Yahoo Finance 
UnitedHealth Group's CEO Discusses Q1 2014 Results - Earnings Call Transcript
UnitedHealth Group Inc. (UNH) Q1 2014 Earnings Conference Call April 17, 2014 8:45 AM ET
Executives
Stephen Hemsley – President and CEO
Jack Larsen – CEO, UnitedHealthcare Medicare & Retirement
Gail Koziara Boudreaux – EVP; CEO, UnitedHealthcare
Daniel Schumacher – CFO
Jeff Alter – CEO, UnitedHealthcare's Employer & Individual business
Larry C. Renfro – CEO, Optum
John Rex – EVP and CFO, Optum
Austin Pittman – CEO, UnitedHealthcare Community & State
John Penshorn – SVP
Dirk McMahon – CEO, OptumRx
Dave Wichmann – EVP
Analysts
Matthew Borsch – Goldman Sachs Group Inc
Justin Lake – JP Morgan Chase & Co
Peter Heinz Costa – Wells Fargo Securities, LLC
Dave Windley – Jefferies LLC
Sarah James – Wedbush Securities Inc
Christine Arnold – Cowen and Company, LLC
A. J. Rice – UBS Investment Bank
Ralph Giacobbe – Crédit Suisse AG
Scott Fidel – Deutsche Bank
Christian Rigg – Susquehanna Financial Group, LLLP
Sheryl Skolnick – CRT Capital Group LLC
Josh Raskin – Barclays Capital
Operator
Good morning. I'll be your conference facilitator today. Welcome to the UnitedHealth Group First Quarter 2014 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.
Here's 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 result 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.
Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated April 17, 2014, which may be accessed from the Investors page of the company's website. (Operator Instructions) I would now like to turn the conference over to the President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.
Stephen Hemsley
Good morning and thank you for joining us today. This morning we will review the first quarter results in the context of our full year objectives for 2014. Objectives that include continuing to diversify our services and product offering, continuing to develop and expand our capabilities and relationships and further strengthened and consistent fundamental execution and services to customers and consumers.
And we are working towards all these while new national healthcare policies begin to come into the place and new baselines for market behaviors and new market dynamics become realities. We plan to deliver revenues in a range of $128 billion to $129 billion for the year produce earnings in the range $5.40 to $5.60 per share and generate cash flows from operations between $7.8 billion and $8.2 billion.
UnitedHealth Group, UnitedHealthcare and Optum performed largely as we expected in the first quarter. We remained in our plans for 2014 and as usual continue to work through more challenges and benefits for the moment.
Longer term, we continue to more clearly see evidence for the growth opportunities for both UnitedHealthcare and Optum as we knew beyond the more negative immediate term impacts of the ACA and its implementation. This is was really the first quarter a full scale operation under the ACA.
Everything else in the past three years has been more of a preamble. The ACA's impacts on 2014 had been immediate and significant as we described at our Investor's conference. Nondeductible insurance taxes, ACA prescribed Medicare Advantage funding pull backs, commercial underwriting changes and various other provisions cumulatively reduced our per share, net earnings by nearly $0.30 for this quarter and sequestration cut an additional $0.05 in this quarter.
On a full year basis 2014 Medicare funding actions will cut roughly $0.45 per share beyond that. This makes a grand total of about $1.50 per share and externally driven year-over-year pressure fully consistent with our view at our Investors conference in December.
The ACA impacts every major line item of our consolidated results and distorts comparisons virtually all performance ratio. This will continue as the year's progresses, a new regulatory and tax baselines are established and settled in, but we think some very important early observations can be made about the ACA's first quarter introduction.
First consumers and benefits sponsors are showing by their actions the clear value they see in private sector, managed care products and services.
The capabilities of the private sector healthcare community are significant and have proven to be highly adaptable to serving the needs and demands of consumers in all stages and situations of life as well as government and private benefit sponsors and the broader health system.
And ultimately there should be advances access to care and the healthcare system as a whole will become more effective and efficient and consistent overtime. Early evidence of these is visible and will produce long-term growth opportunities for both UnitedHealthcare and Optum.
Let's review, how this played out in the first quarter for UnitedHealth Group starting with UnitedHealthcare, whose revenues grew $1 billion or 3.6% year-over-year to $29.3 billion led by membership growth in Medicaid. Over the past 12 months alone, UnitedHealthcare has implemented six new or renewed Medicaid contracts and grown to serve 395,000 new members.
In this past quarter, we grew by 255,000 people driven by the expanded eligibility offered in and about half the States, where we serve Medicaid beneficiaries as well as new membership in traditional categories.
We expect growth throughout the year and could well exceed the upper end of our outlook of $350,000 to $450,000 additional people served this year. The Congressional Budget Office forecasted 12 million people will obtain coverage through Medicaid by the end of 2016 and we will endeavor to gain market share serving the needs of these beneficiaries and their State's sponsors.
Nationally managed Medicaid, is also broadening to serve new patients with greater clinical needs like dual eligible. We believe our integrated and in the market clinical model gives us distinct advantages in serving these higher growth; more complex areas. Our model integrates behavioral, pharmaceutical, medical and social services with the focus on the 5% of the population that drives well over 50% of the total medical cost in the typical Medicaid program.
In Medicare, we began the year with growth of 360,000 across all Medicare product categories. As Part D sales were strong and Medicare Supplement also grew nicely. Participation in our Medicare Advantage program was essentially flat down 5,000 people sequentially and well within the range we expected, despite significant market exists and products network adjustments made in response to the 2014 Medicare Advantage rate cuts of more than 6%.
We continue to manage our Medicare Advantage products and cost structure with the local market level and we will stay focused on that task all this year and next; given the continued adverse funding climate for Medicare Advantage.
Commercial membership also began the year generally in line with our expectation with a sharp decrease in people served through fee-based relationship as well as some expected declined in risk-based business. As expect our individual policy business declined this quarter as we decrease by 90,000 with the advent of the ACA.
In the commercial market, we experienced a strong competitive period over early renewals for Legacy benefits, where many small group customers renewed early to avoid community rating and ACA price increases. These decisions were rational, driving healthier groups to renew early. While other groups took advantage of the community rating or that was the best course of action.
Over the last quarter, we have seen intensified pricing in several markets including small group in New York, a large market for us. We believe several carriers there including new entrants our pricing well below cost and what we would view as unsustainable pricing levels.
If this climate continues, we could see some further pressure on risk based membership beyond the ranges, we anticipated this year. And at Amil, we are beginning to see clear signs of response and recovery from surgeon utilization caused by aggressive access standards imposed nationally by the Regulatory Authorities in mid-2013.
We continued to project a 6% commercial medical cost trend plus or minus 50 basis points for 2014. First quarter usage benefited slightly from intense winter conditions across the mid-western and northeastern areas of the country.
Offsetting this item was the rapid launch of an effective and very expensive new hepatitis C therapy. The aggressive US pricing practices on this has been well publicized and continues to be quite controversial. We are working diligently to ensure this medication is applied under clinically appropriate standards.
Patients were treated across the Medicaid commercial and Medicare Part D categories that cost to more than $100 million to us in the quarter. The Federal Government will bear significant expense in the Part D program because the high cost of this treatment causes the patient to quickly move through the donut hole into the 80% CMS reinsurance quarter.
Meanwhile, State Medicaid Directors are at varying stages of concluding whether to include the medication on their approved state pharmacy list and if so, how to pay for it.
Stepping back from these first quarter trends are full year commercial care ratio will see pressure caused by a combination of the revenue impact from stronger than expected early renewal activity in December at pre-ACA rates.
The under pricing dynamic in New York at higher than expected utilization and cost related hepatitis. The size and diversity and United Health Group tends to mute the effect of the commercial variance on the consolidated care ratio, but we expect this ratio could lean toward the higher end of the 80.5% plus or minus 50 basis point range, we provided last December.
Before I turn to Optum, I want to recognize some of our colleagues with us today who have taken on new roles at UnitedHealth Group. All in keeping with our long standing philosophy of moving talented executives across the enterprise to broaden their experience and management depth.
Jack Larsen has moved from the Medicare business to head up our rapidly growing Optum Collaborative Care, which includes our Care Delivery businesses, a perfect transition given his background in Medicare and extensive M&A background.
Steve Nelson has shifted from his role leading our local market oriented Medicaid business to heading our Medicare and Retirement operation, where we are putting intense focus on market-by-market strategies around clinical care, network alignment and quality [stars].
And Austin Pittman takes over at our Community & State Medicaid business coming from his most recent assignment leading our overall UnitedHealthcare network and local commercial market leadership before that.
Turning now to Optum, it is becoming more evident the capabilities we have collectively built in our services, platform are increasingly recognized in the marketplace. Optum continues to grow and mature quarter-by-quarter. We continue to evolve to meet the needs of the market further integrate offerings, strengthen and grow relationships and align our efforts to the most valuable and sustainable opportunities to make the healthcare system perform better.
More participants recognized Optum is in position to help customers engage their toughest healthcare challenges. Our work assisting the healthcare.gov website in the last quarter of 2013 has led to new relationships, new pipelines of potential work and new contracts with the spectrum of customers for 2014. We expect further growth in government services this year continuing this first quarter's trend.
Our efforts to help our customers improve their end-to-end performance and their structural cost to move ahead with the launch of our Optum360 revenue management business with Dignity Health.
We are developing a pipeline of additional health systems and expect to add business to Optum360 as the year progresses. Optum is seeing positive market response to its broad business process outsourcing capabilities as well. Optum Health is aligned around five key growth areas; prevention, intervention, financial services, distribution and care delivery.
Broad capabilities meeting market needs, matched with an efficient, agile, customer focused organizational structure. The relationships we are building, leveraging these critical capabilities and they will be instrumental in Optum's future revenue and earnings growth as the consumer becomes a more significant buyer and decision-maker in healthcare.
OptumRx is working a strong prospect pipeline in pharmacy services. Our distinctive focus on managing total cost by synchronizing information and care process across the medical, lab and pharmaceutical continuum is driving significant interest. We are only able to generate this interest as a result of the meaningful investments; we have made in OptumRx over the past couple of years.
And similarly, we are making targeted investments in OptumHealth and OptumInsight to seek opportunities in areas such as consumer engagement, consumer distribution services, next generation analytics that combine administrative and clinical data at the scale 60 million people or more and next generation medical care review and compliance analytics.
We will also invest startup cost in the assimilation of each new Optum360 relationship. This quarter earnings bear $60 million of these investments, which will continue over the course of the year, but somewhat more waited in the first half. All of these resonate with one theme; new and sustained areas for growth by helping the system to perform better for everyone.
Turning to Optum performance for the quarter revenues grew 29% to $11.2 billion and earnings from operations grew 20% year-over-year to $650 million. Operating margins decline slightly due to the exceptional growth of the lower margin OptumRx business as well as the planned investment we just discussed.
OptumRx led this quarters reported results with revenues up 43.5%. Earnings from operations up 114.2% and operating margins expanding a full percentage point to 3.2%. We filled 140 million adjusted scripts this quarter up 38% year-over-year.
OptumInsight had strong growth in government and sponsored services in the quarter. At the same time, they slowdown and hospital clinical compliance services pressured revenues and operating earnings year-over-year and sequentially. As the Federal Government deliberated over medical necessity processes for Medicare, it's so called Two-Midnight Rule.
At the same time, our newly introduced compliance offering serving hospitals needs for clean medical necessity documentation for privately insured patients have seen accelerated growth in sales in and pipeline.
We expect OptumHealth and OptumInsight to increase in profitability as the year progresses accelerating into the second half. All in Optum delivered a strong first quarter with improved earnings and capital returns as compared to last year and remains on pace to produce $3.1 billion to $3.2 billion in operating earnings this year.
As well as roughly one-third of UnitedHealth Group's cash flow from operations. All, while investing in the future growth in its business. As a whole, we have a solid start to the year, against the increasing headwinds, we described at our investors conference.
UnitedHealth Group's first quarter revenues grew nearly $1.4 billion or 4.5% to $31.7 billion and net earnings were at $1.10 per share fully in line with our expectation. Cash flows from operations were strong at $1.4 billion up 34% year-over-year and a good start toward our full-year projection.
The biggest challenges in 2014 are the combination of nondeductible healthcare taxes and ACA mandated Medicare rate cuts. On top of sequestration and the government's continued systematic under funding of Medicare Advantage. Including the 2014 Medicare funding issue and other ACA provisions, these impacted our first quarter results by well more than $0.35 per share and will pressure our full year net earnings by about $1.50 per share.
We expect second quarter earnings per share will growth this past quarter's results, but as planned will come in below last year's reported second quarter, which benefited from strong reserve development. It did not bear some of the competitive commercial market pressures, UnitedHealthcare faces today and like this quarter, we will have substantial ACA effects.
Items we are watching including hepatitis C treatment cost, the full recovery State Medicaid fees, commercial risk-based membership, New York and the overall performance of our Medicare business. And we are always respectful of medical cost trend even though they are basically inline in the quarter.
As always, we will strive to deliver the best possible result in both the short and longer term. We expect our 2014 net earnings to land in the existing range of $5.40 to $5.60 per share and we mean that as a range. The items we discussed this morning, might serve temper ones thinking within that range.
Standing back from the number, UnitedHealth Group faces an expansive long-term growth opportunity. In the US alone, there is the opportunity to approach and serve the more than 700, the Fortune 1,000 companies not yet our customers. Today we serve, more than 85 million people leaving more than 230 million Americans, we do not touch.
There is a growing number of people in government sponsored programs, who are yet to benefit from Managed Care. There is significant upside potential in our PBM market share and there are multibillion dollar, multi-year opportunities that links services, technology and insight to fundamentally health-to-health system perform better for everyone.
Beyond the US, we see the same growing opportunities. As the challenges other national health system space around access, control, affordability and affected decision making are in fact the same ones, we have here in the US even as these systems differ. The level of a longer term success, we achieve will depend on two things.
First an adaptive and innovative approach to applying our three long standing core competencies of clinical care, organization and delivery. Health information analysis insight and advanced enabling technology. And second the effectiveness of our leaders in our organizational culture.
We serve in the sensitive social services arena in the early stage of important market changes and we believe success will come to those, who can build trust, serve with compassion and control costs; while driving higher quality outcomes.
We thank you for your time, this morning and look forward to your questions. So we will give you a second to get organized and we will pick up your question. Thank you.
Earnings Call Part 2:
