UnitedHealth Group - Earnings Call - Q1 2011

Transcript

Speaker 10

Good morning. I will be your conference facilitator today. At this time, I would like to welcome everyone to the UnitedHealth Group First Quarter 2011 Earnings Conference Call. After the speaker's remarks, there will be a question and answer period. As a reminder, this conference is being recorded. This call and its contents are the property of UnitedHealth Group. Any use, copying, or distribution without written permission from UnitedHealth Group is strictly prohibited. Here is some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. Such statements are subject to risks and uncertainties that 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 filed with the Securities and Exchange Commission from time to time, including the cautionary statements included in our current and periodic filings.

Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated April 21, 2011, which may be accessed from the investors' page of the company's website at www.unitedhealthgroup.com. I would now like to turn the conference over to the President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.

Speaker 5

Good morning and thank you for joining us. This morning, we will review our first quarter results and how those results underpin our outlook for a strengthened full-year 2011 performance. To put the quarter in perspective, we are serving an ever-increasing array of customers across the healthcare system. Our portfolio of products and services is growing and may provide opportunities for deeper involvement and penetration in serving customers' needs. They enable us to deliver more comprehensive solutions, and as a result, we are developing longer, more durable, and more expansive relationships. We are delivering products and services that are more affordable in how they are designed, delivered, and how they perform. We are driving higher quality and lower cost outcomes, and better information and interoperability on behalf of our customers.

As a company, we have become more flexible and innovative in our products, services, and approaches, and we're getting better at combining these in practical ways to meet specific customer and market needs. We are developing new products and new ways and venues to serve our markets. Today, we can be found in retail settings, social networks, mobile applications, delivered in clouds and through connectivity, embedded in alliances and associations, and inside care provider systems and care settings, as well as delivered through consultants, brokers, and agents serving the spectrum of market segments. Every quarter, we are becoming more aligned, more integrated, simpler to understand, and easier to do business with. We are today more easily recognized and more accountable to our customers under the UnitedHealthcare and Optum brands. Our product, service, and performance commitments meet and exceed customer expectations and are more trusted today.

We're more invested in relationships and more innovative in our solutions. These themes resonate powerfully in our people, and while there's more to be done, we believe it's making a difference in our business performance. As we update our view of 2011, we now forecast full-year revenues to approach $101 billion, nearly $2 billion above our initial forecast from November, and a nearly $7 billion increase over 2010 results. We expect per share earnings for the year to be in the range of $3.95-$4.05 per share, an increase of $0.40 at the midpoint of the range. We see operating cash flows strengthening to a range of $5.8 billion-$6.2 billion. In the first quarter of 2011, our revenues exceeded $25 billion, an increase of nearly 10% year-over-year, and nearly doubled the rate of growth in the first quarter one year ago.

Product revenues grew 23%, fee revenues advanced 17%, and premium revenues grew 9% year-over-year. Operating margins were stable at 8.7% in the quarters, with a strong mix of higher margin service revenues offsetting a 10 basis point year-over-year increase in both the medical care and operating cost ratios. With higher revenues, a slightly lower tax rate, and fewer average shares outstanding, first quarter net earnings grew 18% to $1.22 per share. These earnings were supported by strong cash flows from operations of more than $1.2 billion. Our strengthening reputation for service, value, and innovation, combined with balanced and trusted local market engagement, continued to produce consistent growth for the UnitedHealthcare benefits businesses. We grew to serve one and one quarter million more people across these businesses during the quarter, after adding 1.2 million in total in 2010.

We are increasing our 2011 growth outlook to reflect the momentum from the first quarter performance, while still factoring in an expectation for a continued stagnant employment outlook. First quarter results for UnitedHealthcare showed particular growth serving the commercial and Medicare Part D markets. In commercial markets, we grew nearly 800,000 people in the quarter. More employers using fully insured products retained UnitedHealthcare benefits in the last year, and many more people chose UnitedHealthcare during the open enrollment season than we could have anticipated. Employment attrition was also a less negative factor this quarter. In government-sponsored benefit markets, we were privileged to serve 450,000 more people in the quarter. This was led by growth in Medicare Part D and supported by consistent and strong contributions from Medicare Advantage and supplemental health benefits.

Seniors continue to be drawn to our Part D value proposition, which combines stable benefits, broad formulary access, and reasonable prices for consumers, supported by award-winning service from our PBM, Optum Rx. We serve 360,000 more people in Part D across all product categories this quarter, despite being required to consolidate plan and withdraw from five low-income regions, representing more than 200,000 pharmacy members in 2010. UnitedHealthcare grew its Medicare Advantage business by 95,000 people in the quarter. This included 285,000 seniors from very strong net new sales, 35,000 from an acquisition, and a decrease of 225,000 seniors from market and product exits and programs that were not funded at sustainable levels. Medicaid continued to perform well, led by growth in newer markets such as Mississippi and Florida's CHIP program.

In total, this strong and diverse growth performance helped UnitedHealthcare's first quarter earnings from operations grow more than $200 million year-over-year. While the incidence of influenza was substantially higher this quarter than last year, overall medical cost growth was restrained. Outside of flu, we continued to see a more moderate level of medical system utilization, in part to the effect of severe and persistent winter weather conditions across significant portions of the country. We remain concerned about the drivers of medical cost growth, the most significant of which continues to be unit price increases. We follow longstanding disciplines of pricing to match expected medical costs, and we continue to expect a return to higher utilization patterns this year and into 2012. The commercial medical care ratio of 78.6% decreased 40 basis points year-over-year, and reserve development continued to be favorable.

Our first quarter commercial results include a pro-rata estimate of our full-year care ratio rebates payable, which we increased meaningfully and factored into our updated 2011 outlook. We also benefited from positive prior year reserve development in our senior public program businesses. Coupled with effective medical cost results, first quarter performance was favorable to our expectations. Again, we expect a return to higher levels of health system utilization as the year progresses. UnitedHealthcare businesses sharply reduced the ratio of operating expenses to revenues year-over-year. This occurred even with the addition of 750,000 consumers in fee-based programs, which have much higher operating costs as a percentage of revenues. This strong cost performance was driven by ongoing operating cost initiatives and the benefits of leveraging our scale by increasing coordination and systems integration across UnitedHealthcare's health benefit businesses.

I should also mention that ours is the first organization with full HIPAA 5010 core certification. This is an important milestone in efforts to simplify healthcare administration, in part by standardizing electronic information for healthcare payers and healthcare providers across the system. In summary, UnitedHealthcare delivered another strong quarterly performance driven by broad-based growth and fundamental execution, focused on serving customers with innovative and affordable benefit products. It is well-positioned to keep performing over the course of 2011. Longer term, we believe UnitedHealthcare's focus on innovation, affordability, and ever-higher service for care providers and customers will continue to drive growth. Moving to our Optum businesses, I would observe that over the past year, we have improved the alignment of our health services businesses to better address emerging opportunities in that growing realm.

Earlier this month, we announced our health services businesses are unifying their external market presence under the Optum master brand. The change reflects the continuing evolution of these businesses and is focused on making it easier for the broad healthcare marketplace to understand and access our full range of capabilities for modernizing health systems and improving population health. Our Optum businesses serve key participants in the health system, from life science researchers to care providers of all varieties and sizes to plan sponsors and consumers. A quick survey of recent market successes will give you a sense of Optum's growing scale and diversity. We expanded our total population health solutions to almost 600,000 new consumers associated with Fortune 500 employers, commercial payers, and state-based programs. We closed new business providing pharmacy benefit management for roughly 400,000 consumers in settings as diverse as the labor plan markets to independent health plans.

Our EHR medical necessity compliance business serving care providers continued to see exceptional results, closing contracts with some 178 new hospitals in the first quarter. In connectivity, we secured our seventh statewide health information exchange customer. We also had several wins in the provider and integrated delivery system segment of this marketplace. A number of hospitals purchased our computer-assisted coding solutions to support their transition to the new ICD-10 coding system. In consulting, we have a number of new awards from federal and state agencies, including a study of health outcomes for children with autism. A market-leading diabetes prevention and control alliance continues to build momentum. Elements of this program are available in 29 communities today, including New York City. We launched a new health plan customer for the alliance in February and are in discussions with other health plans this month.

We strengthened the alliance with the addition of Albertsons and Kroger supermarkets with their strong retail pharmacies. We will continue to introduce the alliance to new communities this year while adding capabilities to serve beneficiaries in Medicare and Medicaid plans. During the quarter, we implemented a new federally sponsored telehealth project for the Navajo Nation, connecting health information and treatment data electronically to support complex children's neurology care in remote parts of Arizona. This project increases patient access to specialist physicians while improving physician productivity and capacity. These examples are intended to give you a sense of the breadth we offer the market as Optum and how we leverage capabilities in connectivity, intelligence, alignment, and total population health management to help diverse customers solve specific challenges.

This includes large growth opportunities in serving as an enabler of integrated care models in various configurations that meet local market circumstances, including the early versions of ACOs as they evolve in the months and years to come. The goal we hold in common with all participants in healthcare is to help deliver higher quality, more consistent, and sustainable levels of healthcare delivery, better patient satisfaction, and optimal resource use, working locally to help improve medical outcomes and to lower costs. In the first quarter, Optum's total revenues increased 20% year-over-year. Revenues increased 13% at Optum Rx, 33% at Optum Insight, and 37% at Optum Health. We've strengthened recent acquisitions by integrating their capabilities into broader solution sets that we then introduced to our growing customer base.

This deeper penetration strategy is accelerating revenue growth and is an important driver in the increasing pipeline of business opportunities that Optum is capitalizing on today. Sales to UnitedHealthcare have also grown meaningfully, due in part to its overall member growth, which embed Optum services. Optum Insight's 57% or $30 million year-over-year earnings increase was a highlight of the quarter. Optum Insight expanded its operating margin by almost 2 percentage points through improvements in revenue mix, meaning sales with more software and less labor content, and favorable leverage in operating costs. Optum Rx's earnings were flat year-over-year, and Optum Health's earnings decreased $34 million, both in the ranges we expected as we began the year. Both reflect efforts to realign and rebaseline these businesses in 2011, positioning them for future earnings growth.

Optum's overall results reflect the 2011 realignment of businesses between segments and related revisions and service agreements, which we previewed at our investor conference last November. We expect Optum will continue to perform well over the course of this year. Optum is positioned to help customers address the growing pressures of state and federal regulations and cost containment, and consumer and client expectations they face for quality and affordability. As we offered in our opening comments, we now forecast revenues will approach $101 billion in 2011. We provided a revised financial outlook summary sheet this morning that takes into account the stronger than expected start to the year and updates our expectations for various financial metrics across businesses. Our press release includes financial tables that realign historical business segment financial data to our current presentation format. This simply updates the preliminary information we provided at our investor conference.

We estimate our 2011 results will include up to $0.15 per share for an assessment of our pro-rata portion of a policyholder claim of Penn Treaty, an unaffiliated, potentially insolvent long-term care insurance concern. We have never sold long-term care insurance to understate licenses. The State Insurance Guaranty Association laws require we and other insurers fund this company's obligations despite our having nothing to do with it. Accounting rules do not allow accrual of these costs until Penn Treaty is deemed insolvent by a court of law, which has not yet taken place. We anticipate this will occur in the second quarter of this year. We expect higher levels of health systems use overall and the typical seasonal earnings patterns in commercial benefits, plus the potential $0.15 per share assessment.

If it is recorded in the second quarter, it will pressure results on a sequential basis for UnitedHealthcare, while Optum expects slightly higher operating costs as we continue to invest. Clearly, we anticipate second quarter net earnings per share will come in meaningfully below the first quarter results. We estimate 2011 full-year earnings in the range of $3.95-$4.05 per share, driven by revenues above our initial outlook and slightly stronger margins. We believe this range prudently reflects our strong first quarter performance and appropriately considers challenges that may present themselves over the course of the year. With the advances in growth and earnings, we now forecast cash flows from operations of approximately $5.8 billion-$6.2 billion this year. We continue to value financial flexibility and maintain strong liquidity and regulated capital positions. Our first quarter debt offering was well received by bond investors.

We believe our operating results and continued strong financial positioning, combined with improving market sentiment around the risks of health reform, position us well for a return to the debt markets later this year if we choose to do so. In conclusion, we see expansive market opportunities opening to health benefits and health services, and we have two strong platforms in place to pursue these opportunities. We're delivering consistent fundamental execution and solid operating and financial performance. These are driving diversified growth, improved physician and consumer satisfaction, and higher customer retention. It is still early in the evolution of a newer and more modern healthcare environment, but we are offering innovative approaches and capabilities to improve fundamental health service performance, higher quality, and lower costs on behalf of all constituents. The market uptake for these innovations is accelerating. We're interested in your questions this morning.

As usual, there will be one question per person so we can speak with as many of you as possible. I'll now turn this call back to the moderator for your questions, and thank you again for joining us this morning.

Speaker 10

At this time, we will proceed with the question and answer period. We ask those with questions to limit to one question per person so we can get to as many participants as possible. In order to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, hit the pound key. We request that you do not utilize a speakerphone or headset when asking a question. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Tom Carroll with Stifel. Please go ahead with your question.

Speaker 8

Hey, good morning. These are very strong earnings we're seeing here today, certainly greater than expectations. How should we think about how these earnings relate to potential rebates that UnitedHealth Group might have to pay back, I guess, what, late next year? Can you quantify this for us some way?

Speaker 5

I will let Gail and Dan Schumacher respond, but I will offer that they have been fully considered in our results and our outlook.

Speaker 1

Sure. Tom, you know, obviously, we're very pleased with the performance we had in the first quarter. We revised our full-year outlook. In doing that, we also increased our quarter and full-year expectation of our rebate meaningfully. I think the other thing that's important to remember inside that is that we made some very nice progress in markets where we are operating today above the minimum threshold. All of those things are taken into consideration both in the quarter and on the full year, and it's fully reflected.

Speaker 8

Your premiums today include an offset for some estimate that you made baked in for rebates.

Speaker 1

Absolutely.

Speaker 8

Is there no way to quantify that for us today, even just a range?

Speaker 1

What I'd say, Tom, is there's a lot of elements that go into our decisions as well as our performance, and that is simply just one of them. We don't individually isolate those other elements, and similarly, we don't plan to with respect to rebates.

Speaker 8

All right. Thank you.

Speaker 1

Next question, please.

Speaker 10

Our next question comes from the line of Josh Raskin with Barclays. Please go ahead.

Speaker 9

Hi. Thanks. Good morning. Just a question on the medical loss ratio as well, I guess. You cited in the press release moderated levels of overall health system use. You spoke a little about that in the second half of the year. Should we assume that the trend is continuing to show lower utilization, or is this just the same level of low utilization? Does that include, when you talk about rebates, your assumption that you're going to pay out the rebates, or are you making some assumption that you may be giving back premiums in some of those markets where you may be below the minimum?

Speaker 1

Sure. Josh, when we talk about our trend guidance, we're thinking about that in terms of our core trend and our realized trend, and we don't incorporate rebates into that conversation about trends specifically. Obviously, coming into the year from a trend perspective, we did expect it to go up. We expected it to go up on the combination of the introduction of the reform-related coverage expansions, a more normal flu, and also a return to more normal utilization trend. What we saw in the first quarter is that we did experience the coverage expansions, and actually, from a flu standpoint, we saw something that was a little bit higher than normal, but utilization broadly was lower than we had expected. That was due in part, as Steve mentioned, to the winter storm season.

As we look at the balance of the year, we expect a more normal utilization trend to emerge, and we've incorporated that in our view. When you think about our calendar year realized trend, we now have an expectation that's closer to 6.5% ± 50 basis points, so down roughly a point from our Investor Day guidance. I think it's really important to recognize that this is a calendar year realized trend, and it doesn't reflect our forward view into 2012. We do expect trend to increase, and we're pricing for it. We expect to see continued unit cost pressure, which is a primary driver of trend, and we also expect more normal levels of utilization, which frankly have been abnormally low.

Speaker 9

Okay. Dan, I'm just sorry. On your rebate assumption, are you assuming that you're going to pay those rebates, or are you assuming that you're going to make other changes in the market that may get you closer to that MLR minimum?

Speaker 1

We assume that as we make our decisions around the performance of our business, we're working to manage the rebates, obviously, and then we compare it against the thresholds, and then we have an expectation of paying rebates where we exceed them.

Speaker 9

Okay. Thanks.

Speaker 1

Thanks. Next question.

Speaker 10

Your next question comes from the line of Charles Burrati with Credit Suisse.

Thanks. Good morning. I want to congratulate you, Steve, and the company for maintaining the focus throughout this difficult period of reform. My question on medical cost expectations: you talked about your expectations for utilization to pick up later this year and into 2012. I'm just wondering if that's just based on conservatism, or do you see evidence beyond the flu of it picking up? Are the assumptions you're using implicit in your rebate accrual the same as the assumptions on your guidance for medical expenses this year, or can you be concerned in the accrual by assuming utilization doesn't pick up while you're assuming it does pick up for purposes of estimating medical trends?

Speaker 5

Dan?

Speaker 1

I had to wrap it all into one question.

Speaker 5

No, it's actually a very good question.

Speaker 1

That's fair. Charles, on the utilization side, as we step into the second quarter, we do expect utilization to increase most immediately related to we don't expect a carry forward of that winter storm season, obviously. It's really in the second half of the year that we expect to see that more normal utilization trend emerge. As we look at both our trend, our pricing, our enrollment, and work up our aggregate performance for the year, we then determine what our rebate is. I would tell you that these factors are all correlated in our determinations, and they're fully reflected in our forward guidance.

This actually relates to the previous question too. Again, I reaffirm. Similar to 2010, we continue to see trends moderating, and it's moderating in utilization and not in unit cost. While we see those realized and then respond to them appropriately, that does not change our forward view of where these costs may ultimately go. We don't think that these trends are sustainable. Actuarial science would be on our side on that. Accordingly, when we think about our product and pricing, we think about a more normal trend.

Thank you.

Speaker 10

Your next question comes from the line of Kevin Fischbeck with Bank of America. Please go ahead, sir.

Speaker 24

Okay. Thanks. I wanted to talk about the services business this year. I guess it's not clear to me why the Optum Health margin outlook is down from the previous guidance. I mean, down year-over-year makes sense given the health parity costs and the mix shift. Based upon the fact that your commercial membership guidance is higher and state-sponsored, I guess, is more or less in line, I would have thought that that mix shift would have improved at least versus prior guidance. You're just kind of following on to that. At the Investor Day, you gave kind of long-term margin guidance for all the services businesses that were above where they are today. I guess only Optum Insight is better now, but the other two aren't.

I just wonder if you could give some color about what's going on there, particularly in Optum Health, but then just kind of generally and long-term in those businesses.

Speaker 1

Donna, please go ahead.

Speaker 17

Yeah. Thanks, Kevin. I'll take an initial response, and then I'll hand it over to Dawn Owens for further on Optum Health. As you may recall, back at the Investor Conference, we did talk about 2011 being a rebaselining year for several of the businesses within Optum. A couple of things have changed since then. Obviously, from the results, you'll see that we've exceeded growth expectations, which we're very pleased with. It's a good start on exceeding our expectations. Back in that time period, we had made an estimate around what's the rebaselining, some of the changes that we were making between the business segments. Frankly, as we true those up and got to actuals, those did impact Optum Health's results.

Even though we beat the revenue targets and the related operating earnings were generated from that as well, it was offset by just the rebaselining that we put through the estimate. Vis-à-vis what we projected, it's obviously a different result, but we're very confident and pleased with where we stand today. I'll hand it over to Dawn to talk maybe a little bit about some of the opportunities. I would also say, Kevin, with respect to Optum, you know we showed some pretty significant growth, as you noted, in Optum Insight, and we're excited about that. In Optum Rx, we continue to see strong growth, but we continue to make investments in that future platform. Back to the Investor Day conference, we're pretty pleased with early traction that we received. Dawn, you want to add anything to Optum Health?

Speaker 13

Yeah. I would say carrying on, Mike, to what you said, I mean, we feel very, very good about the growth that we achieved in the quarter. The external performance on sales growth across the board in our businesses contributed to, we believe, very strong momentum as we go throughout the year. Mike explained how that carried through to the earnings and what impacted that. We see opportunity not only in our traditional markets in serving sponsors and payers with our total population health solutions, but you're starting to see the evidence of that coming through and applying those services into the care delivery marketplace and in other new venues for our businesses. That really gives us strong momentum as we go throughout the balance of the year and look forward.

Speaker 24

I guess this quarter is kind of consistent with the view that our historical precedent is that the top line comes in better than we think, but the margins end up coming a little bit lower. Is there a view that 2011 is, in fact, going to be the trough number and that 2012 we can see stable or improving margins in those three business lines?

Speaker 5

I think what we feel good about, again, is the early traction. As we look to the future, we think that you're going to see absolute operating earnings growth and margin expansion throughout our businesses.

Speaker 24

Okay. Great, thanks.

Speaker 10

Your next question comes from the line of John Rex with JPMorgan. Please go ahead.

Speaker 20

Hey, thanks. Just wanted to come back yet again to the med utilization questions. I wonder if you could break down to us in just the major four categories in terms of what you're seeing on the utilization trends there. Which was kind of most surprising versus where you stood a few months ago in your expectation? Are any of them actually running negative in terms of units consumed?

Speaker 1

John, this is Dan. On the utilization side, I would say that it's frankly, it's down broadly. It's down, I should say, more moderate across all those categories. If I were to highlight one area in particular, I would say inpatient is an area where we've seen more pronounced moderation. We actually, in some instances, are seeing that negative. From our perspective, it's a combination of factors that contribute to that. Obviously, the broader factors around the economy are at play in there. We also see the progress we're making from our clinical agenda inside there. We see it in metrics that aren't influenced by the broader economy, things like readmission rates as an example.

Speaker 20

Bed days would be the only one you'd be seeing in absolute negative territory, though, of the four main buckets.

Speaker 1

It certainly varies across the individual businesses within the UnitedHealthcare platform and by geography. Overall, it is flat to slightly down.

Speaker 9

Flat. Flat.

Speaker 1

Yeah.

Speaker 2

John, this is Gail Boudreaux. Just a couple of points because I know we're focused on the utilization component here, but I just want to bring us back to as we think about medical cost increases and trend. Remember that two-thirds of our pressure is really on the unit cost side, and that intensity has not stopped. While we have seen some lower utilization, we do expect that utilization to increase as we pace through the course of this year. The unit cost pressure, particularly on the inpatient side, I think remains very intense, and we should continue to think about how we manage through that, which we're very focused on.

Speaker 20

That's running in the same area you've been in, right, in terms of the unit cost on the inpatient side, typical year-over-year?

Speaker 2

Yes, that's correct. If you go back to our guidance overall on the unit cost side of that trend, it was in the 5% range in total.

Speaker 20

Thank you.

Speaker 10

Our next question comes from the line of Ana [Goutain] with Bernstein. Please go ahead.

Hi. Thanks. Good morning. My question is about your recent Optum Health acquisitions and the outlook for 2011 and going forward as well. Can you provide some color to us on how that fits into your stated strategy as you expressed it at the Investor Day? What the capital deployment has been. There's been a number of small things that have been done and what the revenue and earnings potential are for those.

Speaker 5

Ana, can we clarify, are you speaking just of Optum Health, or are you speaking of Optum, the health services businesses in total?

In total.

As you know, the health services platform, we've been building and investing in health services for well over a decade. Throughout that time period, we brought in businesses and capabilities that add to that platform that ultimately can help us achieve what we're trying to with our customers, and that is to improve the healthcare system. As we look to the future, we continue to believe that acquisitions or strategic acquisitions are going to be a component of that. Of late, you've seen some acquisitions like Inspiris, if you will, as one of those. That's an area that is targeted around the chronic and sick population and managing those through nurse practitioners and primary care providers dedicated to that population, serving multiple different payers in the marketplace.

It's things like that that we've been bringing into the fold that ultimately will fill out the broad capabilities across our health services platform. I'll remind you that across Optum, you know we serve all constituents. It's a very diverse set of capabilities, ultimately, again, with the idea that we can bring services to better the healthcare system. We're going to continue to pursue acquisitions where it makes sense.

Okay. Just to follow up, to get some more color, does it seem right to say that you may be moving now more away from data exchange and software support to investing in higher touch clinical services like you talked about just now, either phone-based or primary care, selectively in some local markets or broadly speaking?

I'm going to ask Andy Slavitt, the CEO of Optum Insight, to answer a portion of this. I want to interject with I don't think it's fair to say that we're very much invested in the use of data and analytics and connectivity solutions. One thing that we believe does differentiate us from others in the health services marketplace is we build solutions, but we build it from insights, from operating from within inside the system. Whether it's providing care delivery services like within Southwest Medical or just providing nurse practitioner services like we've done for decades within Evercare, all of that instructs the types of solutions that we bring to the marketplace. Andy, do you want to comment on the first part?

Speaker 18

Sure, Ana. I think Steve revealed the elements of our strategy that are at work in both the organic growth that you're seeing as well as the M&A-related growth. He talked about helping health communities become connected, intelligent, aligned, and then allowing them to factor in the human element by managing the health of the population. We think there's a demand and a need in many of the markets we serve for all of those capabilities. We are seeing strong performance from the acquisitions that you referred to in the last part of last year. I think, as Steve said, that's because of the fact that the portfolio as a whole strengthens any individual offering and what we're able to bring to the market.

This is a strategy that, as Mike said, will have some M&A continue to be in the portfolio, but it will really be to enable that strategy that Steve and Mike laid out.

Okay, thank you.

Speaker 5

If I were just to, I think, to your question, I think we have two investable platforms that you're referring to. We'll continue to be interested in technology and information. We are increasingly seeing how that enables our ability to actually engage in the more integrated clinical care activities more effectively. We really have a pretty virtuous situation where we can invest in both, and they strengthen each other. The acquisitions that have been made have been strong performance. We're very pleased with the ones that occurred last year and will continue to build this business.

Thanks for taking the question.

Speaker 10

Our next question comes from the line of Matthew Borsch with Goldman Sachs.

Speaker 6

Hi. Good morning. Thanks. I just want to ask about the pricing environment here, particularly in light of the entire industry adapting to the new minimum medical loss ratio (MLR) rules, coupled with the build-up of surplus at some of the not-for-profit plans. As well, related to that, the lower trend experience. What are you seeing broadly in terms of pricing across your different markets, and how variated is it?

Speaker 2

Morning, Matt. This is Gail Boudreaux. We see the market as remaining competitive and rational. Plans are raising premiums based on what they see as their underlying escalation in medical costs. That has remained consistent, as we've talked about on these calls. As I've mentioned on several of the calls, we do see certain instances in a few markets or in a couple of case situations where there is some aggressive action, but it is not any kind of a trend or anything that is a wholesale pricing philosophy or change. I think that makes it a very rational market. The other thing I just think we should all consider too is that as plans have to invest in order to be compliant with all the regulatory changes, they've got some significant capital expenditures coming for HIPAA 5010 as well as ICD-10. I think that's a factor as well.

As we think about our own pricing, we've remained very consistent. We price our forward view of costs, and that's really driven by our expectation of where we see utilization and unit costs trending. That's been very consistent.

Speaker 6

All right. Great. Thank you.

Speaker 10

Your next question comes from the line of [Scott Fadel] with Deutsche Bank. Please go ahead with your question.

Thanks. Wondering if you can give us an update on your thoughts here on the Medco contract just relative to your target of growing the PBM. Also, maybe an update on the TRICARE West protest and whether you have any increasing confidence that you might be positioned to win that business after the appeal was sustained.

Speaker 5

I'll comment on Medco, and I'll have Gail comment on the TRICARE. The answer is really no different than we have offered in the last couple of exchanges. We've said before, well served by Medco and continued to be a strong partner. Our Optum Rx business continues to grow and is growing nicely from an external business point of view. Its capabilities continue to become enriched and are robust. They're very strong in specialty pharma, et cetera. We really have a lot of positive options in front of us. I will say that we will basically set a definitive direction over the course of this year, given the timeframe of the Medco relationship. We're really well served at the moment and have a variety of options in front of us and feel very good about how we are using those resources for our businesses and for our customers.

I wouldn't suggest that we're offering any new direction to you at this time. And TRICARE?

Speaker 2

Sure. Scott, I think as you noted, on April 6, the Department of Defense upheld our protest of their July 2009 West Region TRICARE contracts that they awarded to the incumbent administrator. They have indicated to us that they will be updating their solicitation of the contract. As you know, this is distinct from our ongoing protests around the award in the South Region as well. We believe that we have a superior proposal, and we look forward to demonstrating that as part of this protest process because we think that we can bring real value to the beneficiaries in this area.

Is the Logistics Health acquisition that you just did part of trying to position even better for the TRICARE bid, or is that a separate strategy in terms of just increasing your military health and sort of wellness and services capabilities more broadly?

Speaker 13

Hey, Scott. This is Dawn Owens. Logistics Health, or LHI, will become, upon close, a part of Optum Health. We really see it as a platform that allows us to take our population health solutions and apply them to a very important part of our constituency base, the military servicemen and women of our country. They provide very specialized services related to pre and post-deployment that we think we are a natural complement to and are excited about their inclusion in the overall Optum services portfolio.

Okay. Thanks.

Speaker 10

Your next question comes from the line of Carl McDonald with Citigroup.

Speaker 3

All right. Thanks. It's another angle on utilization, which is if you've got any data that shows you historically that when utilization does come back, if it shows up first within different areas of the commercial market. As an example, is it right to think that you see utilization come back first in large group accounts, and then it's a little slower to respond in an individual? Secondarily, if you've got an updated estimate in your commercial loss ratio for this year.

Speaker 1

Hi, Carl. This is Dan. In terms of how utilization emerges, I would suggest that there isn't any particular difference across either geographic category or by customer segment, frankly. It comes back broadly, and it leaves broadly, and comes back broadly. With respect to the loss ratio, we now expect our full-year loss ratio on the heels of a combination of our Q1 favorable development, our lower utilization, and then obviously, that's partially offset by our higher rebate estimate. We now expect that to be 82% ± 50 basis points. We are down about 170 basis points from our Investor Day guidance. One thing I'd like to note is as you look at that difference, 40 basis points of it is simply just adding in our specialty business, and then the balance is really those other factors.

Starting from the first quarter and then thinking about how it progresses over the balance of the year, we don't expect any further impact of the winter storms. We don't expect further favorable development. We do expect the normal wear-off pattern of our deductible, and then we expect a return to more normal utilization over the balance of the year. Those are the things that are coming together to inform that 82% guidance.

Got it. Thank you.

Speaker 10

Your next question comes from the line of Christine Arnold with Cowen & Company. Please go ahead, ma'am.

Speaker 23

Hi there. Clarifying question on the trend here. Excluding places where you saw winter storms, so presumably Arizona, California, some other places, Florida didn't have storms. Was utilization up, or is it up, excluding the winter storm effect? I'm just trying to clarify whether you're seeing it or whether you're building in something you think you'll see. Did you see in-group growth or attrition in the first quarter?

Speaker 1

On the Christine, this is Dan. On the utilization side, we did see utilization up just more modestly than we would have expected outside of the storms. On the attrition, I'll turn to Gail.

Speaker 2

Sure, Christine. One of the challenges, actually, of identifying and segregating it, we did see attrition in the first quarter of this year, but it was down from last year. We also, as you know, had extremely strong overall enrollment growth across all of our benefits platforms, particularly the almost 800,000 new consumers we're serving in the commercial market. Inside of that, we had very strong open enrollment results, particularly in our self-funded national account business, and that contributed. When you try to segregate attrition, we still expect attrition to be a factor this year, particularly in our self-funded business as you look at our guidance going out for the rest of the year.

However, our strong service platform, I think the products we put in market and the value that we offered our customers was clear in our open enrollment where we gained a lot of in-group members versus our competitors.

Speaker 23

Excluding storms, were bed days up?

Speaker 1

Bed days, excluding storms, were flat to slightly down depending on the geography.

Speaker 23

Okay, that's helpful. Thanks.

Speaker 10

Your next question comes from the line of Sarah James with Wedbush. Please go ahead.

Speaker 0

Thank you. I wanted to go back to the topic of capital deployment. As part of the recent WellMed acquisition, you obtained some point-of-care facilities or clinics in Florida and Texas. I also saw that you're funding some clinic development or expansion in California. I was hoping you could talk a little bit about your long-term strategy as far as your point-of-care presence goes, both in clinics and/or ACOs.

Speaker 5

I'll let Mike address this, but I would not describe any of these kinds of activities as particularly new. We have been in clinical care activities, particularly around integrated models in various ways in markets for quite some time. As we continue to advance our services business, it's very natural for us to pursue opportunities in markets where we see the potential that the kind of solutions that we can bring offer value. Mike, do you want to comment about the specific activities?

Speaker 17

I'm not sure that I have a lot else to add other than, you know, as Steve said, we've been in the delivery business for some time. We have a broad range of services. We seek to bring capabilities and integrated solutions into the care delivery marketplace, whether we're serving them and partnering with them or, in fact, you know, allocating capital ultimately to the same end state, and that is to create a more sustainable, more affordable, and high-quality community. As Andy stated earlier, we have a fundamental belief that there are some core attributes around those sustainable communities, and that is they're connected, intelligent, and aligned, and we bring all of our capabilities to bear to achieve just that. Whether we're partnering or investing in, we're somewhat neutral too.

We're ultimately seeking the same end state, as I said, and that is to achieve a better outcome in the communities that we serve.

Speaker 5

Next question, please.

Speaker 10

Your next question comes from the line of Chris Rigg with Susquehanna.

Speaker 16

Thanks. Thank you for taking my question. Just a confirming question here. Is the $0.15 from Penn Treaty, was that in the original guidance of $3.50-$3.70?

Speaker 1

Steve, you want to comment? No, the Penn Treaty estimate of $0.12-$0.15 was not in the original estimate, and it has been included in the revised guidance that we gave you today.

Speaker 16

Okay. Thanks. Just real quickly on some of the accounting for the MLR, is it right to assume that PPD on an absolute basis, when we see that start to decrease, I know you're not assuming it in your guidance, but assuming that any favorable development may get rebated away, is it correct to assume that over time, you know, sort of you've reported $440 million this quarter, that that would become, that that should go down?

Speaker 1

Chris, this is Dan. I wouldn't read anything into development versus rebate. At the end of the day, from a reserve standpoint, we have a very comprehensive and consistent process, and that remains unchanged. At the end of each quarter, we determine our best estimate of the ultimate claims and accruals, and we do not have any expectation of development forward.

In terms of why we've seen some of it, particularly in the second half of last year and into the first quarter of this year, obviously, we had more moderate utilization, and that showed up in the second half of last year and carried into the first. We also saw an improvement in the time of claim submission, and that acceleration also contributed to our development.

Speaker 5

Okay, thank you.

Speaker 10

Your next question comes from the line of Matthew Coffina with Morningstar.

Speaker 7

Hey, good morning. I just wanted to follow up on the Medco question. Could you tell me anything about where your capacity utilization is currently in the PBM and what incremental costs would be involved if you did decide to bring that business in-house?

Speaker 5

Yeah. We've said this before, and I'll have Bill Munsell confirm if I'm wrong. We have substantial capacities, and we have made investments over the last two years that continue to strengthen our Optum Rx platform. I think we have virtually the full range of motion in that as it exists today, and we have meaningful capacity. Is that, Bill?

Speaker 19

Yeah. I don't know what else I could add to that other than, and we've actually said this on the call too, we continue to invest in the capabilities of Optum Rx so that we have the flexibility depending on what we ultimately decide we want to do.

Speaker 5

Some of that is in the building conversation that we've been having around Optum in total. That is unchanged, though. That is not new. We have been in that mode for about two years now.

Speaker 7

I can interpret that as meaning that you wouldn't incur any incremental costs from bringing that business in-house?

Speaker 5

No, we have been building the platform, so we have been incurring those costs.

Speaker 7

Thank you.

Speaker 10

Your next question comes from the line of Doug Simpson with Morgan Stanley.

Speaker 21

Hey, good morning. Thanks for taking my question. Just on the issue of inpatient pricing, it sounds like utilization there remains dampened, and the price trend is still an issue. What are the strategies of the company, you know, looking at over the next 12-24 months to deal with that issue? Maybe just if you could give us color on what you hear from employers in terms of their willingness to consider more narrow network-based products. Any color you have around that would be great.

Speaker 2

This is Gail. Good morning. I think first, let's put the overall hospital environment into context. You know, hospitals are clearly feeling the pressure and the burden of the low-cost reimbursement from Medicare and Medicaid, and that has put pressure certainly on their commercial reimbursement. If you look at, as we said a few moments ago, when we look at overall medical trends, the unit cost side, and it's the inpatient aspect that has the most pressure. Our strategies are really a couple. We are really focusing our future reimbursements on paying for performance, trying to get away from just unit cost increases, but moving to more pay-for-value as a way to mitigate that. We have been doing that now for the last several years, and it's an ongoing strategy.

In terms of employers, as we look at our growth over 2010 and into 2011, we are seeing very strong response from them around programs that do have some narrow network components. They're looking for any way to have affordability. I think it's a bit of a mix depending on the size of the clients, but there is interest in value-based performance networks, and that's part of our contracting strategy with hospitals and physicians as well as how we're working with employers.

Speaker 21

Okay. Maybe just a follow-up. When we think about G&A over the balance of the year, there's some cross-currents with the Optum investments and the ASO growth, as well as the branding. In the quarter, it came in a little light of expectations. How should we think about the seasonality over the balance of the year as compared with last year? Should it look similar, or are there reasons why it would deviate?

Speaker 5

Good morning, Doug. Just answering that question across the UnitedHealth Group, our operating costs tend to trend higher throughout the year. They're generally higher in Q4. As you know, that's the AEP period for Medicare.

Speaker 21

Sure.

Speaker 5

Example. We are doing all of our preparations for our seasonality and the early or during the winter period and whatnot. Generally, we're hiring Q4, and Q2 and Q3 generally average out to be close to the full-year average. I'll remind you that in this instance, we expect the Penn Treaty assessment to land in Q2. It may slip to Q3 depending upon when the court rules. Again, that's a $250 million assessment, about 100 basis points of operating costs during that time period.

Speaker 21

Okay, thank you.

Speaker 10

Your next question comes from the line of Peter Acosta with Wells Fargo. Please go ahead, sir.

Speaker 12

Good morning. Can you go through a little bit more about your days and claims payable and the drop there? Historically, you've suggested that you pay claims when they're due. Is this a change in your payment policy, or is there something else that's causing the days and claims payable to drop? What do you expect to happen going forward?

Speaker 11

That's a good question, Peter. It's Dave Wichmann again. It doesn't have anything to do with the pace upon which we're paying claims. It has more to do with the pace in which claims are being submitted by physicians. This is in part due to the strategies we have across our business to enhance EDI submission because that has a tendency to reduce manual handling and therefore errors as part of that. We're receiving claims about two days faster now than we did this time last year. The other day that was lost relates to the way in which the Health Net transaction was recorded. It elevated the days in 2010 as a result. No changes in terms of the payment practices, only in terms of submission rates from physicians and the hospitals.

Speaker 5

Last question, please.

Speaker 10

Your next question comes from the line of Michael Baker with Raymond James.

Speaker 25

Thanks. I was wondering if you could comment on how the Medicaid RFPs are shaping up relative to expectations, which geographies we should anticipate United being focused in on, and what your longer-term margin expectation is for that business.

Speaker 1

Sure. Jack?

Speaker 2

Let me just provide a couple of overall comments because I think you hit it. There's a lot of opportunity right now in the pipeline for Medicaid. We think you're extremely well-positioned given the breadth and scope of our business and are excited about the opportunity to respond to that. I'll ask Jack Larsen, our CEO of Community and State, to give you some more specifics on what we're seeing in the market and your other question.

Speaker 14

Thanks, Gail. Good morning, Michael. I was hoping this question did come up. We've been talking about the numbers of RFPs and the size of the pipeline now for several quarters, and you're right. There is a lot of activity right now. I guess the way I would think about it is that what we have seen in the RFPs is pretty much what we had expected over our discussions in the last several months and quarters with our state partners. I think they're shaping up quite well. I think you can count on us to take a good hard look at all of the RFPs that are there, and we're going to be very aggressive where we think we're well-positioned to serve both eligible beneficiaries as well as our states.

Short of that, I'm really not in a position to comment on particular strategies or particular states that we're going to participate in.

Speaker 25

Now, how about in terms of outlook for margins longer-term? Obviously, there are a number of favorable dynamics happening today.

Speaker 14

I think the outlook for margins longer-term, clearly, the state fiscal situation is going to be a very difficult thing for them to contend with over the next year to two. The rate environment will tend to be a little bit turbulent. I would expect margins going forward to probably have some compression at the share ratio level, but I think we're well-positioned to do a very good job for our states with respect to managing our administrative costs and also get to work on some of the elements of acute costs through our various medical care management programs.

Speaker 25

Thanks for the update.

Speaker 5

Thanks. I think it reflects the strong leverage in that business. Thank you for your questions and for spending time with us this morning. Maybe just a couple of wrap-up thoughts. We started 2011 with good momentum, but we remain very aware of the challenges that may arise during the balance of the year. I think this performance momentum reflects our continued focus on fundamental execution, commitment to high levels of service, practical innovations that are meaningful to our customers, and an emphasis on building relationships. We believe this approach will serve us well, and we think we have two great platforms well-defined to pursue opportunities in the marketplace with Optum and UnitedHealthcare. We're very grateful to serve the many people that we do, and we are sensitive to the responsibilities that it represents. We thank you for your attention this morning. Thanks.

Speaker 10

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.