UnitedHealth - Earnings Call - Q2 2025

Executive Summary

• Adjusted EPS was $4.08, below S&P Global consensus of ~$4.45; revenue was $111.6B, modestly above ~$111.58B consensus. Consolidated medical care ratio (MCR) rose to 89.4% (up 430 bps YoY), reflecting medical cost intensity outpacing pricing and ongoing Medicare funding cuts. Consensus values retrieved from S&P Global.
• UNH re-established 2025 guidance materially lower: net EPS at least $14.65 (from $24.65–$25.15), adjusted EPS at least $16.00 (from $26.00–$26.50), and revenue $445.5–$448.0B (from $450–$455B). Full-year MCR now 89.25% ±25 bps; operating cost ratio 12.75% ±25 bps.
• Management detailed remediation and a “tone of change and reform,” including 2026 Medicare Advantage pricing set to ~10% trend and exiting plans covering >600K members, with a focus on narrower networks and disciplined managed products.
• Discrete Q2 impacts totaled ~$1.2B, including a $620M ACA exchange premium deficiency reserve; dividend was raised 5% to $2.21 in June, with Q2 capital returns of $4.5B.

What Went Well and What Went Wrong

What Went Well

• Optum Insight improved operating margin to 20.7% (Q2) and backlog stood at $32.1B; recovery from change healthcare cyber event is progressing, albeit slower than initially expected.
• Optum Rx revenue grew 19% YoY to $38.5B, with script volume rising to 414M; earnings modestly increased (~$200M full-year expected), despite specialty and launch headwinds.
• CEO emphasized “a tone of change and reform” and proactive regulatory engagement to modernize operations, strengthen compliance, and improve transparency.

What Went Wrong

• Adjusted EPS fell YoY and missed consensus; MCR climbed to 89.4% (up 430 bps YoY), driven by higher unit costs and service intensity beyond pricing assumptions. Consensus values retrieved from S&P Global.
• Optum Health revenue declined ~$1.8B YoY to $25.2B and operating margin compressed to 2.5% (from 7.1%); management cites mis-execution on V28, mix of complex/new patients, and underpriced capitation.
• Discrete items of ~$1.2B (incl. $620M ACA premium deficiency reserve) weighed on results; guidance reset sharply lower across EPS and revenue for FY25.

Transcript

Speaker 1

Good morning and welcome to the UnitedHealth Group's second quarter 2025 earnings conference call. A question-and-answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded. Here is 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 amount is available in the financial and earnings reports section of the company's investor relations page at www.unitedhealthgroup.com.

Information presented on this call is contained in the earnings release we issued this morning and in our Form 8K dated July 29, 2025, which may be accessed from our investor relations page of the company's website. I will now turn the conference over to the Chairman and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.

Speaker 0

Thank you. Good morning and thank you for joining. Today, our prepared remarks will be a little longer than usual, so we will be allowing more time for your questions. As we begin, I want to recognize and thank our employees who have been so dedicated to serving our patients, consumers, and customers during a prolonged, challenging period for our business. I would like to thank our leadership team, many of whom are new in their roles, for their willingness to join me in looking hard at our businesses, getting a grounded assessment of our action plans, re-baselining our outlook, and moving a pace to advance the performance of each of our businesses. This morning, I know you are eager to get into the underlying details of our revised financial outlook, which we will do.

At this moment, I believe it's also important to convey the tone we're setting at this enterprise. More than anything, it is a tone of change and reform born out of recommitment to our mission to help people live healthier lives and help make the health system work better for everyone. It's a mission that requires a commitment to a culture of values, of service, responsibility, integrity, and humility. We pair that mission-driven ambition of reform with a keen sense of the opportunity and the expectation to perform better than we ever have. As we continue to assess the state of our businesses, it is very apparent that some require a fundamental reorientation, others require building and nurturing, and others must be reconsidered and redirected to original purpose.

We also recognize the need and the opportunity to revisit and address critical processes and fundamental business practices, both internal and market-facing. We are acutely aware we have an enormous responsibility for providing care for millions of people and for protecting the government and private programs we partner in. As such, we have embarked on a real cultural shift in our relationship with regulators and all external stakeholders. We intend to be proactively engaged, constructive, and responsive to the concerns of all stakeholders and in our engagement with them. We have the chance to reposition our enterprise as a far more modern, reliable, consumer, and provider-friendly enterprise using new technologies and approaches, and we're going to pursue that course. The pursuit of these opportunities aligns to and enables our reform and change mandate and allows us to better achieve our mission and to steadily perform better in doing so.

We are on this course against a challenging environment, which includes a generational pullback in Medicare funding set in motion in 2023 and playing out through 2026. Unprecedented medical cost trends measured in both intensity of services used as well as unit prices and more aggressive care provider coding and billing technologies. The prospects for further contraction of the Medicaid and exchange markets, the growing need to invest in the opportunities new technologies offer, and the expectation of all healthcare entities to offer a better experience for consumers, customers, care providers, and employees. Finally, the continuing public controversy over longstanding practices and complexities across the entire healthcare sector, particularly managed care, which bears the critical roles for coverage, for care management, and for pricing, for the intensity of the cost and services used in the benefit products and programs for the entire healthcare market.

As a leading provider of health services, we must help advance a better health system. We are committed to engaging in these pursuits with a sense of purpose and better partnership with all stakeholders, transparency in our business and reporting practices, and continued integrity in all we do. Beyond the environmental factors that are affecting the entire sector, and more specifically to us, we have made pricing and operational mistakes as well as others. They are getting the needed attention. Our critical processes, including risk status, care management, pharmaceutical services, and others, are being reviewed by independent experts, and they will be reviewed every year and reported on, as these processes can be reviewed at any time by outside stakeholders.

While we believe in our oversight and the integrity of these processes, wherever they are determined to be at variance with prescribed practice, they will be promptly remediated and will continue on this path. All the foregoing is fully addressable. We can steadily restore our performance to levels consistent with our mission and stakeholder expectations, all as we strengthen an institutional culture aligned to that mission and accountable for performance. Over the last 60 days or more, we have made extensive management and operational changes aligned to this agenda of reform and performance. Other such changes to leadership, to our businesses, our culture, our approaches and practices, and to our board, governance, and succession oversight as appropriate will continue to be made as we proceed through this period.

With those thoughts in mind, Tim Noel and Patrick Conway, heads of UnitedHealthcare and Optum, respectively, will walk through some of the specifics in their businesses. John Rex will discuss financial performance and the elements affecting our outlook, and I'll come back with some closing thoughts, and then we'll have ample time for questions and answers.

Speaker 2

Thank you, Steve. I want to start by emphasizing that we are approaching our business with greater humility, greater transparency, and a renewed determination to meet your expectations and our standards. The primary driver of the UnitedHealthcare earnings shortfall for 2025 is that our pricing assumptions were well short of actual medical costs. Our current view for 2025 reflects $6.5 billion more in medical costs than we anticipated in our initial outlook. A little over half, or $3.6 billion of this, is in our broad-based Medicare portfolio. About one-third, or $2.3 billion, is in the commercial business, split evenly between ACA plans and our employer business. The remaining trend pressure is related to Medicaid, most notably due to an elevated behavioral trend. In addition to trend-driven issues, the updated 2025 outlook removes about $1 billion from previously planned portfolio actions that we are no longer pursuing.

It also reflects about $850 million of other items, including unfavorable prior period items, primarily from 2024, and recognition of several one-time settlements. We know these are serious challenges. We are humbled by them and will carry that sense of humility more deeply into our culture. We also believe we can resolve our current issues and recapture our earnings growth potential. Let me now provide an update on where each business stands, starting with Medicare. When we prepared our 2025 Medicare Advantage offerings back in the first half of 2024, we significantly underestimated the accelerating medical trend and did not modify benefits or plan offerings sufficiently to offset the pressures we are now experiencing. This was compounded by the magnitude of planned exits across the sector and the extent to which we now see care providers placing further service intensity into the health system.

The increasingly flexible orientation to which our Medicare networks and plan designs have evolved over recent years left us less able to address these trends in year. On trends specifically, the increase in care activity across individual and group Medicare Advantage we saw earlier this year has now affected complex populations and our Medicare supplement business as well. Across Medicare Advantage, physician and outpatient care together represents 70% of the pressure year to date. However, inpatient utilization has accelerated through Q2, and we expect will comprise a relatively larger portion of the pressure over the full year. We continue to see utilization increases in and observation stays and consistently see more services being offered and bundled as part of each visit and clinical encounter. In short, most encounters are intensifying in services and costing more.

The higher trend is broad-based geographically and across our membership, including our large retained membership base. To put this into context, we had initially assumed Medicare Advantage medical cost trend of just over 5% when configuring our 2025 bids, in line with our normalized trend experience in 2024. We now expect full year 2025 trend to be approximately 7.5%. Medicare supplement, which typically is representative of overall care activity levels and cost trends in Medicare fee-for-service broadly, is up similarly in 2025 compared to historical levels. We expect that trend to be over 11% this year versus 8%-9% in recent years, further confirming the broad-based nature of the care activity and the coding and billing patterns we are seeing. On commercial, we are seeing higher than expected medical cost increases, particularly in outpatient care and, although to a lesser extent, inpatient care.

Orthopedic spending and pharmacy infusions are notable factors here. In the ACA business, the revenue impact resulting from a difference between the morbidity that we price for and what we experienced is the primary cause of our underperformance. One example of the elevated commercial trend is group fully insured. Their trend is approaching 11%, which is approximately 100 basis points higher than our initial expectations. Moving to Medicaid, similar elevated trends are apparent and further affected by increasing and unanticipated acceleration of cost and behavioral health, where trend is running at 20%, as well as in pharmacy and home health. We anticipate the existing rate and acuity mismatch will extend well into next year. Beyond these segment-specific factors, there are other broad drivers of higher medical cost. There has been a marked increase in healthcare cost due in part to increases in service intensity per encounter.

For example, in Medicare Advantage, higher frequency of physician rounding, testing, and related services of specialists and in settings are contributing to elevated outpatient spend. In addition to strongly responsive pricing for 2026, which I will speak to in a moment, we are intensifying our remediation actions. We have stepped up our audit, clinical policy, and payment integrity tools to protect customers and patients from unnecessary costs. These efforts ensure care is delivered in appropriate settings and grounded in safety and quality while also identifying waste and abuse in outlier coding and billing practices. We are shifting to narrower networks and focusing on more disciplined, managed products, particularly in Medicare Advantage. We have scaled our AI efforts across health plan operations, which improves the patient and provider service experiences while driving cost savings.

Lastly, in Medicaid, we continue to actively engage with state partners using both past experience and data-driven insights to show the need for immediate and more regular rate updates. Taken together, this work is helping restore our operational muscle and reclaiming executional rigor, helped by modern tools and driven by a relentless focus on improvement. Turning now to 2026, our pricing strategy is intensely focused on margin recovery and moving back towards our earnings growth targets. In Medicare, we have historically targeted an operating margin range of 3%-5%. Now, with the changes from the Inflation Reduction Act on the Part D program, which resulted in higher revenue but do not impact earnings, the equivalent target margin range is in the 2%-4% range.

We are working intensively to remediate Medicare through pricing, product design, and benefit changes that will enable us to be within the lower half of the targeted margin ranges in 2026 and advancing further in 2027. Our Medicare Advantage pricing strategy for 2026 assumes a trend approaching 10% compared to our current 7.5% trend expectation. This accounts for trend acceleration and incorporates factors such as changes in fee schedules and the continuation of higher yields from provider coding and billing practices. Considering the continued cost trends and funding pressures and the need to support margin recovery, we have made significant adjustments to benefits. Additionally, and unfortunately, given these pressures, we have made the difficult decision to exit plans that currently serve over 600,000 members, primarily in less managed products such as PPO offerings.

We have taken similar approaches for Medicare supplement, Group MA, and standalone Part D pricing for next year. We will be watching the market closely as the 2026 Medicare offerings become public so we can better assess our market positioning and respond quickly. For commercial, because renewals occur over the course of the year, we are able to price for changes more dynamically. Our pricing will anticipate higher trends continuing into 2026 and 2027. We expect increased membership decline as well as shifts into both level-funded and self-funded product categories because of higher medical cost trends. In the individual exchange business, while we are prepared to continue to participate in the majority of the 30 markets we currently serve, we will approach them far more conservatively for 2026.

We may need to make the difficult decision to exit select markets if we are unable to achieve the rates necessary for higher market-wide morbidity. Additionally, due to the projected expiration of premium subsidies across the ACA market, our membership should decline significantly, and we are mindful of the potential for adverse selection dynamics as we reprice these offerings for next year. In Medicaid, there remains a lag between funding levels and member health risk, and we expect this to continue into 2026, resulting in additional margin compression in the business, including a loss within the non-dual segment of Medicaid in 2026. Membership losses from early adoption of recent legislation are also factored into our initial views for 2026. Wherever states support responsible funding for Medicaid, we remain committed to serving people through that program and view this as integral to our mission.

The American health system's long-standing cost problem is accelerating. We are embracing our responsibility to continue to drive better health outcomes while trying to keep healthcare affordable for all Americans. The operational and pricing strategies I have described reflect our understanding of the challenges we face as a company and a society and our dedication to responsibly navigating the current financial pressures so that we can set a stable course for the future. I'll now turn it over to Patrick Conway, CEO of Optum. Thanks, Tim. Clearly, Optum's performance this year has also not met expectations, yours or ours. Echoing Tim and Steve, we are approaching this with humility and the need for deep analysis of key issues and commitment to substantially improved execution.

Serving our patients and customers is at the heart of our mission and business, and we have the opportunity to truly help make the health system better for everyone. To do that, we need to refocus on our performance discipline with a bias for action and transparency for all stakeholders. We have launched our agenda of change at Optum, starting with the evolution of our leadership team. Roger Connor brings tremendous experience in organizational execution as our Chief Financial Officer. Krista Nelson is a deeply experienced healthcare operator, now in the new role of Chief Operating Officer of Optum Health. Dhivya Suryadevara is already re-energizing product development, marketing, and service as the new CEO of Optum Insight. John Prince brings his unmatched pharmacy services experience to bolster the already compelling offerings of Optum Rx. These are not the only people in new roles, and there will be more.

We are taking these and many other steps swiftly to enable Optum to recapture its historic momentum. Let me turn now to review of our businesses. Starting with Optum Health, where improved execution is needed most, and we are experiencing the greatest pressures to our business. Our belief remains steadfast: value-based care has the potential to transform healthcare. Yet, even as we struggle to align this model with new funding dynamics, it consistently delivers better outcomes. Tim highlighted the challenges of rising healthcare unit cost, accelerating service volumes, and provider coding intensity, which further underscores that value-based care remains the most effective method for compensating providers to improve and sustain a patient's health in contrast to simply increasing the volume and price of services.

Research consistently supports this premise, showing Medicare Advantage patients in fully accountable arrangements are 20% less likely to be hospitalized and experience 11% fewer visits compared to those in fee-for-service. We are early in our value-based care journey. We know we have real and self-inflicted executional challenges, and we bear the responsibility to get this right, recognizing that urgent work lies ahead. We have spent a decade assembling a care delivery model today serving nearly 20 million patients across three lines of business: value-based care, fee-for-service care delivery, and services, the latter two of which help further enable value-based care. The first category, value-based care, has grown to account for approximately 65% of Optum Health's revenues and serves 5 million patients in fully accountable arrangements. I'll provide more details on this in a moment, but first, we'll detail the gap to our original Optum Health outlook.

Overall, Optum Health earnings in 2025 are approximately $6.6 billion below our expectations. To break this down, approximately $3.6 billion, or 55%, is concentrated in our value-based care business with three principal drivers of roughly equal weight. Number one, the mix of enrollment, including more complex and dually eligible members and more new-to-Optum patients who are underserved. Two, accelerated medical trend, particularly physician and outpatient in Medicare and behavioral in Medicaid. Three, underestimation of new members' risk status as they come into our care and suboptimal execution of the V28 risk model transition. Second category, another $2 billion, or 30%, relates to the decision to discontinue previously planned portfolio actions. About $1 billion, or 15%, is from a combination of lower service volumes in our services businesses, some non-recurring prior period impacts, and the slowing of tuck-in acquisitions.

For example, on lower service volumes, in 2025, we plan for approximately 20 million fee-for-service visits in our care delivery clinics, and we are tracking 19 million visits, or 5% below this expectation. Let me dive a bit deeper, specifically into factors affecting our value-based care business. First, V28. This industry-wide shift is effectively a price reduction that we now estimate created an $11 billion headwind over three years for Optum Health, with $7 billion that will be realized through 2025. That is $2 billion and $1 billion, respectively, more than our initial estimates, while we also overestimated the impact and mis-executed the planned efforts to offset these V28 funding cuts. Second, enrollment mix. Consistent with Q1, in 2025, we have an unanticipated number of new-to-Optum Health patients who are previously underserved. These new patients are largely in markets where numerous plan exits occurred.

They include complex patients who require time to be managed effectively by us. This mixed impact implies negative margins near double digits for these new patients, which will improve meaningfully in 2026. Lastly, the elevated medical trend we recognized in the second quarter was exacerbated by insufficient pricing within UnitedHealthcare and other payer partners, pulling through in the form of insufficient capitation rates for Optum. Despite these headwinds, Optum's fully accountable value-based care business is delivering an operating margin of about 1% in 2025. This compares to full-year operating margins of over 3% in 2024 and nearly 5% in 2023. A large part of the mis-execution addressing the V28 funding cuts was due to non-standardized and overly localized management approach, which we are addressing with urgency. We are driving to a consistent and much more concentrated regional operating model with four market leaders.

We are evaluating our position in each market. We will shift risk back to the original underwriters until we have the hardened capacity to navigate it under value-based constructs. Optum will be much more disciplined in taking risk arrangements in product designs and constructs that allow value-based care to have its intended impact. The margin compression reflects significant growth in new membership cohorts, with nearly 40% of patients served today having come in since the beginning of 2024. It also reflects the pull-through from Medicare Advantage pricing dislocation Tim described and the V28 payment cuts. Regarding patient cohorts, in our value-based care practices, margins improve the longer patients remain. Our most mature value-based care cohorts, those from 2021 and prior, are operating at an estimated 8+% margin in 2025. Those in 2022 and 2023 cohorts are operating at a 2% margin.

The 2024 through 2025 groups are at negative margins. Strong physician engagement, appropriate medical diagnosis, and improved consistent quality of care continue to drive year-over-year improvement in a cohort's financial performance and in their health. It is taking too long, and there is too much variability in results among practices, and we are actively addressing those factors. That is the overall picture of what is happening. I'll turn now to remediation. Our plan for improvement has four key elements. First and foremost, we are improving the implementation and consistency of our clinical model, which is anchored in primary care and supported by wraparound services that continue to outperform on quality and cost. Second, we are committed to margin recovery in value-based care. We have aligned our 2026 benefits and product portfolio and footprint with our payer partners to address the final year of V28 headwinds.

We plan to cease arrangements for about 200,000 patients, largely in fully accountable PPO products, representing approximately 40% of the PPO patients we serve today. We expect to keep narrowing our exposure beyond 2026. We are increasing rates to reflect the higher risk profiles and acuity we are seeing and expect to continue. We believe the combination of these activities will mitigate about half of the remaining $4 billion V28 headwind in 2026. The remainder of our offset will come from operating cost discipline and consistent execution of our care programs, which enhance engagement, diagnosis accuracy, and quality outcomes, and reduce overall cost of care. With 2026 being the final year of V28 phase-in, you should expect 2026 value-based care margins to remain relatively consistent with the 1% margin we are achieving this year and then begin to advance again in 2027 and beyond.

We are optimizing our portfolio of clinical practices. We are managing our fee-for-service and fully accountable risk practices to align with performance expectations, transitioning to partial risk or service arrangements where necessary, and exiting fully accountable products in certain markets. Third, we are aggressively advancing operational disciplines across our portfolio of businesses. The more concentrated operating model I mentioned earlier plays into more standardized approaches, predictable outcomes, and lower operating costs. We will complete the final stages of our technology integration, which will enable meaningful advances with emerging technologies like AI to drive efficiency gains. For 2026, we expect to deliver almost $1 billion in cost reductions. Finally, beyond value-based care, Optum Health also includes fee-for-service care delivery, including home care, ambulatory surgical care, and medical practices that are not yet fully accountable but support value-based care. These together account for 15% of Optum Health's revenues.

Most of these businesses are performing well and operate at low double-digit margins. However, the primary care and multi-specialty medical practices that are not yet fully accountable are running at negative margins, generating hundreds of millions of losses this year alone, placing the overall fee-for-service care delivery business in the mid-single-digit margin range. We are actively working to improve payment yields and productivity while growing these high-value services and fee-for-service margins. We are targeting growth for these services, which are projected to deliver strong year-over-year earnings growth in 2026. The third component of Optum Health services is comprised of businesses including managed behavioral health, military and veterans, and health financial services. These account for about 20% of Optum Health revenues and combined have an almost 10% operating margins.

Overall, at Optum Health, while we expect continued pressure for the rest of this year, we anticipate meaningful improvement in our operations and with earnings growth in 2026, albeit with a longer path to recovery in our value-based care business. We now see Optum Health long-term margins in the 6-8% range and at about 5% for value-based care specifically, as we see significant growth opportunity for the decade to come. The overall blended margin will reflect the early-year investment losses generated by new cohorts. Optum Health is early in its development, and mis-execution is a clear setback, but the long-term growth potential and expectations remain intact and significant. Moving to Optum Insight, there is a great need and appetite for technology and data products to help the health system perform more efficiently and effectively. Yet Optum Insight has not fully capitalized on this opportunity.

That's largely due to an unfocused suite of products, lagging innovation, and longer-than-expected impact from last year's cyber attack, which unfortunately came at the expense of being able to drill down on business innovation, operations, and growth. As I mentioned earlier, we have a talented team in place now and continue to recruit talent to develop the next generation of products rooted in AI. As it relates specifically to 2025, we are adjusting our outlook downward by $1 billion. About half of this is due to more gradual recovery than initially expected in some of our volume-based businesses due to changed healthcare and one-time cyber-related expenses. The other half is due to pausing previously planned portfolio actions so that we can prioritize growth and innovation across our broader portfolio. At Optum Rx, client retention remains high and consistent with past years.

We expect revenue growth of $18 billion, or 13%, and earnings growth of just over $200 million, or nearly 4%, driven by low-margin specialty drugs. Compared to the strong revenue growth rate, our earnings growth has been constrained by four main factors. The removal of portfolio actions from our plan is roughly a $150 million headwind. Another $50 million is from a couple of ancillary businesses where we are taking aggressive corrective actions and adjusting plans. The impact of the initial launch phase of our private label business, Nuvela, is a roughly $150 million headwind. As it matures, we see Nuvela delivering affordability for our clients and consumers and strong earnings for Optum Rx. Additionally, GLP-1s, which can benefit appropriate patients, continue to impact earnings, representing a $160 million headwind for our pharmacy services businesses.

After three months in this role, I want to thank the thousands of people serving in Optum and to let external stakeholders know that the problems are fixable and that Optum will continue to drive long-term growth and make the most of our opportunity to serve people. I'll turn it over to our President and Chief Financial Officer, John Rex. Thanks, Patrick. I'll first walk through second quarter results, then provide some color around the underlying assumptions within our re-established 2025 outlook. Starting with the second quarter, UnitedHealth Group reported revenues of nearly $112 billion, a 13% increase over the prior year, which reflected growth across UnitedHealthcare and Optum. Adjusted earnings per share of $4.08 was below the same period last year. This was due primarily to the pricing and medical cost trend factors at UnitedHealthcare and Optum Health. It included about $1.2 billion in discrete items.

A little over half reflects the recognition of unfavorable impacts to our ACA exchange offerings, which I will describe later in more detail. The remainder is the settlement of several outstanding items which have been in dispute or for which collection has recently become questionable. Most of these items arise from prior years. The full-year 2025 outlook we've offered today accommodates $1 billion in additional potential such items that we may seek to resolve in year. Now, on to business overviews. At UnitedHealthcare, second quarter revenues grew by over $12 billion to $86.1 billion, while operating earnings declined by $1.9 billion to $2.1 billion, primarily due to the medical trend factors Tim discussed. Within our Medicare businesses, year-to-date Medicare Advantage growth is 650,000 people, including those who are dually eligible for Medicaid and Medicare.

As noted, the second quarter results reflect just over $600 million of unfavorable impacts from our ACA exchange business, which includes acceleration of anticipated second-half losses with the establishment of a premium deficiency reserve. This is due to the higher patient morbidity that is pervasive across the entire exchange market. Given competitive market dynamics, we have less member growth within our commercial offerings than initially anticipated. ACA exchange drives about one-third of our reduced commercial risk member growth outlook for 2025, with group insured comprising much of the rest. As outlined earlier, our Medicaid offerings continue to experience pressure from the lag in state rate updates relative to the health status of the members being served. Our state partners remain highly engaged in ongoing rate conversations, and we are closely attuned to the federal funding changes and the continued pace of medical cost trends, particularly in behavioral health.

Moving to Optum. Optum Health revenues were $25.2 billion in the second quarter, a decline of $1.8 billion from last year. This was driven by the previously noted contract adjustments and the effects of the Medicare funding reductions. Optum Health now expects to add 300,000 new value-based care patients this year compared to the initial 650,000 outlook, as it seeks to focus on improving operating performance. As noted, we've updated our long-term target margin objective for Optum Health to the 6-8% range. Optum Insight had revenues of $4.8 billion, an increase of $285 million, or 6% year-over-year. We continue to progress on customer recovery following last year's cyber event, albeit pacing more slowly than expected, and this is a component of the reduced full-year outlook. The contract revenue backlog at the end of the second quarter was $32.1 billion.

Optum Rx's second quarter revenues grew $6 billion, or 19% over last year, to $38.5 billion, driven by new customer adds as well as continued contribution from specialty products. Total adjusted Scripps were 414 million, compared to 399 million in the year-ago quarter. Moving on to 2025 guidance. Our adjusted earnings outlook is at least $16 per share. Revenues will approach $448 billion, growth of 11% over 2024. We now expect a full-year medical care ratio of 89.25%, plus or minus 25 basis points. This compares to the initial 86.5% midpoint we offered at the end of last year, with the increase driven by the factors discussed. Within this, seasonal pacing compared to historical measures is impacted somewhat by the Part D coverage gap modifications due to the Inflation Reduction Act.

With first-half results at the midpoint, that places the second half at just under 91.5%, with the fourth quarter expected to be the highest, and at this distance, a relatively proportionate distribution on either side. The full-year outlook contemplates a total of $1.6 billion of potential settlement items, an increment of $1 billion over the $600 million recognized in the second quarter. Our tax rate for the year is now estimated at about 18.5%, affected by our revised earnings outlook as expected benefits remain steady while earnings declined. The lower tax expense in the second quarter reflects the year-to-date recognition of the updated full-year effective tax rate. We expect the second-half rate to be just over 20%. Full-year 2025 cash flows from operations are expected to be about $16 billion, or 1.1 times net income.

In June, we increased our dividend by 5%, and we will strike a balance as to how we use capital over the near term, being thoughtful about maintaining a strong balance sheet and credit rating, and mindful of long-standing commitments, including the pending Amedisys transaction. Our updated share count of 912-914 million compares to the original outlook of 918-923 million and considers only share repurchase completed earlier this year. We will continue to balance and assess our capital priorities as we progress to returning to the performance levels we know we can achieve. With that, I will hand it back over to Steve before we head into Q&A. Thanks, John. This is a challenging year for our enterprise, but I feel strongly we can overcome these challenges as we've done before. I can see the depth of the commitment of our team.

We are regaining the intensity, the precision, and the executional disciplines required to perform consistently and reliably. Our customers and our shareholders deserve it, and the health system expects us to function at our full potential. As we look towards 2026 and beyond, we expect the efforts we discussed throughout today's call to steadily improve our performance. It begins with respecting pricing basics, advancing our foresight acumen, and just better, more intense, more decisive overall management. We will be driving better business practices, better consumer and provider experience, and accelerating investments in key areas to both strengthen our foundations and modernize our businesses anchored in practical innovations and scaled AI applications. We are continuing to evaluate the investments we need to make in the near term to meet our long-term growth potential while acknowledging the challenging environment in the year ahead.

As I mentioned at our shareholder meeting in June, we're rebuilding the trust through both change and through increased transparency. That includes work to ensure a wide range of stakeholders have confidence in the integrity of our company and our business practices. This work is moving forward in our assessment of key policies, practices, and associated processes by the end of the third quarter and our first performance measures report in the fourth quarter. We have retained independent experts to oversee and assist in these reviews, including the Analysis Group and FTI Consulting. We will use this to continually strengthen and advance our strong compliance environment. Looking to 2026 at this distance, I would expect solid but moderate earnings growth. As we look further ahead, we see our earnings growth outlook strengthening quickly in 2027 and pacing steadily upward over the succeeding years. Now, let's open it up for questions.

Operator, please. The floor is now open for questions. At this time, if you have a question or a comment, please press Star 1 on your touch-tone phone. You may remove yourself from the queue by pressing Star 2 on your touch-tone phone. We ask you to limit yourself to one question. If you ask multiple questions, we will only be answering the first question so that we can respond to everyone in the queue this morning. First question for you. Our first question comes from A.J. Rice with UBS. Hi, everybody. Maybe just to drill down a little bit on Optum Health, if I could. You're talking about the rate increases or how you're pricing for a much higher trend in M.A. on the insurance side. I would assume that has some trickle-down benefit to Optum Health.

When you're talking about having margin consistent with this year, next year on the physician piece, does that not contemplate some benefit from that repricing? And maybe as well, talk about your discussions with the outside plans that Optum Health contracts. I mean, are you seeing them make similar steps toward pricing for a more reasonable margin next year that you're trying to do at UHC? It certainly does, A.J. Patrick, do you want to comment? Yeah. Thanks, A.J., for the question. Let me take the sort of pieces and parts. So yes, in terms of the pricing across payers, UnitedHealthcare and other payers, as they adjust pricing, that flows into our capitation rates. That is a tailwind versus the headwind we saw this year. We're also working with our payer partners on benefit reductions, which we talked about.

Significant benefit reductions across payer partners and a much tighter, transparent, bidirectional dialogue in this year, which I think sets us up better for next year. Those combinations, we think, mitigate 50% of the headwind of V28, which, as you heard, we sized at $4 billion for next year. The other two components that will mitigate the other 50%, one, operating cost reductions, where we continue to hone our model using AI and other tools, generating operating cost reductions. Next, deep engagement with the patient cohorts we see. As you heard, as we mature and remain stable in those cohorts, you have increased performance over time. As you pace into 2026, as you heard, we believe we can maintain those margins at the 1% level. Obviously, we'll continue to do the work each day to see if there's any upside to that potential.

The approach this year with our payers has been tight, close, and I think will bear benefits going into 2026. Thank you, Pat. Next question. Our next question comes from Justin Lake with Wolfe Research. Thanks. Good morning. Appreciate all the detail. Wanted to focus on the run rate out of 2025 into 2026. It looks like you're about $5 of earnings for the second half. I add back about $1 for the discrete items that John mentioned. You're about $6. Given typical seasonality, maybe that's like $13 of run rate earnings. Wanted to see if that's reasonable math first. What are the moving parts that drive EPS growth specifically? Maybe you could talk to where your M.A. margins are this year versus where you expect them to be next year. Thanks. Hey, Justin. Good morning. It's John Rex.

Just a few comments on that. Yes, your overall kind of assessment of second half is correct. A few things I'd point to, and then I think I'd ask Tim and Bobby to comment a little bit also on as we talk about Medicare Advantage margins and where that goes. I mean, the key elements here. Yes, we are kind of looking at getting some things behind us in terms of the actions we're taking. We anticipate taking in the second half. As you know really quite well, 80% of our premium revenues reprice on January 1. Very significant impact in terms of that as you move into that next year in terms of the impact that creates in terms of off-the-run rate that you see going into the second half.

I'd ask Bobby to maybe comment a little bit specifically on your piece on Medicare Advantage. Yeah. Yeah. Thanks, Justin, for the question. Thanks, John. Justin, when you think about 2026 or 2025, where we're likely to kind of pencil out for the balance of the year here is more in the low end of the new normal range that Tim outlined in his prepared remarks. Think kind of the 2-2.5% range, and I'm talking about kind of all broad-based UHC Medicare in that bucket. Given the actions that we're taking for 2026, the meaningful benefit cuts, the planned reductions, the trend that we're pricing towards, we do believe that'll allow us to overcome some of the headwinds, again, tied to V28 funding cuts and that embedded trend, and expand those margins to a range of 2.5-3%.

Think about us then getting to kind of the midpoint of that range by 2027 and advancing from there. Thanks for the question. Justin, yeah, really kind of the math that you're looking at here. Continued trend accelerations that we look at through the end of the year while our revenues are staying the same. Then we get to January 1, where the vast majority of our premium revenues reset, and that's really the impact that you're seeing in terms of as you look at that 2H run rate and where we come out. Thank you. Next question, please. Our next question comes from Josh Raskin with Nephron Research. Thanks. Good morning. I appreciate some of the commentary you've made on 2026 and 2027 even. Do you have an updated view on your long-term EPS growth rate?

It was formerly cited at 13-16% at the enterprise level. Then I heard the target margins obviously updated for Optum Health, but do you have updated target margins for maybe UHC in its entirety as well as the other two segments within Optum? Yeah. Thanks, Josh, for the question. As you can appreciate, as we're just coming back on stream, in the near term, our growth rates do not reflect, I think, the potential of this enterprise. It is somewhat academic, but I expect we will pace back steadily to low double-digit ranges and continue to advance from there. I think, importantly, the framework for our long-term growth outlook remains very much intact.

Reasonable year-over-year organic growth from within well-run businesses, the compounding effect of deliberate productivity gains, the compounding effect of capital applied in the form of share buybacks as we return value and capital to shareholders, and the compounding effect of capital use in evolving the business model toward a more expansive view of the healthcare markets that is less fragmented, more integrated, better serve consumers and the overall system. The components of that should allow us to continue to grow at the strong levels we've experienced in the past. That's our outlook on it. Josh, just maybe a little bit on margins. Maybe Tim has a comment, and he made some comments on Medicare in particular with the IRA changes. Tim, maybe if you just could reflect on those. Good morning, Josh. Thank you.

We talked about the reframing of the broad-based Medicare Advantage targeted margin range, really kind of really not all that different, just the mechanical implications of more revenue coming through the IRA without necessarily any incremental earnings. As Bobby just talked about, we see that pacing to the closer to the midpoint in 2026 and getting there in 2027. On the commercial business, 2026 will be a year where we'll not get all the way into our target margin range of 7-9%, but certainly see a path to get there thereafter. Really no change bottom line to the targeted margin range across UHC. Josh, any more? I think just maybe Tim's comment that he made on the call in terms of how he thinks about Medicare Advantage with the addition of those IRA dollars and such.

It does not change really the productivity of the business. It is just that piece of the revenue impacts the margin calculation that came in, a piece of revenue that came in without really any earnings attached to it when it came in. Similar profile. In general, I do not think we have actually ever seen the full portfolio of Optum perform to its full potential. I think that should be strongly additive as well as the margins of the Optum Insight businesses, the strong margins that are coming off the platform of more technology-enabled services. Those elements play in, but it is so early in our restart that to me, the discussion of a long-term growth rate seems somewhat academic other than the framework for our historical outlook remains fully intact. Next question. The next question comes from Kevin Fischbeck with Bank of America. Okay. Great. Thanks.

In your commentary around the guidance reduction, you mentioned across a number of businesses that you had portfolio actions that you're delaying. Can you talk a little bit about what exactly those types of actions were across the businesses? Are those potential savings still something that you think you're going to execute on, or are those not the right ways to think about as adding those up and then coming up with an earnings power number at some point over the next couple of years? Thanks. Clarify the question. I'm not sure I understand. Yeah. Portfolio actions. You mentioned a number of things like when you're trying to bridge between the Medicare Advantage results this year versus what you assumed would happen. I think you put some buckets in there saying that you were going to do some things, and then you decided to put them on pause.

Is that not the right way to think about it? These are on transactions? Yeah. That's a good question because I do think that needs to be clarified. The company pursued kind of an evaluation of the portfolio of all of its businesses last year. We're taking actions to position some of the businesses and divested some that I think is evident in our results. As I came in and looked at that, my orientation is to pursue more the performance of the business portfolio that we have, make those businesses perform to their full potential. I think that portfolio needs to be considered in light of what I think the real performance potential is. We stopped that entire activity. Some of that was considered in the outlook in the current year, and that has been withdrawn completely.

We are focused on the performance of the businesses that we have, and we will pick up portfolio assessment somewhere down the road. Right now, our focus is on the portfolio that we have, and we have removed any of that from our outlook. Thank you. Next question, please. Does that answer? Thanks. Next question. Kevin, does that answer your question? Actually, maybe just to clarify. Are these businesses that you thought you were going to be losing money, and you are now going to keep them and focus on the earnings power going forward? Or was there something around gains on sales or things like that that you were going to recognize from divesting things that you are not going to include in the guidance? Thanks. I think that is a much more complex issue, Kevin. I think the motivations for those transactions all have different reasons.

Some of those businesses we thought were better in the hands of others were what's thought to be, let's say, not core. We are really not debating that right now. I think all solid businesses, and we will continue to run them and optimize their performance and then consider their long-term standing in our portfolio. Next question, please. Our next question comes from Lance Wilkes with Bernstein. Great. Can you talk a little bit about the management process and strategic review process that you have undertaken with the company and where you are to date with that, maybe providing some insight into what the management process was previously and the changes you have made to it? From a strategic review process, would you say you are completed with any sort of strategic review, or are there any sort of timeline associated with future strategic review? Thanks.

I'm not sure I know what you mean by strategic review, but just to kind of thematically address this, probably just 70-plus days in, kind of returning to what I would call very basic fundamental discipline. So much greater intensity around depth of review of the businesses, underlying financial levers, etc., core of the economic levers in the businesses. Basically, just a much more intensive monthly management review of business performance, not just on financials, but on operating metrics, on relationships with the external stakeholders, on future potential, on the progress made on remediation efforts and programs, offsetting some of the headwinds that we have discussed this morning, like V28 and so forth. Just a really comprehensive business-by-business review and assessment of the performance prospects of the businesses, I'd say, relatively in the near term.

Much more broader engagement of the management team and engaging our resources across the enterprise to take just a very fresh, objective look at all of the businesses, the progress made in terms of their undertakings, and maybe refocusing those things to things that, let's say, a more narrow, more concentrated agenda of priorities, faster decision-making, changes in people. There have been, I think, as Patrick described, pretty far-reaching changes across the entire Optum portfolio. That is still in motion across our other businesses and across corporate. I am just basically rambling to give you a sense that it is a much more intensive, everyday kind of engagement. We have returned to monthly business meetings. We are focused on six underlying directions along those lines. The leadership team has really engaged exceptionally well.

We have returned to work across the enterprise, just to give you an example of things like that. I just think there is a new tone and a new expectation setting in. We are going to continue to drill down on these businesses and get much more granular, particularly as we get in and complete the 2026 planning process. I think that gives you a feel for it. Great. Thanks. Sure. Our next question comes from Lisa Gill with JPMorgan. Hi. Thanks very much. Good morning. Steve, when you talked about 2026, you talked about this steady improvement, but you also said you need to evaluate investments. How should I think about that for 2026? Are there incremental costs that you need to bring online, other investments that you need to make in the business as we think about 2026?

If we do have incremental investments in 2026, how do we think about the returns on those investments and the timeline? Coming into kind of returning to this environment, you obviously looked at particularly with the results at the cost structures, the organizational approaches that have been taken, and so forth. I think there are meaningful cost opportunities within the enterprise, and we are pursuing them with urgency. I also believe that we should be balanced that there are areas that we have underinvested, and they include areas of Optum Insight where Patrick talked about the performance challenges there. Optum Insight, I think, can be a remarkable business, but we need to pay more attention to it, make sure it has stable and deep leadership. We need to make the investments in updating the product offerings, which are largely a portfolio of point-to-point solutions.

With the technology capacities we have and the expertise we have, make them much more compelling end-to-end kind of impacts. That would be just one example. I think our AI agenda, Sandeep, has gotten real traction on that agenda, and I intend to accelerate it to really infuse this entire enterprise with an AI-first orientation and also use that as a means to develop the capabilities to, again, revitalize products really across the enterprise. I'd also tell you that, again, in what I'll view as Optum Insight, Divya, who's leading that business, the fintech agenda for that could also be compelling and has also been underinvested in. We have an excellent and distinctive platform there, and we need to push forward on that. I think there are so many areas of opportunity that really are near-term for us. Do I think they will translate?

I think they'll translate into good contributions for 2026, but I think not only do we need a little money, we need a little bit of time. I do think 2027, 2028 is really where you're going to see acceleration in those, for sure, in 2027. Does that give you a feel for those kinds of things? I don't know, Patrick or Divya, if you have other commentary. Just briefly building on what Divya said, what Steve said, and then Divya, feel free to add on. Look, I think Optum Insight and Optum Financial and the AI agenda are a large area of opportunity. As we interact with clients and customers, we hear that from payers, providers, others. They want our support in those areas. I think it's both external and internal.

Internal on cost savings, external on growth and innovation, as Steve alluded to. Divya, turn it over to you if you want to add more. Yeah. Lisa, coming into this business and just giving it a fresh look, there is a lot to be optimistic about in both of these businesses, Optum Insight and Optum Financial. There are some structural tailwinds when you think about it. Firstly, as Steve said, payers and providers are looking for tech-forward solutions to help solve their problems and the headwinds that they face. Coming in, I'm finding that we have deep customer relationships and domain knowledge that'll help us do that. On top of that, combining Optum Insight and Optum Financial, we're able to create unified solutions that are going to offer the market a lot more financial flexibility, and that's something that the market really needs.

What we are doing is taking all these trends, and we are coming up with a product portfolio that is AI-based. We have already launched this year an AI-powered RCM solution. Later this year, we will be launching an AI-powered real-time coordination of benefits. Think of this as early innings in our product journey, and we are going to have more launches coming out in the coming quarters and years, which makes me very optimistic about the future of the business. As Steve said, this is not an area we have focused in in the past, but we have the right strategy, we have the right investments, and we have the right team to go execute it. Thank you. I will just make two other comments, and one pretty basic.

That is you come in and you take a look and you see cost opportunities for sure and starting at corporate and the corporate versions of the business units. You basically are sitting back saying, "We're going to pull those back, and we're going to make the investments in the businesses that we think can produce remarkable performance for us going forward, high-margin businesses, etc." That plays into the long-term growth view. That is if we execute on those, which have always been in our strategic sites, the contributions of those can be distinctive and plays into a very positive long-term growth outlook. Next question, please. Thank you. Our next question comes from Stephen Baxter with Wells Fargo. Yeah. Hi. Thanks. I think you suggested the long-term target margin for value-based care is now 5%.

I think this is also what you suggested the business earned as recently as 2023 before the onset of V28. It just might be helpful to better understand, I guess, what were the old value-based care target margins to compare the 5% to? I heard you loud and clear talk about expected stability in 2026. Can you better help us understand the margin drivers beyond 2026, with the exception maybe of the AMA repricing, which we already understand, to get back to that 5%? Thank you. Yeah. Maybe we'll start with Patrick, and then if John wants to comment about kind of the change of perspective on margins there. Patrick. Yeah. Thanks, Steven, for the question. You did hear correctly. Optum Health margin all in 6-8%. Value-based care, as we sit today, estimating around that 5% level.

Really, the issue is the significant revenue hit to the system with V28 and what that meant and adjusting the impact. I'd point you back to the cohorts that we called out. I think this is critical. In years one and two, which is about 40% of our membership as we stand today in 2025, negative margins. Years three to four, cohorts, 2% margins. Year five plus, 8-plus % margins. If you look at the progression as we focus on taking risk in markets that we're confident in our ability to perform and in products, primarily HMO, confident in our ability to perform, focused on employed and contracted positions, you should see those cohort shifts. Years one to two will be more in the range of 25-30% of the portfolio. Years five plus, more 40-plus %.

That gets you to that five range in terms of margins. As you heard on the services businesses, we've got services businesses often with a margin around 10%. We'll continue to grow those. I'd call out in care delivery fee-for-service, we have an opportunity for both growth and margin improvement. Home health, low double digits, surgical centers, in the range of 20%. In care deliveries in our clinics, we've got opportunities, especially in some regions, to improve performance, improve that margin portfolio, and improve the performance of the care delivery service bucket. Steven, considering the change in the Optum Health margin target, most of that is driven by really the value-based care, the value-based care perspective.

What is going on there is really we are being a little more circumspect about how long it takes to get these practices into the zone that we need them to be in. The appropriate amount of time to get them performing as they should perform, that is a component there. The conversion for those that are still mostly fee-for-service and getting those into a position where they can actually also start becoming fully accountable practices, important elements in that. This perspective that at 5 million patients served today, the addressable market is much, much larger than that. We will be continuing to do this for a decade, as Patrick made and has stated in his prepared comments, and the investments that that takes.

A little more circumspect about the investments that we need to put in to bring these into fully production. Patrick noted that some of the longest-standing vintages or cohorts of members are performing at 8%+ margins. We're giving ourselves more time to get there and also giving ourselves times, more investment room, maybe echoing a little on what Steve said in terms of the investments we need to make into getting them fully ready and to be performing. We'll be making these investments for the next decade as we grow this business. Or more. Six to eight becomes a much more rational and better guidance outlook. Good question. Thank you for asking it. Next, please. Our next question comes from Sarah James with Cantor Fitzgerald. Thank you.

Can you talk about any changes you've made in your management review process of underwriting assumptions and conservatism and the independent party review that you talked about? Does that involve any of your underwriting process? Thank you. Yes. First, I'll have maybe 10 comments about kind of underwriting perspectives as well. Maybe then Dan Schumacher, because from an enterprise point of view, we are looking at, let's say, strengthening underwriting and making sure that we are taking in a total enterprise view from an underwriting point of view. Tim, you want to start? Yeah. Thanks for the question, Sarah. With respect to underwriting and the processes associated with that, we still feel like we have very strong people, processes in place to submit product filings, to analyze and assess our business.

I think that's one of the reasons why we have a very clear view on what's happened in 2025. If there's one change, the change would be that I think we're a little bit more respectful of the environment that we're in and the dynamic nature of it. We're contemplating that as we think about our pricing in all of our businesses, commercial, Medicare. We're going to use those data and analytics on the Medicaid side to approach our partners, our state partners, with data-driven insights as we talk about how to configure rates appropriately moving forward so that revenue matches the new acuity of these populations. No fundamental change in the processes in people. We're very strong there.

These analytics will, frankly, drive the approach that we're seeing, which I think is appropriate and respectful of what's going on broadly in the healthcare industry. Dan. Good morning, Sarah. This is Dan. At the enterprise level, we are working to strengthen our forecasting process. We've implemented an internal audit review that examines our guidance and the work that we put into that. We are also strengthening our actuarial resource base. To Tim's point, we'll be looking at the underlying trend builds across the company and across membership cohorts, as well as the revenue composition. Obviously, revenue is complex when you think about the interactions between risk model changes and so forth. We will be doing that as well.

Likewise, building out and strengthening our analytics, taking advantage of new approaches, working with Sandeep on the AI front, and pulling in signals earlier and being able to adapt to those more quickly and then propagate them rapidly across the enterprise. Those are some of the things that we have underway. Yeah. I think we already use third-party experts in our processes. That would not be anything new. I think we probably use as much or most of the resources in the marketplace along those lines and have for years. At the end of the day, as those processes come to closure, judgments are made. Judgments are made about market reads and how markets are predicted to perform. I think those judgments are some of the areas that are kind of sensitive in terms of our outlook right now.

The oversight of those judgments and the conservativeness of them is also something we are taking into place and broadening those decisions across the enterprise. A good question, but it is definitely among the processes that are under review across the enterprise. Our next question comes from Andrew Mok with Barclays. Hi. Good morning. Wanted to follow up on Medicare margins. If we think about the three patient populations in Medicare Advantage, retail, group, and special needs, can you compare the relative margin profiles and different paths of margin recovery for each, including which population is most addressable near term? Thanks. Please. Yeah. Hey, good morning, Andrew. Bobby here. Again, overall margins for 2025, think about 2%-2.5%, 2026 expanding to 2.5%-3%.

Yeah, we talked about early in the year some of the pressures that we were seeing in the group business in particular with the trend pressure kind of overweight in that area. I would say that phenomenon has continued. We continue to see certainly pressure on the medical side across all populations, but that one in particular has been elevated. Group, as you kind of know, does have the opportunity to reprice each year, not dissimilar from individual MA. We are pursuing those discussions with our group customers. Think about the majority of those being able to be repriced on a given year. That is absolutely kind of the path that we're moving down. On the retail and SNP portions, I would say both performing generally in line. Obviously, more of our growth this year is coming in both the DSNP and CSNP space.

We saw that in AEP. We've continued to see that as the years progressed. On balance, that growth is accretive to the enterprise. Those are areas that we're going to continue to focus. I think we have the broad care management tools really that kind of best equip us in partnership with some of our value-based care providers like Optum to really effectively manage that population. That is going to be an area you continue to see us lean into heavily and bring the full capabilities and assets of the enterprise. On the retail side, we talked about, obviously, the different approach we're taking to trend for 2026 and the different approach that we're taking to the products, the benefits, exiting a significant number of plans and obviously impacting, as Tim noted, about 600,000-plus members. That is predominantly in the PPO space.

Think about roughly a third of those as kind of full market or sub-market exits. Meaningful adjustments coming both on the individual side and the group side to help advance that margin progression for 2026. Thank you. Next question, please. Our next question comes from Anne Hines with Mizuho and Securities. Great. Thank you. I do not know if you addressed it on the call, but can you remind us what your target margin is for Medicaid and what you expect it to be in 2026? And then just to follow up, John, you had talked about 80% of the premium next year will increase because the pricing cycle should improve in 2026 for the industry. Can you give us a compounded increase that you expect? That would be great. Thank you. Michael. Thank you for the question.

For 2025, we expect break-even performance for our non-dual or core Medicaid business under Community & State. Our 2025 Medicaid earnings outlook is down modestly due to persistent high medical trend stemming from care usage levels, but really higher than we realized in the final stages of redetermination. Also, increased service intensity per encounter as identified within our claims data. We do expect some degradation with our cost-benefits ratio driven by the 12-18 month lag that we see in our core Medicaid rating cycle process. As we think about 2026, we contemplate negative margins at that time, anywhere from negative 1% to negative 1.7%. Thank you for the question. This is John following up on the rest of your question here, a few comments. I'm going to ask some of the UnitedHealthcare people to contribute to this here.

As Bobby and Tim have explained, a lot of what happens in Medicare Advantage, you know, is the benefit redesign and then the cost trend assumptions are building in. They have talked to looking towards about a 10% trend for 2026 with the actual rate of premium increase determined by what CMS has come out with. Let's get a little deeper into that and talk about specific components, maybe even getting to commercial and some of the things that we're doing in there. Tim, I'll lead it with you and just go ahead. Yeah. So answering the question around our long-term margins in the Medicaid business itself, excluding the dual special needs plans in community and state, the rated margin that we attempt to attain with the states is around a 2% margin.

Historically, we've talked that blending to a 3-5% margin within the community and state segment. Given the adjustments we've talked about around Medicare Advantage broadly, moving from 3-5% to 2-4% because of the impact of the Inflation Reduction Act, we'd expect that to be mirrored in the community and state growth targets. So 2-4% still in community and state are adjusted to in community and state, and Medicaid would be kind of a 2% targeted margin. Ann, in terms of the point you were making about kind of premium increases one would expect in 2026 as you go into that overall on the 80% of premiums renewal.

Bobby and Tim shaping up what happens in kind of those businesses, those government program businesses and the premiums coming from those customers and then what they're doing and the benefit design underneath there. Maybe it'd be helpful if Dan Keeter commented a little bit on some of the pricing expectations in commercial markets and what he's seeing there because that's another important part of what's driving that premium increase in that marketplace. Yeah, John, sure can. In 2025, as noted in Tim's remarks, trend in the commercial group business has materialized 100 basis points above our expectation, which has created some trend pressure. I'm sorry, trend and margin pressure. We are well below our margin range for the commercial business of 7-9% this year.

As we look to 2026, we're pricing for margin recovery in both the exchange business and the group business. This will lift our margins to be closer to, but modestly short of, our target margin range of 7-9%. We expect to recover into that range for 2027, as has been previously noted, to provide that margin expansion and recovery in 2026 with our trend outlook to be above 11%. We are pricing with that fully in mind. This is Dan. Just to round it out in terms of the premium increases, what Dan just described in the commercial business, you should think in terms of double-digit on that one. On the Medicaid side, we're operating at about a combined 6% premium increase in 2025 and would expect that to be comparable as we move into 2026.

Obviously on the Medicare side, as John mentioned, that would track with what the CMS adjustments were. Okay. Next question, please. Our next question comes from Matthew Gilmore with KeyBank. Hey, thanks for the question. For the settlements you called out, they're part of the discrete items. Can you give some detail on the nature of those settlements? Are those mostly tied to value-based care contracts and Optum Health? If that's the case, can we think about the Optum Health outlook for 2025 as being burdened by about $1.5 billion of those settlements that hopefully do not repeat next year? Matt, John Rex here. I would not call it necessarily mostly tied to that. It is across businesses.

Think of these things as ranging from elements like you've described, but I'd put it more in the context potentially in some areas that company receivables we have from other companies that we for which we started to question whether or not they're collectible. As that moved into that zone, we've taken some provisioning for those. Other areas were just disputed items. In this business, there can be disputed items that persist for some period of time. I think as we were taking a fresh look and we were coming to come out with our outlook for the year, making sure that we had contemplated all those so we could get some of those settlement items out of the way.

Think about it as both in the zone of receivables where we question the collectibility, maybe a dispute with a customer over amounts, and these dating back a year or more sometimes in terms of where they might be, sometimes with providers also in terms of areas that we were looking at. It is really a collection of items that we came at. I would not call it predominantly. I mean, there is certainly a good amount of that sitting in Optum Health too, but I would not call it predominant in terms of those amounts. That gives you a little flavor for some of the items that we are trying to. Can we just generally split them so they get some idea of what they are overcoming? Yeah.

I would say kind of within Optum Health, think of that kind of in the zone of, if I take the full amount of probably about $500,000,000 or so sitting within Optum Health, we called on a call, Tim called on a call, $850,000,000 within UnitedHealthcare, and then a couple hundred million in Optum Insight, and a little under $100,000,000 in that zone in Optum Rx, and then a smattering of a few other items probably accounting for about $100,000,000 or so that would be, I'd call it, corporate items and such that we across the enterprise. That should give you the granularity you need. Okay. Next question, please. Got it. Thank you. Our next question comes from Jessica Tassan with Piper Sandler. Hi. Thanks so much for taking the question and for the detail this morning.

When we think about the Medicare margin recovery, can you help us understand the split and timing between kind of MLR improvement and then incremental operating leverage, if any, and your updated MA margin targets kind of fully contemplate the benefit of efficiencies you might harvest from AI at UHC? Thanks. Yeah. Good morning, Jessica. Thanks for the question. Obviously, when we've outlined the number of actions that we're taking to pursue the margin recovery this morning, they've really been items oriented around what we're doing with optimizing our plan design, ensuring that we're investing in durable and plans that are designed around care management, enabling care management. We've made meaningful benefit adjustments. All the kind of levers that are in our control related to the product design, operational cost efficiency is absolutely something that we will continue to drive.

We are partnered incredibly closely with Sandy and the team at Optum around different use cases of how AI can not only drive efficiency, but also help inform the forecasting, help inform the early insights, and help us make decisions faster in terms of both kind of how we respond to headwinds or challenges, as well as kind of how we identify solutions and can bring those to stakeholders. Think about kind of all of those really in the mix as we think about opportunities to leverage those efficiencies, drive margins, and certainly will be supportive of our 2027 and beyond kind of range that I've talked about where we'll be at the midpoint or above in that 2%-4% guidance. Okay. We have time for one more question. Please, next. Our last question comes from Ben Hendrix with RBC Capital Markets. Great.

Thank you for squeezing me in. In light of your business line review and your reorientation of some businesses and balancing that with the sustained commitment to value-based care, I'm wondering if there's any changes to how you're thinking about the breadth and scale of care capabilities that you want to add to support VBC. Specifically, I'm thinking about kind of commitment to assets like the pending Amedisys acquisition and the expected closing there. Thanks. Sure. Do you want to comment on Amedisys? Then Patrick, maybe comment about kind of the broader question there. Yeah, Ben, John Rex. Yeah. We're looking forward to closing the Amedisys transaction here as we work through the process. We are still working through that process.

As I mentioned in my capital comments on the call earlier, I mentioned that's one of the items in our minds as we think about the rest of the year. We continue to work through that process with the regulators in a productive way, but committed to those kind of assets and certainly very committed to capabilities where we can serve people in the home. Super important in terms of foundational part of value-based care in terms of how we actually serve them and serve them well. It gives us a lot more reach into serving other people also. I'll have Patrick maybe comment a bit. Yeah. Thanks for the question. I'll hit on the clinical rationale and then pass it off to Chris to hit some clinical operational points. As many of you know, I'm a practicing physician. It's about patient need.

For value-based care, we need clinical assets. We need assets in the home and capabilities and clinicians in the home. We need mental and behavioral. We need specialty care. We need ambulatory surgical centers. You need serious illness care. You need the breadth. We have those component parts in Optum Health, and those allow us to serve people's physical, mental, social, and financial needs to broaden it out to Optum Insight as well. That platform for value-based care is distinctive. It has huge growth potential, as John described earlier and Steve. Importantly, it is the pathway to a better-performing U.S. health system that achieves better health outcomes, better experience, and lower costs for the people we serve. I would like Chris to just talk briefly because then you have to execute on that with fidelity everywhere about some of the work there. Yeah. Thank you so much for the question.

I think what I'll just add, Patrick commented a lot on the work we're doing across our value-based care platform to stabilize the business and provide meaningful growth in the future. Maybe just a couple of comments on some of the other care delivery services that we offer that really enable that integrated delivery system to come to life. Whether that is investments in ancillary services, whether that's growth in home health, whether that's growth in our ASC platform, those will be things that we consider. Most urgently and importantly, the team is really focused on how do we make sure we drive the best productivity, the best performance, the best payment yields, and some of the near-term opportunities we have to deliver on our services businesses in the short term while we enable further growth for the long term. Thanks for the question. Thanks, Krista.

That is all we have time for today. I would thank you all for joining us. We look forward to speaking with you again in a few months. I think you will find those discussions will be even more specific and detailed, as well as a little deeper from a strategic point of view as we continue to progress through our review here. We look forward to those engagements and the engagements with you that we will have in the meantime before our next quarterly review. Thank you for joining us. We appreciate your interest and attention. Thanks. Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.