market. But when we think about that, can you just kind of like help us think through the Part D dynamics and how that would flow through the P&L, if it's going to have any impact on OptumRx throughout the year?

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [43]

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We'll have John Rex start and then shift to Tim Wicks or John Prince.

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John F. Rex, UnitedHealth Group Incorporated - CFO, Executive VP & Member of the Office of the Chief Executive [44]

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John Rex here. So in terms of those elements you mentioned, I'd say both immaterial in the scope of our company. You're correct, yes, when we guided to 2020 initially, the repeal of the HIT was, the health insurance tax, had not yet occurred, but I would call that immaterial to us. Yes, there's some impact, but not material in terms of modest headwinds in the scheme of our company, not something that we'd call out. Also in terms of the Diplomat, the pending Diplomat acquisition also, I would call that immaterial, really no impact, really neutral in terms of our 2020 outlook. And John Prince?

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John Prince, OptumRx, Inc. - CEO [45]

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Thanks, Ricky. John Prince. In terms of the other pieces around Part D and our components, that's as expected, so I think we're not changing our guidance for 2020. What we expected in terms of Part D and Diplomat is built into our guidance, and so we're comfortable with our expectations.

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Operator [46]

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We'll go next to Stephen Tanal with Goldman Sachs.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [47]

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I guess, at this stage, I was just wondering if you could kind of give us a sense of what -- the HIT repeal, how we should be starting thinking about modeling that in, whether you'd commit to sort of at least a nontax deductibility of it going away kind of falling into the bottom line or if it's still too early? And then maybe just if you could comment on OptumHealth, just given the risk-taking nature of what you guys are doing, I thought it would be interesting to hear from you all how the flu impacted the economics of that business in Q4, thinking sort of revenue earnings margin.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [48]

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Great. I'll touch on the HIT and then Wyatt Decker will comment on OptumHealth. So overall, the HIT, we're, as I said in the prepared remarks, we're pleased that this would go away. Obviously, it's great for seniors, families of small businesses and individual insurers as well. On average, for a couple, a senior couple, it's $500 to $600. It pretty much carries out the same for a family of 4 that's sponsored by a small business. And so obviously, this has a strong economic impact on these families and individuals, so it's terrific to see it get repealed.

The other thing about it is it removes the excessive volatility. I'm sure you're as fatigued with it as we are. It's in. It's out. And -- but more important than all of that is that it affects the volatility of pricing in the marketplace as well. So hopefully, we'll see that stabilize as we get through 2020 and into 2021 as well.

Just before I go to discuss 2021 and what our strategies may be with respect to how we handle this, obviously, it's important that the tax value gets back into the hands of people. That's what it was intended to do, and that's what we intend to accomplish overall. And as John already indicated, while it has a drag on earnings for 2020, we're not changing our outlook as a result of that. That is a small item in the broad scheme of things. And I think we're to discuss flu with OptumHealth.

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Wyatt W. Decker, UnitedHealth Group Incorporated - CEO of OptumHealth [49]

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Yes. Stephen, thank you for the question. At OptumHealth and OptumCare, we follow the usual flu modeling, and we have not seen a material impact deviating from that in Q4, and we do not anticipate significant impact in Q1. As you may know, it's been a reasonably robust flu season, but it's mostly of the B strain, which is not as severe. So we also have a fee-for-service of MedExpress practice, which tends to offset any hit we might take on the risk side.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [50]

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Thank you, Wyatt. Just -- I want to clarify one thing that Ricky asked. And I'm not so sure we answered it correctly. It's really about whether or not Diplomat, the proposed transaction, is in our numbers for 2021 and our 2020. And the answer to that is no. It would not be in there. We don't include a transaction in our forecast until they close. So that is not included in there. And as soon as it does close, the quarter following, we'll update our forecast accordingly. This is one of the reasons why we talked about the impact of capital deployment on our growth rate and how it can advance during the year because of transactions. In this case, it will be very, very modest. But nonetheless, I just wanted to make sure we have that clarification.

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Operator [51]

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We'll go next to Steven Valiquette with Barclays.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [52]

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Actually, not to beat the Diplomat pharmacy acquisition topic to death, but I know it's not a huge acquisition for you financially. But despite that, I do have to believe there would just almost immediately be a ton of operational synergies when folding that book of business into your existing PBM and specialty pharmacy operation, probably in reimbursement and also in the pharmacy network contracts. So I guess I was hoping to hear more color around what you see as the biggest area of synergy at this stage. And then just conceptually, could this deal move the needle for UNH overall in 2021? Obviously, you're making it sound like probably in 2020 not much, but could it move the needle for the company overall in 2021?

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [53]

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It will be nicely accretive to us. Unfortunately, it also comes with a great deal of integration costs, most of which will hit 2020 as well. And would you like to touch on that, John?

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John Prince, OptumRx, Inc. - CEO [54]

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Sure. Steven, it's John Prince. Just maybe talk a little bit more why we're doing the deal because I think that's really at the core of it, which is to better serve individuals that have complex diseases like oncology, immunology and specialized infusion therapy. When you look at the capabilities of Diplomat around specialty pharmacy and infusion, it fits well with the strategy of OptumRx, focus on these unique populations that need better volume, helping improve their drug costs, improving their health outcomes and overall value of care and doing it in a compassionate way. So we think there's a good fit of our 2 businesses that come together to better serve the key needs in the market. And as we've talked about before, strategically, especially drug cost is a key focus of the future as well as polyclinics, and I think that strategically fits very well. We're, obviously, still a little ways away from closing the transaction. We're actively doing our planning for that, and we'll be ready to start that as we conclude the transaction in the first quarter.

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Operator [55]

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And we'll go next to Michael Newshel with Evercore ISI.

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Michael Anthony Newshel, Evercore ISI Institutional Equities, Research Division - Associate [56]

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Maybe just going back to the flu. I just wanted to confirm that those earlier comments also apply to the UnitedHealthcare side as well. Are you seeing high outpatient activity, but the severity and hospitalizations just don't appear to be that high, at least to published yet?

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [57]

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Jeff Putnam?

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Jeff Putnam, UnitedHealth Group Incorporated - CFO of UnitedHealthcare [58]

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Yes. Thanks for the question. Yes, on UnitedHealthcare side, similar dynamics. The flu season, the C -- in the CDC data started early, and we are having elevated incident levels on the outpatient side. But overall severity, as was mentioned, is lower there and inpatient admits have been close to normal. So a very modest impact in the fourth quarter.

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Operator [59]

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We'll go next to Ralph Giacobbe with Citi.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [60]

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You're rolling out certain initiatives and benefit line changes to your fully insured book around site of service initiatives and prior auth, along with preferred lab network, et cetera. And it sounded like that actually benefited some -- to some degree in the fourth quarter. Can you give us maybe a little bit of a sense of what proportion of the ASO book has adopted these initiatives maybe for 2020 and/or how we should think about sort of the take over time?

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [61]

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I don't think we'll talk about adoption rates in the large national accounts business. But Dirk, do you want to talk a little bit about your overall efforts around containing medical costs?

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Dirk C. McMahon, UnitedHealthcare, Inc. - CEO [62]

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Yes. As we think about medical costs, you mentioned very effectively site of service. We rolled that out to a lot more codes in November, knees and procedures like that. We're also very focused on our network negotiations to try to drive unit costs lower in many areas. As we look at our trend, 2/3 of unit costs in network is at the start of that. We're doing a lot of work in terms of increasing consumer engagement, providing them with effective decision tools through Rally and our other app portals and other digital properties to drive the right movement. And I also got to thank Optum. A lot of work with our clinical models driving savings as well as payment integrity, as Andrew mentioned in his remarks. So we really have a full-court press on affordability. We think that is a primary driver of our ability to price effectively in market and actually provide access for consumers and employers and everyone. So a lot of work on the affordability front.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [63]

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Dirk and the team at UnitedHealthcare are doing a wonderful job on affordability broadly in medical cost. Obviously, they're interested in getting health care to be much more affordable. And the collaboration between Optum and UnitedHealthcare has never been stronger on that front. Optum has really stepped in, as they do with all the third-party health plans as well, to really assist in driving this broad-based agenda across the company. We have time for 2 more questions.

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Operator [64]

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And we'll go next to Gary Taylor with JPMorgan.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [65]

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My one question is, I do appreciate the earnings cadence commentary given leap year. But thinking since reported MLR is such an outsized impact on the near-term stock volatility, wondering if you'd be willing to give us a first quarter MLR range? I mean there are a few other moving parts in the quarter besides leap year. There's pretty high March seasonality with extra Monday, Tuesday. And then obviously, there's the dilutive impact of the HIT statement.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [66]

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John Rex, if you could maybe just -- I know that was pretty complex in terms of the quarterly progression and we expected that. So John, if you just want to make sure that everybody understands that well.

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John F. Rex, UnitedHealth Group Incorporated - CFO, Executive VP & Member of the Office of the Chief Executive [67]

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Sure. Let me give you a little more color in terms of the impact that occurred as we go into that. So I described kind of some of the impacts with workday, content and how that flows. And just in terms of thinking about that, so when valued different days with different medical costs, weekends versus weekdays, even versus different days of the week. In terms of what I was describing there, it actually comes out to -- it's a little -- it's not 2 days, it's more than 1 day. It's about 1.3 days unpacked in terms of the workday content is what falls into when you flow into a leap year like this. And that pattern, typically, of course, repeats. So that's kind of the element that flows into that.

Then if you consider the other elements we talked about at -- when we talked to our full year MCR progression and year-over-year progression, we talked about the impact of the health insurance tax, about 140 basis points and that impact -- and then we talked about mix impacts also that occur over the course of the year. So those are kind of the core that are -- as we consider -- if we consider where we'd expect the medical care ratio to be lining up here as we look at the first half of the year. I hope that gives you a little extra color.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [68]

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But you don't want to give us a 1Q range today?

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John F. Rex, UnitedHealth Group Incorporated - CFO, Executive VP & Member of the Office of the Chief Executive [69]

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Sorry, what's that, Gary?

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [70]

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You don't -- you don't want to give us a first quarter MLR range?

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John F. Rex, UnitedHealth Group Incorporated - CFO, Executive VP & Member of the Office of the Chief Executive [71]

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First quarter, a first quarter pick, a first quarter pick, I think I kind of described it actually pretty, hopefully, fairly clearly there in terms of the roll forward and how you would approach that. So if you take the components of the math that I just gave you, I think that should get you to a first quarter pick.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [72]

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So there's no change to full year guidance. John tried to lay out for you what first half, last half would be and then within the first half what the proportions would be as well. So you should be able to get a pretty good sense of things from all of that, recognizing, oftentimes things don't shoot quite that straight. So plus or minus would probably be a worthwhile range to put around whatever point estimate you come up with.

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Operator [73]

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And we'll go next to Sarah James with Piper Sandler.

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Sarah Elizabeth James, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [74]

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Now that there's some bipartisan support for spread pricing, though, can you talk about the exposure? In '19, you said it was about 25% of the book, so did that needle move for '20? What does the mix look like in your commercial book of spread versus pass-through? And does this bill impact the value proposition that you see for OptumRx at all?

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [75]

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John?

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John Prince, OptumRx, Inc. - CEO [76]

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Sure. Thanks for the question. As you know, we're committed to driving to a strategy around negotiating with the clients of a transparent model where more and more of our services are coming from administrative fees and value-based arrangements. Our clients decide how they want to pay for our services. So when we bid on a deal for a client, we give them an opportunity to either pay through an administrative fee or with spread or traditional. So it's a client choice. So as you look at it, we don't have a preference about where we want to go from the business model. We're indifferent around how a client wants to choose it.

In terms of the commercial market, the trend in the market hasn't changed in the last couple of years. So actually, the client is not going to move one way or the other in terms of spread versus administrative fee. As you look at the Medicaid market, there has been a trend over the last 3 years where more and more of the state organizations have been moving to administrative fees. So if you looked at our client base 3 years ago, the majority would have been spread. If you look at it today, less than 1/4 is in spread. And actually, we expect that to almost disappear as you look out next year or 2 years. So from us and when they actually impact our financials, I won't speculate about what will happen in Washington, but we're well positioned from a business standpoint.

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David Scott Wichmann, UnitedHealth Group Incorporated - CEO & Director [77]

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Great question, Sarah. Thank you so much. I'll go ahead and close now. Thank you all for your questions. Sorry, we can't get to everyone today. As you heard this morning, we remain confident in our outlook for 2020 and beyond. Our diversified and complementary businesses are strong and well positioned for continued balanced growth by delivering even higher levels of societal value while generating strong returns for you, our shareholders. Thank you, and this concludes today's call.

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Operator [78]

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And this does indeed conclude today's program. Thanks for your participation. You may now disconnect.