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UnitedHealth Group Incorporated (NYSE:UNH)

Q3 2013 Earnings Call

October 17, 2013 8:45 am ET

Executives

Stephen J. Hemsley - Chief Executive Officer, President and Executive Director

Larry C. Renfro - Executive Vice President and Chief Executive officer of Optum

Dirk McMahon

Jack Larsen

Gail Koziara Boudreaux - Executive Vice President and Chief Executive Officer of United Healthcare

Mike Weissel

Daniel Schumacher

Steve Nelson

Jeff Alter - Chief Executive of UnitedHealthcare Employer & Individual Business

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

John S. Penshorn - Senior Vice President

John Rex

Bill Miller - Chief Executive Officer

Analysts

Justin Lake - JP Morgan Chase & Co, Research Division

Albert J. Rice - UBS Investment Bank, Research Division

David A. Styblo - Jefferies LLC, Research Division

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Scott J. Fidel - Deutsche Bank AG, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division

Sarah James - Wedbush Securities Inc., Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Operator

Good morning. I will be your conference facilitator today. Welcome to the UnitedHealth Group Third Quarter 2013 Earnings Conference Call. [Operator Instructions] 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 expectation. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. This call will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amounts is available on the Financial Reports & SEC Filings section of the company's Investors page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated October 17, 2013, 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. Please go ahead.

Stephen J. Hemsley

Good morning, and thank you for joining us. This morning, we will review our third quarter results and update you on our view of market trends and developments as we approach 2014.

In the third quarter, UnitedHealth Group earned $1.53 per share on revenues of $30.6 billion. Revenues grew 12% year-over-year, with continued diversification across businesses and product types. Cash flows from operations were strong at $3.4 billion, more than 2x our net earnings for the quarter.

The consistency of our efforts and results is guided by a focus on serving the distinct needs of all health system participants: those who receive, deliver and who pay for care. No other company is engaged so diversely across health care. Our services all center around the same 3 competencies cultivated for nearly 2 decades: the organization and optimization of health resources at the local market level, the application of data and the enabling use of advanced technology.

Over the long term, this approach continues to produce distinguishing results: record growth from those who have experienced our products and services, well-controlled medical and operating cost trends and improved affordability and access to health care. The emergence of public exchanges, private exchanges, Medicaid expansions, growing dual eligible and long-term care need, accountable care experimentation, rising consumerism and the confluence of these elements have the potential to create new opportunities for us to grow and serve in new ways. We continue to adapt to the market's changing need. We offer consumers and customers an unparalleled array of health products, services and capabilities, and we are steadily advancing along themes of consumer responsiveness, simplicity and affordability.

Turning to the quarter. Our 12% revenue growth, solid earnings results and steady operating disciplines grow strong cash flows of $3.4 billion, bringing year-to-date cash flow to nearly $6 billion. As expected, the third quarter operating margin of 8.6% decreased from last year, primarily due to government underfunding of the Medicare Advantage program and nearly 40 basis points of impact from lower reserve development. These were partially offset by strong margin expansion in Health Services at both UnitedHealthcare and Optum.

Operating costs were well controlled at 15.9% of revenue. Our percentage operating costs are 20 basis points higher than the third quarter 2012 despite year-over-year services growth of 25% or more than twice the growth rate of health premiums. That said, we have intense efforts underway to continue to increase the overall level of productivity and realize cost savings across our businesses.

Our debt-to-total-capital ratio was comfortably under 35% at September 30, and we ended the quarter with $1.1 billion in available cash. Year-to-date shareholder dividend payment increased nearly 30% to $777 million. We have purchased about 37 million shares so far in 2013 at an average price just under $64 per share, bringing our pure share count now under 1 billion shares.

Turning to business level results. UnitedHealthcare earned $2 billion on revenues of $28.4 billion in the third quarter. UnitedHealthcare's momentum continues as the fastest-growing health benefits company in the market. It increased the number of people served by 24%, nearly 9 million individuals, over the past year. This includes more than 2.9 million people in TRICARE and another 4.8 million people in Brazil, both new markets for us.

Within our traditional domestic markets, growth has also remained strong. Over the last year, we have grown to serve 1 million more people today in the employers, individuals, senior and public markets. This growth is varied and diverse across geographies, products and market segment. UnitedHealthcare is achieving consistent results by aligning modern benefit design with strong consumer engagement, empowerment, tools, programs and incentives. These are further aligned to targeted clinical management and wellness programs that channel care delivery through a focused set of networks with proven performance capability and with progressively higher levels of care provider financial incentives for quality outcomes and patient satisfaction.

For many years, we have used our commitment to and insight into local market communities to shape our capabilities to fit each unique market as a provider of health benefits. These same local market insights and relationships play out in our accountable care strategy, which continues to differentiate UnitedHealthcare.

We closed the quarter with more than $25 billion in annual medical spending, driving a spectrum of first-generation care provider performance incentives. Today, the health care experience of more than 2 million people we serve are directly aligned, end-to-end, through the most progressive of these arrangements, including full risk, shared risk and bundled episodic care payment approaches.

We entered into several new ACO partnerships in the quarter, including our first multi-entity ACO with Quality Health Solutions, a collaborative of 4 hospital systems and the Medical College of Wisconsin, all in the southeast corner of that state. More importantly, we are making significant gain-sharing payments to several of our ACO partners based on the actual outcomes they are achieving to improve quality and care effectiveness and efficiency for patients. This includes Optum's care delivery network earning payments for its work to improve performance for both UnitedHealthcare and organizations outside UnitedHealth Group.

In the third quarter, UnitedHealthcare growth was, again, led by senior market performance. We added 100,000 seniors with Medicare Advantage or Medicare Supplement benefits and sold 95,000 additional Medicare Part D drug plans. We expect to finish 2013 with market-leading growth momentum coming through these Medicare offerings. We have already grown by 670,000 people in Part D through the first 9 months of the year.

While our overall Medicare star ratings for 2015 have advanced year-over-year, we believe we can and must execute much better than these ratings reflect. We are intensely focused on steady and significant improvement in this critical performance area.

In Medicaid, UnitedHealthcare grew by 15,000 people in the quarter and was honored to be selected for new awards serving Florida and rural Texas, which will begin over the course of 2014. The number of consumers served through UnitedHealthcare Employer & Individual grew by 30,000 in the quarter despite expected in-group attrition. 2013 will be the fourth consecutive year UnitedHealthcare grows commercial membership organically. And UnitedHealthcare Military & Veterans membership in TRICARE was well served, but this transitional issue is now well in hand.

UnitedHealthcare International has added almost 400,000 people so far this year, with particular strength in the large group market. Our UnitedHealthcare International medical assistance and clinics business continues to grow and advance, recently receiving new contracts to serve the global oil and gas industry in the Middle East, Africa and now in the North Atlantic.

Optum's technology-enabled services, again, grew strongly in a market sized at over $500 billion. Our growth potential is particularly compelling as we continue to develop broader, more integrated long-term relationships with larger clients who are pursuing new approaches to the market.

Earlier this week, we announced the formation of the Optum360 business with our partner, Dignity Health. Working collaboratively and applying advanced Optum technologies, we expect to improve revenue cycle performance end-to-end, from the perspectives of both patients and care providers, across Dignity's 39 hospitals and 300 care centers in 21 states.

Through the Optum360 business, we are together creating the next-generation performance organization dedicated to bringing these resources to serve a broad base of large health care systems across the U.S. To that end, we are engaged with other care provider systems and believe Optum360 will develop into a sizable and impactful business.

Earlier this week, we announced a multiyear extension and expansion through 2020 of our new 15-year relationship with AARP. Through this extension, we will continue to advance the overall missions of AARP with the broadest offering of senior products and services around health and wellbeing.

Also this week, consulting firm Mercer announced it was using both the Optum multi-carrier private exchange platform called myCustomHealth and UnitedHealthcare's dedicated exchange platform to serve benefit choice needs of retirees and larger employers.

And earlier this year, we created Optum Labs to combine and analyze both clinical and administrative data from large patient populations. Insights from Optum Labs' research will advance knowledge and understanding of every aspect of care delivery, from care protocols to therapeutic agent performance and more. We expect these research efforts to lead to new and better products and services and improved overall system performance.

The Mayo Clinic Health System is a founding partner of Optum Labs, as is AARP. And other important national relationships are also in various levels of engagement. With these, Optum Labs has the potential to effectively become the national research platform for health care data analytics.

These initiatives, combined with several other important business relationships and awards this year, are the results of our efforts to align Optum around 3 major growth drivers: modernizing health system infrastructure, aligning and enabling the highest quality of both effective and efficient care delivery and engaging the consumer. These drivers define the broad business opportunities emerging as health care evolves and support our optimism and confidence in Optum's sustained double-digit growth. And Optum's operating performance was strong again this quarter. Each business repeated double-digit revenue gain. Overall, revenues rose 33% year-over -- over last year to $9.6 billion, led by the 41% increase at OptumRx.

Operating margin expanded 100 basis points to 6.6%, despite the increasing mix of comparatively lower-margin pharmacy revenues. As of today, our OptumRx pharmacy migration is 96% complete. More than 11 million consumers have transitioned and are now served by OptumRx. Our team has successfully executed the largest-scale and most complex membership transition in the health care industry.

Optum's strong revenue growth, combined with margin expansion, has driven exceptional earnings performance. Optum's earnings grew 54% year-over-year this quarter and 69% year-to-date. Optum is now contributing nearly 1/4 of UnitedHealth Group's operating earnings, up from 16% 1 year ago. We believe Optum will achieve our 2015 margin target of 6% in 2013, 2 years earlier than originally planned.

The combined and complementary performances of Optum and UnitedHealthcare produced very solid third quarter results, as we discussed at the outset, with quarterly revenues up $3.3 billion over last year, driven by increasing diversification, producing earnings of $1.53 per share with cash flows of $3.4 billion. We're achieving our full year results against headwinds ranging from intense government reimbursement pressures, including an unplanned $0.15 per share sequestration impact and $0.17 per share in lower reserve development as compared to the strong reserve development levels of last year. And we're getting there while continuing to make significant investments in our businesses, including the increased level of fourth quarter investment in OptumInsight.

All in, we are tightening our outlook for 2013 net earnings to a range of $5.40 to $5.50 per share. At the raised midpoint of $5.45, this would translate to a strong 15% year-over-year earnings growth targeted for the fourth quarter this year.

Our balance sheet strength continues to differentiate UnitedHealth Group. In the past week, both S&P and Moody's affirmed our corporate debt ratings and upgraded their outlook. We continue to project cash flows from operations in a range of $7.2 billion to $7.6 billion and expect to return $4 billion to shareholders through share repurchase and dividend.

Looking forward, we expect our 2014 earnings outlook to be impacted by overall Medicare Advantage funding levels, as well as the effects of a nondeductible insurer fee on Medicare, as we indicated in our last earnings call. The significant and continued level of underfunding cannot be fully offset in 2014 from the performance effects we expect from the balance of our health benefits market, and we see limited potential for dramatic further improvement in overall medical cost trends, recognizing how well medical costs have been controlled over 2012 and 2013.

We fully expect Optum to again grow and perform strongly, and we are well along in far-reaching efforts to improve productivity and control operating costs across the entire enterprise. And we will, as always, endeavor to use capital judiciously.

Given that overall landscape, we expect our 2014 earnings outlook, which we will introduce and discuss in detail at our December 3 investor conference, will once again begin the year with a broad earnings range that will likely straddle, to the upside and to the downside, our current year performance outlook of $5.40 to $5.50 per share. We will, of course, be focused on performing to the highest possible level. 2014 and 2015 represent periods we have long described as challenging in the near term, followed by the potential for several years of growth and advancement once these markets changes are digested. The history of market changes in the health care sector over the past 50 years bears that out. Our own historical performance provides some context. It is worth noting that today, we generate more than $1.5 billion in operating earnings from businesses we were not even in at the start of 2006. We have grown earnings per share at a 14% annual rate since the end of 2009, accompanied by strong cash flow growth, while going through the most prolonged economic and employment downturn in nearly a century.

Over the last 10 years, we quadrupled our market share and health benefits from a starting point of 3%, yet today, we are only 13% penetrated into the overall U.S. population. While we have the largest enterprise serving the Health Care Services market, we estimate our penetration into that $0.5 trillion market at just 6%. Today, our businesses serving Medicare and Medicaid beneficiaries are approaching parity with our 30-year-old commercial health benefit businesses.

Optum is ahead of our "15 by '15" commitment and moving rapidly to our goal of representing well more than 30% of our overall income contribution and growing at a strong and accelerating pace. We are committed to thoughtful growth pursuing the international market, where emerging economies and fully developed nations both recognize the need to meet the growing health care needs of their people and are looking to the private sector to play a key role.

And here in the U.S., we have recently taken important steps for the adjacent primary care market focused on serving populations whose needs are high, where we can make a positive difference to them and to their benefit sponsors, one of the most fragmented yet influential of all sectors across the health care landscape. We can only be certain of one thing, that UnitedHealth Group will look meaningfully different 10 years from today. We are committed to being a differentiating factor in a better health care system and to grow and productively use capital in the process.

We look forward to your questions today, so we turn to the moderator. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Justin Lake with JPMorgan.

Justin Lake - JP Morgan Chase & Co, Research Division

First question. Just a follow-up on your 2014 commentary, Steve. I just want to make sure I was clear on that. So it sounds like the UHC business will be down in earnings year-over-year, with Medicare Advantage driving down. Any color on how the commercial and Medicaid businesses will look?

Stephen J. Hemsley

Yes. Well, we're going to kind of try to keep our -- this call is not the time when we get into the details of this. We provide guidance at the investor conference, and I really don't want to front run that process. So I will leave it kind of in the context that we put it, that when you look at the businesses in total, pressure that's on the Medicare Advantage program from the funding pressures that we have talked about for some time, and then look at the performance of the balance of the businesses, each of whom have their challenges and their opportunities both, we come out in a range that, as I said, straddles with both upside to where we are today, as well as probably a downside starting point. And that's largely where we think we'll probably position 2014 as we go in. And we're going to try not to provide a great deal more detail than that other than the portfolio has that potential within it and that we are focused on a number of things that we think will drive towards the upper end of that performance. But that execution remains to be done, and so we will kind of keep it in that kind of context this morning, and then we'll talk about it in much more detail when we get to the investor conference.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. And then just a question on Optum. Can you give us some color on the Optum360 revenue opportunity post the Dignity announcement? And also, on the PBM, can you give us an update on the Medco integrations and how you're positioned heading into the '15 selling season?

Stephen J. Hemsley

Sure. I'll let Larry kick that off.

Larry C. Renfro

So Justin, it's Larry. I'm assuming you read the announcement about our arrangement with Dignity Health. As we said earlier in the year, we were going to try to establish what I would call a larger, deeper, more complex relationship with our clients, and I would say that Optum360 is an example of that. We won't go into the detail of contracts, or we won't go into the detailed numbers, but what I would say about that is that it is a multiyear, multi-billion dollar contract, and it is a next-generation RCM that we are starting with them that will -- candidly, will simplify patient billing and -- as well as modernize health care administration. So a nice win, nice venture that we put together, and more to come on that. And I'll ask Dirk to handle the PBM.

Dirk McMahon

Yes, thanks, Larry. I guess what I would say is the PBM migration and the success has given the market confidence that we can compete. It's given us a lot of scale to be able to purchase more effectively. And I think, candidly, our synchronization, as well as specialty value propositions, are resonating well in the marketplace. So my commentary on '15 is that ultimately, we've -- not a lot has moved, but what business has moved, we've won more than our fair share. So I think we're really well positioned for '15.

Stephen J. Hemsley

Next question, please? And we'll try to keep it to one per. That was a nice portfolio of questions on that one, but we'll try to keep it to one each.

Operator

And our next question comes from A.J. Rice with UBS.

Albert J. Rice - UBS Investment Bank, Research Division

Maybe I'll just ask you to flesh out a little more on your comments about the Medicare Advantage outlook. Obviously, you've now got some competitive information available. Can you give us your assessment of the landscape moving into next year, prospects for overall enrollment growth in that segment and maybe for the market overall, if you have any thoughts on that? And anything you could say on the margin outlook on that?

Stephen J. Hemsley

Sure. I'll have Jack comment on that. But I think, as we look at the benefits, we see that and our position as pretty positive. Jack?

Jack Larsen

Thanks, A.J. Good morning. So in 2014, once again, we are looking at a market opportunity that expands upwards of 3 million seniors or so, many of whom who we think will be well positioned to select Medicare Advantage. And I think in our planning this year, we started where we start every year, and that is with identifying the benefits that seniors value most while keeping the year-over-year total cost ranges to them as low as possible. This year was obviously made far more difficult than prior years given the reductions in the effective rates that we received versus the expected medical cost trend. So you have, I'm sure, no doubt seen some of the competitive plan offerings. And while it's still very early in OEP, I think today is the third day of selling, I'd have to say that we're pleased. We're pleased with where we positioned ourselves competitively in our key markets. And we're pleased with some of the things that we are seeing in terms of the leading indicators coming from our field sales teams, our web portals and the busyness of our call centers. Now in terms of growth, I think, as Steve shared in his opening comments, we had industry-leading growth in 2013, something we're very happy with. I would say at this distance, though, when we come to you at the investor conference, we will be positioning our growth as moderating off of the sort of blistering rate we've had this year. And keep in mind that we're approaching 2014 with almost 150,000 people impacted by our plan withdrawal. So I'm sure we'll have lots more to say about that at the investor conference in the next few weeks.

Operator

Our next question comes from David Windley with Jefferies.

David A. Styblo - Jefferies LLC, Research Division

It's Dave Styblo in for Windley. I had just a question on the private exchange, and if you could talk a little bit more about your strategy there, how you guys are approaching it and what sort of success you're having this year, as well as the enrollment cycle that's going forward so far?

Stephen J. Hemsley

Sure. Gail, do you want to start it off?

Gail Koziara Boudreaux

Good morning. It's Gail Boudreaux. First of all, in terms of the overall exchange market, we see -- we're very positive about it. We see it as a significant opportunity both for UnitedHealthcare and for Optum. And I think one of the things to remember, the private exchange market isn't brand new. While it's certainly seeing some acceleration going into 2014, we have had offerings, strong product offerings and feel very well positioned in a number of those markets. Thinking about the private exchange market, I think you have to think about 2 subsectors of it. One is the retiree exchange, and that retiree exchange has had a very consistent movement over the last few years of employers moving into either group Medicare or into private exchange offerings. Again, our product offerings there have continued to grow and are very strong. We also offer, through Optum, an opportunity to do a multiemployer exchange, which has seen increased enrollment and we expect to see solid enrollment going forward. The active space is really getting a lot of recent press. You heard, in Steve's comments, our offering. We participate pretty broadly, actually, and again, feel that we have a very strong product offering in the private active exchange, and we expect to continue to see growth. From our perspective, there's a number of different types. Certainly, the movement from a self-funded offering to a fully insured offering is a positive for us. But overall, we're pretty optimistic and positive, and we see them as an expanding distribution channel going forward. And maybe I'll ask Mike Weissel to comment a little bit about the Optum opportunity because we work mostly with Optum as well and see their opportunity.

Mike Weissel

Thanks, Gail. David, this is Mike Weissel, Executive Vice President at Optum. And from our perspective, we really see 2 major opportunities for us in the exchange marketplace. The first is just acting as an enablement platform using our myCustomHealth platform to work with payers, providers, states, employers; really, anyone who needs that platform for doing an exchange. But maybe the greater opportunity and the more exciting opportunity for us is how we utilize all the Optum products to assist our client. So any company moving to a private exchange often has a greater need for incentives, wellness, care-management capabilities to create a consistent experience across their membership. And we just see a strong market for ourselves over time in really using our services to meet that need.

Stephen J. Hemsley

So for us, basically, exchanges have 2 dimensions. It is a great new channel for us, and we'll participate in that channel. And then for our Optum business, it is not -- we can not only be a channel as that, but also enable others. So we really see exchanges as having 2 business dimensions for us. Thanks for the question.

Operator

We'll go next to Peter Costa with Wells Fargo.

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

I'd like to zoom in a little bit on the cost trend commentary, about it not being a helper going forward. And also, combine that with the fact that payroll PPD went from sort of a helper by $100 million last quarter to a headwind of $100 million this quarter. Can you contrast that with your commentary and talk about whatever you see going on with the medical cost trend?

Stephen J. Hemsley

Sure. I'll have Dan talk to medical cost trends. But we've had very strong performance in those over the last 2 years. And I think our only signaling was there's only so much you can expect to achieve out of that, so I think that was really the nexus of it. I don't think we're really planning on offering any new or enlightening views about where trends will be. Dan?

Daniel Schumacher

Sure. Good morning, Peter. Dan Schumacher. With respect to our medical cost performance, as Steve said, we're very pleased with it over the course of the year thus far. But obviously, this is a space where our work is never [indiscernible]. As you look underneath it, I would tell you that inpatient is an area that continues to be very distinguished for us. So as you look at each of the 3 quarters this year, in each of our 3 businesses, we have lowered our bed days. And that's been true for the last 4 years. So doing well on the inpatient side. As you look at the commercial space, in particular, we've had, against our expectations, some improvement in the outpatient as well as we continue to focus our program around out-of-network spend, around the appropriate site of service and things like that. When you put it together at the commercial market level, we have a trend expectation that we provided was 5% to 6%, and we now expect to be at the other lower end of that range. As you think about the development, I wouldn't read into the variation of that quarter-to-quarter or business-to-business. Some of the factors that influence that, obviously, is our operating performance stability. But also, those programs that I was talking about, in outpatient as an example. As we introduce those programs and they begin to come into -- in full effect, we start to realize those in our actuarial process. So there is differences in timing quarter-to-quarter and business-to-business.

Stephen J. Hemsley

And last year, we did have exceptional levels of reserve development, and that fits into the narrative of the contrast between the third quarters -- third year [ph] of '12 versus '13.

Operator

And we'll go next to Christian Rigg with Susquehanna.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Just wanted to touch a little on the Medicaid business and the industry fee there. I know we're getting kind of late into 2013 now. Any sense for whether you expect some margin leakage there because of the tax? Do you think you're generally going to be made whole in most states? Any color would be helpful.

Stephen J. Hemsley

Sure. Steve Nelson, want to take that?

Steve Nelson

Sure. Good morning, Chris. It's Steve Nelson. We actually have made a lot of progress in that area since last quarter. We have a twisted [ph] kind of level, so we have a very robust and consistent rate advocacy process where we're consistently engaged with our states around rates in general, and the insurer fee and the tax impact of that is a part of that ongoing conversation. And I'll tell you, at this point, we have about 1/4 of our states that have formally committed to including both the fee and the tax impact in the rate. And while we have a lot more work to do, the conversations we've had so far have been very productive and positive. I would say, very much in line with our expectations.

Operator

Our next question comes from Kevin Fischbeck with Bank of America.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Great. I appreciate your -- the fact that you're probably not going to have an ability to put a fine point to this at all yet at this point, but just the commentary around the headwinds to MA for 2014 just kind of beg the question about what the implications are for 2015 because, as we look at 2015, we already know we have the health care reform cuts to the rates. We have the clearing adjustment. We have the industry fee increasing. We have -- you mentioned the stars maybe didn't improve as much as you would want them to. So there's a number of headwinds in 2015, which may argue that the rate situation in '15 might not be dramatically better than 2014. So I just wanted to understand if there's any good reason to think that the headwinds in '15 would be any better a starting point for thinking about what 2015 looks like as to kind of how you think about how 2014 is going to shape up.

Stephen J. Hemsley

Well, I think you have a good list of the headwinds that we all see and have talked about, so you have been attentive to our calls over the last couple of quarters. Those are the things that concern us about, basically, the funding approaches that have taken into the Medicare Advantage program because it does serve 1/4 of the U.S. seniors and is the fastest-growing and, by far, the most popular of the programs. So that's why we have been vocal about it in that context. So those headwinds are real. Now we are clearly pushing back against those in terms of how we're approaching the business. And I'll let Jack speak to some of the actions that we're taking along those lines. And our star performance clearly has to improve. We are not pleased with our execution there, and that is something that we have to address. But we are positioning that business, and that business has grown very nicely. And we want to kind of balance the position of that business and continue to grow it because long term, Medicare Advantage and whatever other products come forward in the private sector as Medicare are going to be important because the pressures that you're seeing in the funding from these programs are the pressures that are felt in the program in total, and the private sector is the best outlet for that. I'll let Jack...

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Just before you can get the clarification...

Stephen J. Hemsley

I'll let Jack respond. Sorry.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

I was just going to say that -- yes, I'd love to hear Jack's perspective. But just to clarify, do you feel that 2015 headwinds are the same or worse or better than what you're seeing for 2014?

Stephen J. Hemsley

We don't know. I would certainly hope that funding actions are stronger than they were -- have been in the last couple of years. And then unique to us, I think that we need to improve our star performance, and that's going to affect us in '15. That's the thing I would say would be unique to us. Jack?

Jack Larsen

So hey, good morning, Kevin. Jack Larsen. So I guess, maybe, first things first. You've articulated all the headwinds that we're seeing. And we certainly, early on, recognized that the shifting of all of the legislative and regulatory prompted rate reductions, recalibrations, insurers' taxes, channeling them through benefit design changes to seniors would have been absolutely crushing, both to them individually as well as, I think, to the sustainability of the program itself. We also recognize that, notwithstanding that point of view on overall reimbursements, that we have a responsibility to ensure that we are doing all that we can to make sure that we make the basic product as affordable and as accessible as possible. The kind of work we're doing is making sure that we have the highly performing, best-in-class networks that are aligned not only with us and the physicians, but with the members as well. We are doubling down on efficiency of our clinical programs. And then, of course, the never-ending battle we wage on operating cost. All of that sort of goes in to make the MA program sustainable in individual market. And so I think with the work we did in 2014 puts us in a good position to take on those challenging headwinds in 2015. Let me spend a moment on stars since that, I think, was embedded in part of your question. I would say, overall that we're pleased with the progress we've made. We have almost 2.5x more of our members in 4-star or better plans for 2014 that will impact the 2015 payment year. And you need to keep in mind that, that star rating represents the activities that we did in 2012. So while that's a nice percentage gain overall, I'd have to say that we're admittedly starting off from a relatively low level. And we have, as Steve said, much more work to do to get to the point where we're making the progress we should. I can tell you that we have an intense level of focus all around the company, starting with Steve on down to the UnitedHealthcare organization. Also, within our Optum colleagues. Who are really a significant part of our overall success.

Stephen J. Hemsley

We are focused on this sector, for sure.

Operator

Our next question comes from Josh Raskin with Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

So I guess I want to talk a little bit about MA in the context of the overall UnitedHealth Group. And I think you guys historically have talked about the sort of 13% to 16% earnings per share growth. Obviously, we're not going to get too close to that this year. And then it sounds like -- I don't know what straddling means exactly, but it sounds like the midpoint should be something relatively flat on a year-over-year basis. So it would imply -- and if the overall business is growing even just low teens, then MA is going to be down by 1/3 in terms of profitability next year. And so I look at your market actions, and I understand there's been some product exits, but you guys are entering 4 new states -- or counties in 4 different states, new counties altogether. And so I guess I'm just a little bit confused as to what the actual magnitude in terms of the headwind on MA. Are we really looking at a business that's going to lose 1/3 of its profitability in 1 year?

Stephen J. Hemsley

Now so, again, let's go back to the first question. We'll talk about 2014 in more specific terms at the investor conference, and we will go through each of the business lines along those lines. The pressure on MA is not a new subject. We have been talking about this through the course of the year. We have a lot of opportunities to improve the performance of that business, but we have to take a look realistically at the funding levels that have been imposed there. And the other businesses also have their individual pressures. So we're going to talk about them on a line-by-line basis at the investor conference and then as a total portfolio. But if I go back to the range, we are clearly focused on growing earnings in 2014. And the range that we're beginning with encompasses that upside potential. And I don't know, I think it's appropriate for us to be very direct with you all about the headwinds that are in the marketplace, and we have done that with you each year, and to position ourselves appropriately in a range because there are a range of performance outcomes that could occur as a result of those headwinds, not all of which are fully predictable. But we are putting forward, I think, an appropriate and, I would say, positive context when thinking about '14, that we are discussing a range that has upside performance above the upper range of our current year performance. So I think I would walk away from that, to my view, in a positive context. There is a lot of work we will have to do to perform that upper end, but we are clearly focused on that.

Joshua R. Raskin - Barclays Capital, Research Division

So I think, Steve, I think I understand the context in which your range will encompass potential upside relative to this year. I guess I'm still trying to figure out and quantify what the actual impact from MA, as you guys have talked about the funding challenges as you...

Stephen J. Hemsley

Josh, I know you're trying to quantify that, but we are not going to get into quantifying...

Joshua R. Raskin - Barclays Capital, Research Division

December 3.

Stephen J. Hemsley

MA or commercial or Optum or any of the other businesses this morning. Otherwise, there will be not much left to talk about at the investor conference.

Joshua R. Raskin - Barclays Capital, Research Division

I'll also show up on December 3.

Operator

And our next question comes from Scott Fidel with Deutsche Bank.

Scott J. Fidel - Deutsche Bank AG, Research Division

I was wondering if you could help us think about how pricing is shaping up in the market for commercial and individual and small group, both on and off the exchanges? And then, without getting into too much detail, maybe if you can help us think directionally about how you're thinking about enrollment for commercial large group and national accounts for next year.

Stephen J. Hemsley

So maybe Gail to start out, and then Jeff to comment.

Gail Koziara Boudreaux

Sure. Good morning. A couple of questions there. Let me start with the pricing question. First, on the commercial pricing environment, we've talked about this on, I think, every call I've been on. It remains a competitive environment. What -- this year is a little different in that every year, we see -- I call them different themes that play out in each of our local markets. And some of those themes this year are around what I'll call very selective disruption. It's not broad, but there are some of that playing out, as well as some of the early renewals that are occurring in the market. I think what's important to know about our approach is we haven't changed our pricing approach. It's staying very consistent, our controls and discipline are staying consistent, and our focus really is around the value-based products that we put in the market over the last couple of years and feel that those will resonate very well. In terms of -- I think your second question was on national account enrollment. I'm going to ask Jeff to comment on what's happening there. But before I go, actually, you had asked about pricing in the public exchanges. And our comments on that -- as you know, we have taken a very modest position in the public exchanges. And unlike any other new entry into a market, these are structurally different market-to-market, very similar to our existing portfolio, so you have to look at those. Again, our approach in those markets is very consistent, and we look at things that are basically 2 functions when we set our price. One is the expected cost of the product and network configuration is an important part of that, and then the expected cost of the people to enroll. And that discipline has stayed very consistent. As we look at the pricing across the public exchanges, you would expect to see a broader range because of it being a new market and, quite frankly, the network product configurations that are in the marketplace today. So I don't think that's unexpected, but that's essentially what we are seeing. And I'll ask Jeff to comment on the national account marketplace.

Jeff Alter

Thanks. Scott, it's Jeff Alter. Now just to wrap up with Gail, so on pricing because, obviously, pricing and our enrollment outlook are tied together. So again, we remain unchanged in our discipline in our pricing to flow with cost. And sometimes, as you know, over our history, in doing that, it can tend to cause us to give share back within the short term. So as we think about our enrollment in '14, keeping it at high level, obviously, sitting in the middle of October, there are a lot of things still to play out. But we do expect our enrollment to be down next year. And as Steve said in his comments, we've come off a string of very successful years, but we expect that down to happen primarily in a couple of areas. One, we've mentioned that the national account season, early on, had a structural change in that the pipeline for new business and existing accounts was the lowest we had seen in a number of years. And probably based upon all the changes at the national level in the health care system, many of our national account clients sat still. We've mentioned it before in this morning about the impact of private exchanges, which we think are going to be positive overall financially. But as we do transition some of our businesses and some of our clients that are total replacement into an open exchange model, it would be prudent to believe we're not going to continue to have the total population back. But financially, it's still a very good trade. And then we've got our individual business, which I'll start right out by saying is not a large contributor to our financial performance, but we do have about 900,000 individuals who will be impacted. So that's -- those are those tranches. And then I think we've talked about this, and the world knows about this, the largest driver of our outlook for down for next year is the loss of that large public sector account, which we are protesting but, at this point, believe it's appropriate to say that's a loss. So those are the -- that's where we're looking at our outlook. Obviously, we'll have a lot more detail in December for you.

Scott J. Fidel - Deutsche Bank AG, Research Division

That's helpful. And if I could just clarify on that. So are you saying that when you say expect to be down, is that overall commercial membership, or is that both overall commercial membership and national accounts membership? I just want to make sure that we have that clear.

Jeff Alter

Both.

Operator

And our next question comes from Ralph Giacobbe with Crédit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

I just wanted to go back to public exchanges. And I know you guys provided some commentary already, and obviously, you guys have taken a more cautious stance, at least initially. I guess, again, now that you've seen the pricing, are you surprised at some of those levels and maybe some of the strategies some have taken? And then any concern of sort of spillover effect onto the commercial pricing environment over time because of that?

Stephen J. Hemsley

Gail, you want to...

Gail Koziara Boudreaux

So I'll go back to -- again, there's a few embedded questions in there. The pricing environment in the public exchanges, again, ours is a pretty modest footprint. And there, I think it's hard to draw conclusions at this stage from what we see in the pricing from that market because it is based on a whole group of factors that are not necessarily in the broader small group market. So I think that's the first thing. And it does really rely on the estimate of the product configuration, the network that was chosen, as well as the expectation of what the population of enrollment is in that network. So from that perspective, again, while I can't comment on others, we did expect to see some diversity. And we think over the long term that as people get experience and understand what's happening in that market, we will see that come into a tighter range would be our expectation. And then in terms of our pricing philosophy, I keep going back to we've been very consistent. We're keeping that same consistent methodology. The one change that's happening in the marketplace, as you know, is the market is going to adjust to community ratings. So that is a change in the marketplace, but it's something we're well prepared for, and a large part of our business is already in that model given the states we work in.

Operator

And we'll go next to Sheryl Skolnick with CRT Capital Group.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Steve, I'm very intrigued by your commentary, more qualitative, obviously, than quantitative, about 2014 because my sense is the early perception of the initial straddle guidance, in loose terms, was negative. And yet when you clarified it, which was very helpful, you suggested that we walk away from it positive. And I think it was negative because it was seen initially, early e-mail contact, as being a reversal of your prior commentary, which, on the second quarter call, I think you said that you're intensely focused on, if not committed to, achieving -- finding ways to achieve growth in 2014 despite the headwinds. So let me just clarify, if I may. So you said you'd walk away from this positively. Stock is down. Obviously, the street's walking away from it negatively. This seems to me to be a continuation of what you said before, except represented in a range around current year guidance. That's question #1.

Stephen J. Hemsley

That's exactly right. So I don't know how many questions you'll have, but that one, if -- go back to our commentary, and we do pay attention to what we said in the prior teleconferences, we see today's commentary to be completely consistent with that. We would always put them out in a range, and what we are really signaling is that, that range will have an upper end, and we are basically confirming that today.

Sheryl R. Skolnick - CRT Capital Group LLC, Research Division

Right, okay. So that is good news because obviously, with all the headwinds, it could have been negative. So the real question, if you can give me some qualitative sense, are the things that would have to go right to get to an upper end of that range versus a lower end of that range in very broad terms, the positive influences that you see, because we've heard a lot about the negatives. But I'm interested in the opportunity to achieve that upper end, which, again, would temper the negatives for today or decide maybe it's inappropriate to temper that negative.

Stephen J. Hemsley

I'll do my best. But basically, we laid some of the trends out in the teleconference. We expect our performance on our services businesses, our Optum businesses and the services business in United to continue to grow and perform strongly. We said that in the teleconference. We must execute at very high levels along things that are hard to do because the medical cost trends have been so well managed. We have to continue to not only manage them well, but manage them better than we have. We have to execute on strategies we discussed before on Medicare, around -- focused on specific targeted markets, narrowing networks, ever effective -- there are areas where we could make progress in terms of effective care management on the ground level. It would be in the Medicare book of business. Those kinds of elements, managing and taking our productivity and operating cost disciplines to a next-level performance, which I think we are very capable of doing, are all areas that we see as opportunities. And kind of even to just the last area of discussion, as I think you all well know that sometimes, to improve performance and improve it on the long term, you have to do things in the short term that don't -- that have a longer-term logic to them. So you have to really hold the pricing discipline. Sometimes, you will have to give back some memberships to the marketplace to perform more strongly in the current year and going forward. So all of those elements that you would imagine, we have to do and we have to execute well on. And as we do, we will position ourselves for an even stronger performance position for 2015 because all those things we talked about are structural in nature. And then beyond that, we see growth opportunities that come on to a much higher, a much more rigorous platform. That is, in essence, the elements of the plan. We will be laying those kinds of things out in the investor conference. And to the first part of your question is we put out a range that has a -- acknowledges an upside to where we are today, as well as a downside, because I think we have a responsibility to acknowledge the headwinds that are in the marketplace. The notion that we are putting out a range that has an upside to it, we think, is completely aligned and consistent with the conversation we had last quarter. We are focused on growing earnings of this enterprise. It will be difficult in 2014. We've said that before. But beyond that, we think the things that we're going to do are going to improve and strengthen our business going forward. And we have very strong businesses and growth opportunities in Optum, and we haven't even touched on international. So that's why I think we do take a positive attitude about where we are.

Operator

And we'll go next to Matthew Borsch with Goldman Sachs.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Just one question on the Medicaid business. You touched on the headwind from the industry fee there. I think, though, when we had visited you guys a couple of months ago, Jack, you, in particular, had highlighted that, unless I misunderstood, that the Medicaid businesses, on an overall basis, you expected earnings to grow in 2014. I'm just -- I'm trying to match that up with the size of the headwind that you might be facing. And maybe some of it is just going to be timing because the rates will catch up, but how do you get there with the industry fee not reflected in many of the rates?

Stephen J. Hemsley

Well, I think we can go back to Steve Nelson's comments, but I think what he was offering in his discussion about overall rate advocacy is whether you can pinpoint that element in the rate response from the states. We are getting rates that would suggest that we have opportunity for growth in 2014. So I would have said that, to me, was one of the more positive elements in terms of his commentary. So I think we are getting that kind of overall rate relief. Steve, is that correct?

Steve Nelson

Absolutely. There's not only, within that, a positive view and the opportunity to grow earnings, but tremendous membership growth as well. And that will come from a lot of sources, but our geographic footprint is really strong. We're in states that we've developed great partnerships with, and we're bringing innovations and capability and have demonstrated competitiveness with recent wins. And so I think there's a lot of opportunity. We feel pretty positive about the -- in that business.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Great. That was an important clarification.

Operator

And we'll go next to Tom Carroll with Stifel.

Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division

So a question on the mix shift that you're highlighting with the sizable fee-based growth this quarter, as well as last quarter, I believe, you commented on it. But looking year-over-year at the change in your operating cost number, as well as your cost of products sold number, those 2 things together are up about $700 million year-over-year. And I'm wondering if you can give us a sense of how much of that increase is attributable to the fee-based growth, and should we think about kind of a higher level of operating cost going forward?

Stephen J. Hemsley

Maybe Dave Wichmann would be best to cover this. But when we talk about operating cost relative to that, we're talking about services. So we're talking about the difference between insurance premiums versus services. There are some services in UnitedHealthcare, but the big pieces of services are Optum. Virtually all of Optum's businesses fall into that category. And a significant portion of Amil, as well, because Amil has those significant care delivery services. All of those elements contribute to that. So those are the elements that are growing very rapidly and are outgrowing our premium-based arrangements and creating the higher proportion of operating cost versus medical cost because medical costs only come through on risk-based products. Dave?

David S. Wichmann

Yes, so a couple of things. First, I think, specifically to the lines you're looking at, if you look at our services growth year-over-year, it's 25%. And if you look at our products growth year-over-year, it's 19%. And those 2 things are disproportionally pushing our operating costs up, which are up about 14% year-over-year, and our cost of products sold, which are up about 17%. So you can see, just by the very nature of those few line items, that there is a significant influence there. But maybe in the context of the operating cost ratio being up 20 basis points quarter-to-quarter, I could demonstrate this more fully. The single largest driver of that increase has been and in this quarter, it's no exception, continues to be mixed business exchanges. And most are the things that Steve just laid out. We had a large funding conversion this year, as you recall, in the first quarter. That, of course, reduces our revenue side. We have Amil included, and Amil has a higher operating cost ratio in the business. We brought on TRICARE, which is a significant fee-based arrangement. And of course, the results at Optum are eye-popping in terms of the growth, and that's largely services-based business. That, again, is the dominant component of that. But in addition to that, we have been implementing ICD-10, PPACA, implementing TRICARE and reimplementing it, unfortunately, this year as well, but also this PBM migration as well. So again, a large contributor to the operating cost ratio this year. I'll tell you, these are significantly offset by the productivity advances of this team, very significantly offset. I'd say our productivity is not only at the upper end of the range we typically have given you, but it's an additional 50% more. So very, very strong results this year in terms of the way we've managed that. So in general, we're very pleased with our operating cost results and the progress we've made in containing them, and that's something that we're committed to doing into the future as well.

Operator

And we'll go next to Sarah James with Wedbush.

Sarah James - Wedbush Securities Inc., Research Division

Can you speak to how you're thinking about public exchange accounting? Specifically, can you reasonably accrue for these 3 Rs? And there has been some talk of a plan-initiated data share program to aid on understanding market average risk scores if CMS doesn't provide it until '15. So is this something that United is considering participating in? And how valid is the insight from this group, meaning how much of the exchange market may be participating in the data share?

Stephen J. Hemsley

Dan, do you want to take care of that?

Daniel Schumacher

With respect to risk adjustment, I think it's important to recognize that it's not something that's unfamiliar to us. We've got a couple of our large states and very successful states where we have modified forms of risk adjustment today. And also, we operate in Medicare Advantage, which, as you know, has a big risk adjustment to it as well. To your point, we have absolutely participated with a third party to gather industry information and get some feedback on where we sit. And based on that information, as well as our past experience, we feel very comfortable with our ability to estimate the results as we get into 2014. And the other thing that I think is important is our size and geographic diversity is another thing that plays in our favor with respect to risk adjustment.

Sarah James - Wedbush Securities Inc., Research Division

It sounded like you have already participated with this third party on sharing information. So is there enough out there to kind of tell what the average health of the exchange is? Is that more costly or sick?

Daniel Schumacher

Yes, we've participated in 2 cycles of that right now. And we will again, in the first quarter, participate in another cycle of that. And they're endeavoring to get 75% of the market participants at a local level, segmented by small group and individual. So we'll be able to -- based on that information, we think we've got a good sense of it. And also, again, our size and geographic diversity are things that will be important to us.

Sarah James - Wedbush Securities Inc., Research Division

Is there any comparison you can offer to your traditional commercial book, how much more sick these people are?

Stephen J. Hemsley

So I think we might be getting a little muddled in this because I think you might be asking about does this give us insight into what we think the public exchange mix looks like. And I don't really think we're going to get -- we really don't have an experience with that, and I don't think it is our place to comment on that. I think Dan was commenting that the size, diversity and geographic spread of our book gives us a perspective of being kind of very average across the nation. We're a good proxy for a national platform. Is that right, Dan?

Daniel Schumacher

That's right. And Sarah, this obviously relates to both on and off exchanges business in small group and individual. It's really -- that's the reference around our size and scale, not our exchange participation, which, as we've said before, is modest initially.

Stephen J. Hemsley

Okay. So I'm sure we'll be talking and touching more about that at the investor conference as well.

Operator

And we'll go next to Carl McDonald with Citigroup.

Carl R. McDonald - Citigroup Inc, Research Division

I wanted to focus on the OptumHealth business earnings, up roughly 90% this year, and that's come mainly from margins running 300 basis points above your expectations. So just the 2 related questions there. What's driving the margin expansion within OptumHealth? And do you think a 10% margin is sustainable, or should we look, going forward, for that margin to return to more historical levels?

Stephen J. Hemsley

Larry and John, do you want to touch that?

John S. Penshorn

Before we start, Carl, can you clarify, are you asking about OptumHealth? Sorry, this is John Penshorn. Are you asking about OptumHealth or Optum overall? I don't follow your question.

Carl R. McDonald - Citigroup Inc, Research Division

OptumHealth, specifically.

Larry C. Renfro

So Carl, it's Larry Renfro. Let me make a couple of comments, and then I'm going to ask John Rex to jump in on this. When we look at Optum, we look at the 3, what I'll call, the 3 organizations, and we have a margin range of each one of them. And OptumHealth is 8% to 10%, and OptumInsight is 15% to 19%, and OptumRx is 3% to 4%. And we try to manage this throughout the year. And I realize that we had a very good quarter in the third quarter. But I would say that over the 12-month period, based on mix, seasonality and investments that we're making, that we still believe that, that range in Optum -- in OptumHealth is going to be in that 8% to 10% range. So we don't see anything that's changing that. I think Steve commented that overall, and I'll just say this, that we believe that this year, we'll finish at 6%, which was one of the goals that we have set for 2015 for Optum overall. But maybe I'll ask John to comment on this in more detail.

John Rex

Yes. So if we look at, in particular -- so first of all, I'd comment that when I look at OptumHealth and the performance 9 months to date, and actually I'd kind of broaden it a little bit and talk about Insight and Rx also within that context, that when I look at the 9 months, we're within the range of those long-term guidance ranges we gave you. So 9 months to date, within OptumHealth and OptumInsight, we're running at the high end of those ranges. And within OptumRx, we're running just about in the middle of that range. And that would be our expectation going forward. I mean, I think quarter-to-quarter, year-over-year, we see impacts from mix, seasonality and investments that we'll be making in the businesses. So that's why we stick with those long-term ranges that we've set out. If I would think about OptumHealth particular in terms of the 3Q and some of the highlights, I'd say the entire portfolio of businesses within OptumHealth were performing well, but I'd maybe point out local care delivery, our population health and our health-related financial services businesses as all strong contributors. But again, very much speaking with that long-term range that we've laid out for these business, as we will continue to invest.

Stephen J. Hemsley

And I think in total, if you look at Optum as an emerging enterprise, that there's scale opportunities there that are meaningful. And I think when we talk about things like One Optum and so forth, that's what we're really talking about is that we have opportunities to, we think, continue to improve the performance and yield of that business.

Operator

We go next to Christine Arnold with Cowen.

Christine Arnold - Cowen and Company, LLC, Research Division

Following up on Optum. I'm hearing a couple of things I just wanted to clarify. I'm hearing that we're within the long-term range of margins that we expect, which suggests that margins will be -- probably not move much next year relative to this year. But I'm also hearing it's an emerging enterprise with scale opportunities. Scale opportunities suggests to me kind of margin improvement opportunities. So can Optum grow earnings at the same pace in '14 as they did in '13? How do I think about that?

Stephen J. Hemsley

So let's go back to the very first question of the call. This is, again, more triangulation around '14 that we would really prefer to save for the investor conference and can then actually present those things in a coherent and kind of fulsome basis, see all of the offerings across the enterprise, their relative challenges and their relative opportunities. There are clearly opportunities in Optum. We are clearly looking to improve its performance, grow its earnings, improve its margins, but we're not going to comment specifically on '14 until the investor conference.

Christine Arnold - Cowen and Company, LLC, Research Division

Okay. Well, then, taking a different question, then. If we look at Amil, can you talk to how that's performing? And is this an investment year? How do I think about this year's Amil performance relative to kind of future opportunity?

Stephen J. Hemsley

Sure. Well, I think we have great growth aspirations for Amil, and I think it's performing on or above its plan. But Dave, do you want to talk...

David S. Wichmann

Yes, Christine, Dave Wichmann. For the first 9 months of this year, Amil is ahead of its financial plan, both in terms of growth and profitability. So obviously, we're quite pleased. I think the economy in Brazil is shaping up to our expectations, so it provides a nice platform, if you will, for growth. We are seeing that growth in the business, both in terms of our membership growth on medical lives, which are up about 365,000 since we started, and then also in the general marketplace as well, which are up about 400,000 lives since we commenced just under a year ago. I think that growth is really the great assessment of the strength of Amil's offerings and the value of its -- what I'll call semi-integrated delivery model and its ability to offer higher-quality, as well as cost-effective, products in the marketplace. This quarter, we're experiencing winter, so it's kind of counter-seasonal for what we see here in the United States. So as expected, earnings are off related to seasonality relative to our overall expectation. Just on the integration front, it's going very well. I'd just point out 2 things. One is we're really working with Amil to, I'd say, bring a more modern technology and operating infrastructure to that marketplace, which, I think, is a great opportunity for us to distinguish ourselves in the market around service, quality and whatnot in addition to the clinical quality aspects of the model that they offer. And likewise, we are -- they are, in turn, helping us with ideas around clinical care delivery and how that integrates in local markets and drives the peer performance on behalf of the consumers we serve. So overall, you should take away from all that, that we're quite pleased to date with our Amil relationship.

Operator

We'll go to Michael Baker with Raymond James.

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Just a question on OptumRx. Given the fact that you're at the tail end of the Medco integration here, I was wondering if there are any plans to differentiate your specialty pharmacy management offering, given your unique positioning in the marketplace.

Jack Larsen

Yes, sure. Well, we have a couple of philosophies on specialty. And the first one is we really focus on adherence because adherence for these very sick patients provides lower medical cost for our customers. The second thing is we want to eliminate drug waste, so we do a lot of work with respect to making sure that we take lab values and the like, make sure the treatments are working. And the last thing I think we're doing from a specialty standpoint is we have great visibility into the medical benefits, so we can see and manage about half the spend that resides there.

Operator

And we'll go last to Steve Halper [ph] with FBR.

Unknown Analyst

Just looking at Insight, OptumInsight. Over the last few years, you've been focused on Optum One and focusing on certain business lines. How is that progressing in terms of achieving the overall efficiencies, as well as what were the stronger performers within Insight during the quarter?

Stephen J. Hemsley

Sure. Larry, you want to kick that off, and then Bill?

Larry C. Renfro

Yes, and I'll kick it over to Bill. The overall One Optum plan, and I think you said this, had in it for 2013 that we were pivoting to growth. And pivoting to growth, what we had talked about doing was really being able to position ourselves to attract what I -- and I said this earlier, a larger, deeper and more complex relationship. And the Optum360, the Dignity deal, is a good example. That is part of OptumInsight, and Bill can talk a little bit about that. I can tell you that, as we go down the road here, the pipeline is very strong. We think we're well positioned in the marketplace. And I think that you're going to see more and more of these larger organizations that are going to be part of what I'll call planned investments that we have to put in place as we still have to -- we really have to develop and innovate as we become more of a potent solutions-oriented organization. So we're positioning, for the future, a lot in the OptumInsight area. So, Bill?

Bill Miller

Yes, I think we continue to see, specifically, our compliance offerings expand. A lot of the work that we're doing with payers around payment integrity and, to Larry's point, our provider businesses, as we continue to create depth with them and, really, the One Optum strategy coming together to really give more end-to-end oriented solutions is being, I think, very warmly received by the industry. The latest example of that is the Optum360 relationship with Dignity. And I think we're seeing a continued demand for us to be more end-to-end in our approaches, and that has been the intent of the One Optum thought and our product integration and our business integrations. And I think we're reaping the rewards for that.

Stephen J. Hemsley

So I think that's it. Let me just briefly finish by thanking you again for joining us this morning, your interest and participation. I think we had a very solid third quarter in the context of a very strong 2013. We think we have meaningful performance opportunities in front of us. We are focused on optimizing the performance of this enterprise and addressing the headwinds of 2014. We will look forward to sharing more detail with you and insight at the investor conference on December 3. Thank you.

Operator

This concludes today's conference. You may now disconnect, and have a wonderful day.

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