Good morning. I will be your conference facilitator today. At this time, I would like to welcome everyone to the UnitedHealth Group first quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator instructions)
As a reminder, this conference is being recorded. This call and its contents are the property of UnitedHealth Group. Any use, copying, or distribution without written permission from UnitedHealth Group is strictly prohibited.
Here is some important introductory information. This call will reference a non-GAAP amount. A reconciliation of non-GAAP to GAAP amount is available on the financial reports and SEC filings section of the company’s investor’s page at www.unitedhealthgroup.com. This call contains forward-looking statements under U.S. Federal Securities Laws. Such 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 filed with the Securities and Exchange Commission from time-to-time, including the cautionary statements included in our current and periodic filings. Information presented on this call is contained in the earnings release we issued this morning, and in our Form 8-K, dated April 20, 2010, which maybe accessed from the Investors page of the company’s website at www.unitedhealthgroup.com.
I would now like to turn the conference over to the President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.
Good morning and thank you for joining us this morning. Today, we will provide a brief review of our 2010 first quarter and update on our view of full-year 2010 performance, and an initial high level view on our preparations for growth perform environment. We perform strongly in the first quarter and virtually all our businesses expanding the momentum we built steadily throughout 2009 in a wide range of key performance areas.
First quarter revenues grew beyond our expectations as more people purchased our products and services in the first quarter and anticipated. Again this quarter, we effectively managed medical care and operating expenses on behalf of our customers. We also further strengthened our administrative infrastructure and system and as a result improved performance quality, consistency, responsiveness and operational efficiency.
First quarter earnings per share were $1.03 and operating cash flow as $1.2 billion. We are updating our full-year 2010 earnings outlook to a range of $3.15 to $3.35 per share. This is based on stronger revenue growth, the cumulative impact of ongoing operating the medical cost management efforts, and improving operational integration in our distinct health benefits and health service business platforms.
For the past two years, as you know we have steadily pursued an agenda of consistent execution on the fundamentals of our businesses. Customers are responding well for that execution. We continued to deliver distinctively in key areas such as responsive service and integrated consumer engagements in clinical managements, which we provided significant scale well customize the individual needs.
We have built on our leadership and innovation by focusing on practical developments that help modernize the health system. Last week, there was trade we introduced the Diabetes Prevention and Control Alliance and now have a partnership with YMCA-USA and retail pharmacy beginning with Walgreens. This pioneering program will use adjunct networks of lifestyle coaches and pharmacists to help people prevent diabetes for better control their conditions.
We will use advanced analytics from the Ingenix to identify people who are at risk of diabetes years before the conditions that they’re in. The program is distinct from, but aligns with our Diabetes Health Plan, a use of biometrics screening to drive wellness in our new partnership around healthy eating, nutrition possess in the work shops. These are part of a broader and more sophisticated effort to slow the U.S. diabetes epidemic than as ever been pursued addressing the condition that potentially could affect more than 25% of the U.S. population.
We’re delivering our practical innovations through our health services businesses as well. Ingenix formed a joint venture with technology leaders into it to code develop the quick and help expense cracker, which is now subscribed by several large insurance companies including the UnitedHealthcare, where we already have 50,000 users in just four months. It automatically assembles for consumers a complete picture of their medical-related savings and expenses by drawing on claims and benefits data. This helps people better understand and manage their health expenditures and bring with them the industry’s first automatic online bill payment applications.
Last week the UnitedHealth Center for Health Reform & Modernization issued its first post reform research report providing analysis and ideas that help with the execution implementation of the new laws. We identified nearly $370 billion in potential savings over 10 years for the Medicaid system to the application of proven techniques in programs and suggested a substantial portion of those savings we invested in strengthening primary care resources.
This follows too earlier research reports where we identified more than $500 billion of saving available in the Medicare program and more than $330 billion through the better use of modern technology in the health system broadly. These reports are available on unitedhealthgroup.com. We have more activity in the pipeline as we remain committed to be in a progressive and innovative voice helping advanced healthcare monetization.
Let’s turn now to an update on our major business groups beginning with health benefits. Health benefits include our commercial, Medicare, Medicaid and military bettering businesses. We are steadily integrating and simplifying those businesses across networking clinical care management function, services and technology, administrative in regulatory capabilities in local and regional market relationships.
We’re beginning to advance these efforts for UnitedHealthcare AmeriChoice and Ovations behind a unified UnitedHealthcare brand name. Our health benefits businesses began 2010 with good momentum led by performance in the public and senior markets, where we added 635,000 consumers in total.
Growth in Medicare Advantage, 215,000 seniors including 55,000 from Health Net was more than double the upper end of our full-year outlook for 2010. This strong start brings us to 2 million seniors in that product set and puts us on the course to grow as many as 250,000 for the year.
The product mix was favorable, 70% of the net growth coming from network-based products. This growth was carried over the Part-D offerings as well, where we grew by a total of 505,000 for the quarter with 240,000 of that a new standalone Part-D members.
Reflecting the overall economic climate, we continued to have steady Medicaid growth. We added 145,000 beneficiaries this quarter, and now served more than 3 million through this business, which is dedicated to state-based government sponsor benefits.
A member engagement and care management program have become steadily more consistent and effective in addressing the care needs of these often underserved credits. UnitedHealthcare commercial membership performance improves significantly over the last few years and was above our initial expectations and that is in the phase of continued high levels of unemployment and related attrition.
Self-funded benefits grew 170,000 consumers this quarter propelled by annual enrolment from large customers and strong sales in the mid-size employer markets. For risk-based benefits our first quarter decrease of 275,000 people was meaningfully better than both our original first quarter outlook and prior year first quarter results.
Persistently attrition levels driven by the economy prevailed in our commercial health benefit businesses. Attrition losses exceeded organic sales growth again this quarter, put another way, we would have reported net commercial growth, if there had been no attrition during this quarter and that would have been in true the last quarter as well. Realized premium yields have been as planned and are on track with projected 2010 medical cost trend.
Our commercial benefit sales recovery has been steady and broad based. More than 60% of our local markets delivered year-over-year growth in both risk and fee-based commercial benefits.
Growth has been driven by in a way of simpler and lower price point product, align the local market needs in preferences including consumer directed high detectable plan in order to we now have more than 3.3 million consumers enrolled. Consumer value products between consumer responsibility and accountability design have grown 80% year-over-year to 600,000 people.
Our linear benefit offerings that feature variations in network design, such as premium designated network incentive; through more than 30% to 900,000 people. In total, our health benefit businesses produced $21.6 billion in revenue for the quarter, a 4.7% year-over-year increase. They contributed $1.7 billion in operating and earnings, which strengthen the margins from improved scale in operating cost efficiencies.
For the full-year of 2010, we see health benefit revenues of about $86 billion, which would be a 6% over 2009 as overall, operating margins in a range of 5.6% to 6.1% for the full-year. Rough makeup of those revenues would be more than $40 billion in commercial benefit revenues, nearly $36 billion in Medicare and senior offerings, and almost $10 billion in Medicaid.
The improvements come from higher growth, which we hope will continue to improve our commercial benefits of employer-related to attrition levels and side over the balance of 2010. Our health services business which include OptumHealth, Ingenix and Prescription Solutions, serve markets that offer exceptional long term growth opportunities a less restrictive and are in much earlier stages of the developments in the health benefit markets.
These health service businesses help to modernize in advance the healthcare system by driving better outcome, lower cost, higher and more consistent resource access and efficiencies, consumer and care provider simplicity and convenience. The higher satisfaction levels at both institutional and individual levels.
Our health service businesses also begin 2010 wealth. Combine revenues grew 14.5% year-over-year to $6 billion for the quarter. Earnings from operations of $334 million were slightly better than expected for the businesses are all on their earnings targets for 2010.
The operating margin percentage for health services is lower year-over-year as we have projected and communicated last call. This is driven by two main factors.
First, the continued grow that OptumHealth in large long-term public sector contracts. They have lower relative margins; combine with the commercial health benefits market that’s contracting under current economic employment conditions. That trend should reverse with employment levels recover.
Second, to return to more normal PDA margins following the discontinuation of performance based pricing of the under the Medicare Part-D program, but these franchises now receive variable pricing adjustments throughout the year rather than lacking and committed purchase prices upfront.
Prescription Solutions continue to grow at top line with the 16% year-over-year revenue increase in the quarter with normal margin levels. The business federally advanced in scale and capabilities little finest position is strong alternative to a very concentrative PDA markets.
Ingenix continued and exceptional growth trends first quarter revenues increased by $120 million or 31% with growth driven by traditional businesses and recent acquisition, revenue backlog increased by more than $1.5 billion year-over-year to $2.3 billion at 29% gains.
OptumHealth grew its revenues 6% year-over-year led by public sector and third party market growth, as has been pattern for couple of years now. OptumHealth financial and its striking growth in the quarter with half of accounts now reaching $2 million and assets under management reaching $1 billion.
We’re raising our 2010 expectations for these businesses as well. We expect our combined revenues to grow 12% to a range of around $24.5 billion, we project a combine operating margin of about 5.5% recognizing that margins very significantly across this portfolio from 3% for Prescription Solutions, the 15% or more for several Ingenix products categories.
Looking at consolidated results for UnitedHealth Group first quarter revenues of $23.2 billion increased 5.4% year-over-year driven by stronger membership growth relative to expectations.
Medical cost for 2009 in each of our risk-based businesses of lower than we had estimated, in part this reflected lower levels of H1N1 influenza and the integration of effective consumer engagement in clinical management.
The severe winter in several U.S. markets, particularly, in the Northeast reduced discretionary use of the medical cared system during the first quarter. The consolidated medical care ratio for the quarter of 81.3% reflected those conditions, and was impacted by $490 million in favorable reserved development, compared to $200 million last year.
A consistent focused on clinical performance fundamentals, which help in drive appropriate trends in health system utilization. The Medicare Advantage hospital days for 1,000 members decreased by a total at nearly 8% over the past three years, while maintaining access and improving clinical quality.
In commercial, medical care management results are favorable as well. We achieve these results for our customers by more effectively reaching people as they engaged health system and providing with useful information by fundamental, execution on care management.
There is more opportunity around appropriate times based medical cost containment, including developing more sophisticated performance based payment contracts, and broadening the use a variety of integrated care models such as medical home, modern reimbursement arrangements with accountable care organizations in the life.
Our consolidated first quarter operating cost ratio came in favorably at 14.1%. In large measure, this reflects the continued strength of our efforts around service, quality operational integration in management discipline. The efficiency reflects the improvements in our customer and care provider service metrics, which are clearly been recognized in the broader marketplace.
The consolidated operating cost ratio includes the impact of our strong health services mix, as its direct operating cost to proportionally much greater than that of our health benefit businesses alone. We proceed significant additional opportunities in operating cost management. We will steadily advance integration in alignment to get closer to our end markets and customers while retaining enterprise wide controlled processes in system.
We’ll also drive savings from better sourcing and purchasing discipline, increased use of proven modern technology in further gains and quality. For the full-year 2010, our revised UnitedHealth Group outlook puts consolidated revenues at about $92 billion. We see our consolidated medical care ratio at 83.2% or lower and operating cost in a range of 14.6% plus or minus 30 basis points.
We expect operating earrings be in a range of $6.1 billion to $6.5 billion for the year with operating cash flows of $4.4 billion to $4.8 billion. To project earnings per share in the $3.15 to $3.35 range, this includes the impact from an increase in our expected tax rate which we estimate will cost above $0.07 per share this year.
Turning to the post perform environment, the Patient Protection and Affordability Care Act mandates far reaching changes and how healthcare benefits will be acquired and administered. The broad outlines of the law are known, but how will be implemented is understandably not per say.
Accordingly we’ll the cautious with assumptions and comments that how the provisions will actually work, our stage will approach implementation and how the laws will ultimately being interpreted.
Is important to underscore, that we have firmly committed to making this new law work as successfully as possible to the American people, our new Medicaid paper is just one example. So, as our decision yesterday do ensure there is no gap in coverage for dependence gradually from power.
Some of the most immediate changes impact underwriting practices in the individual and small business commercial market. They concern guaranteed issue requirement, the elimination of lifetime element co-addition on policy rescissions and extensional dependent benefits to age 26.
We supported these elements and are fully prepared to incorporate the economic effect to these changes into our underwriting processes. We expect these changes will proceed in an orderly fashion and they are included in our revised 2010 outlook. Actuarial soundness and integrity is the core of responsible benefit underwriting pricing and regulatory over side. So we believe price changes required by rising medical cost trends and the cost associated with the revised underwriting rules required under the act will ultimately prevail across the states.
Medical cost ratio requirements will go into effect in 2011, so those enter in the pricing and actuarial considerations as well. These types of requirements of existed per years in several markets include in New York, New Jersey, more recently in the New Mexico. There are several unknowns about how these rules were specifically work, but we should know more after the energy of initial work from the National Association of Insurance Commission are just completed and made public and we will be providing comments on the commercial and medical cost requirements as well at the Department of Health and Human Services by its May 14’s headline.
The Medicare Advantage rates for 2011 were announced April 5, they will within the range we had expected and they appeared to be manageable for us, we are well underway in planning 2011 benefit design that submissions are due on June 7. We have set for sometime now that our Medicare Advantage business must ultimately be able to perform better and fee-per-service Medicare on a comparable benefits basis and with care follow be considered.
We believe, we can achieve and for saying that standard in the majority of our local markets. Since undertaking that performance goal almost two years ago, our Medicare Advantage business has strengthened measurable in basic medical cost, in operating efficiencies, in quality metrics and effectiveness of service and distribution and we expect to see steady growth again in 2011.
Our senior market plan is straight forward. We will continue to focus on the same four points that have been driving successful this year. Adjusting benefit levels in Medicare Advantage, preserving the benefit that consumers value the most, adding earnings through the targeted growth from current and new products, further diversifications in natural senior market adjacency and further intensifying both medical and operating cost management.
Turning to the uninsured, this administration plans will significantly expanded subsidize health coverage for an estimated 32 million addition people, split roughly evenly between Medicaid and the commercial market for coverage, or roughly 10% of U.S. population. We are uniquely positioned and fully intend to help serve these people, however, that coverage expansion occurs. We have the products, the cost structure, the technology, the experience, and the innovation to help at remarkable levels with that significance.
This government driven expansion place extraordinary demands and cost pressures on the health system, which we believe our health service businesses are uniquely capable at helping to address. We are well positioned with health of expansions and health information technology and our [fraud] efforts and administrative simplification, as well as the development of the modern infrastructure that will support demand and services.
We have set for some time now that the UnitedHealth Group business model was built for change, adaptability and scale. We would prove that in the months and years to come as the new law works its way to our society and economy. We’ve diverse experience in both the commercial and government sectors and in doing competencies in information, technology and accessing management of care.
We actively developed and deployed practical innovations at large scale, we can operate in the increasingly regulated world of health benefits and the less restricted markets of health services and the patient protection and affordability care that will need and engage all of these assets.
To wrap up, we feel positive about our continuing fundamental execution and the results we are delivering for customers and we can identify important opportunities for growth under healthcare reform. We’re interested in your questions this morning with the understating that we do not yet fully know all of the impact of healthcare reform in our businesses. We ask that you limit your question, topics today and that (inaudible) time and I thank you for your interest this morning in UnitedHealth.
With that we will open it up for question. We’ll give them a minute (inaudible).
(Operator Instructions) Your first question comes from Scott Fidel - Deutsche Bank.
Scott Fidel - Deutsche Bank
First question just is on how you’re thinking about the individual business now in the post reform environment and do you still view this as a fully sustainable business and then may be talk about some of the primary changes that you expect to make to the business, I know Steve, you just mentioned some of the underwriting changes, but may be some of the other adjustments you may need to make for example relative to broker commissions.
We do think it is a very viable space, the one that is going to be important kind of in the broad spectrum of the healthcare markets going forward under reforms.
Scott Fidel - Deutsche Bank
It has actually been one of the areas that has really been a bright spot in terms of our risk- based growth over the last year. Scott, I’ll ask Gail Boudreaux to comments with respect to kind of the prospectus of the individual market.
There is a couple of questions in there, so let me take them in order of the way you asked, the first, I think as Steve outlined, one of the issues around the individual business versus understanding the impact of the medical lost ratios and we know what the minimum thresholds are going to be but obviously don’t know yet in terms of how the definition, what’s going to be included in that lost ratio as well as how that’s going to be implemented, so as you think about that, that process is underway with helping human services asking in The National Insurance Commission with some guidance and as Steve mentioned in his opening comments, we will also be providing guidance.
In terms of the individual markets, specifically clearly that market is more sensitive to some of the changes that are coming. The products on hold to put in perspectives are more affordable than market products. And when you think about distribution cost in the market; well distribution cost on a per member per month basis are equivalent to the one in small business market as a percentage of premium is dealing with a smart premium base and as a result that percentage of premium is larger on that and other factors lead to a lower medical lost ratio in the individual market.
Just put again in perspectives and I’ll talk about commission a little bit in a second, I want to give you a sense of how we think about the business. We have had nice growth in that business, as Steve mentioned, but to give you a sense of the impact for our sub business right now represents about $2 billion of revenue on a roughly $92 billion base growth, relatively small percentage of UnitedHealth Group’s overall revenue.
The second question specifically on commissions and how we’re thinking about that? Our distribution partners have been important part of the individual and on our group business and we expect they will continue to be a very important part of that business going forward. As we look at our arrangements we paid compensation differently based on our different business segments et cetera, and that can arrange from a percentage of premiums all the way to a six per employee per month. So again going back to the issue on the individual market, we do have arrangements, our relationships the opportunity to make changes we have that based on reform or other options and at this stage we’re looking at an effect in the overall impact that we know more about the overall factors that I talked to you at the beginning.
Your next question comes from [Josh Roskin] with Barclays Capital.
I guess just a question on the prior period reserve development and how we should think about, I know it is only sort of one quarter in and I guess if I look at it as a percentage of prior year costs it’s now little bit more consistent with sort of a ten year average. So should we think about this as a more normal course of business and probably being consistently reserved for in the current year?
I don’t know how it relates to previous years in terms of what we should project in the future, but I want to reiterate and I said this last time on the fourth quarter call that our reserve costs remain the same today and that our total prior period development is consistent with previous years, [Josh], as you mentioned, at or below 1% of medical cost. The prior period development experienced in the first quarter is a continued theme that we’ve been seeing throughout the later half of 2009, both themes I talked about as you may recall on the fourth call.
If we had numerous changes in 2009 in our mix of business within our risk customer base, the government business as you may recall grew sharply while commercial business declined, this obviously creates some volatility in our claims data. We continue to benefit from the operational improvements we’ve been discussing for some time now, as I stated before, our auctorial models take time to adjust through those continued improvement in quality and accuracy of our claim payment.
We also now are seeing that we have lower utilization in the fourth quarter than we had originally estimated as we didn’t see the level of benefit rush, we typically see in the commercial business. When we take into account H1N1 flu and that we continue to see that experience true up favorably, all of these would contribute to a larger development in the first quarter. We booked, as we stated for years, [Josh], to our best estimate, we don’t forecast favorable development, but I want to remind you that our reserve processes are consistent, centrally control and haven’t changed over the year.
Just a follow-up on that comment on utilization, you talked about lower utilization as I remember back in the fourth quarter as well, could you comment, how that trend progressed in the first quarter and maybe specifically around the facilities?
We did see utilization in the fourth quarter continue to subside, so if you look at our trends overall for 2009, we had given a range of an estimate of around 8% plus or minus 50 basis points, that is trued up favorably. We’d still be in that range, but it would be at the lower end, where we expect to see comparable trends for 2010 specific utilization, we saw favorable utilization in the first quarter related to flu, the later flu season as I know, you know and we had the storm impact [all these]. That being said, you know, we continue to see utilization in facilities to moderate and over specific to all the actions we put in place across our health benefits businesses, not just the commercial business.
Your next question comes from Christine Arnold - Cowen & Co.
Christine Arnold - Cowen & Co.
I was [specific] you guys don’t generally breakout development by product line, but I would (inaudible) living room here to 79% commercial lost ratio, with them a lot more, even if you add 500 basis points, you’re still pretty significantly under that. So can you give some sense kind of, it sounds like you had a significant amount in commercial? And then as a follow-up, could you just take about kind of your expectations for Medicare Advantage versus where you kind of came out?
Mike, can you respond the -- when you asked about where we came out on the Medicare Advantage, we put that in context for me Christine.
Christine Arnold - Cowen & Co.
Kind of relative to your expectations, how much of the results you feel, you really know right now versus how much has flowed through from 2009?
Okay. Mike, you want to answer the first part.
The commercial loss ratio, Christine, as you know we reported an 84% medical loss ratio for commercial on 2009. We expected a slight decrease in that loss ratio on 2010, there’s no expected H1N1 flu. You know our business is seasonal; our loss ratio within the commercial business increases over the year, especially into the fourth quarter, where we expect that deductibles were off and utilization will increase.
Last year, as I just mentioned the part of the favorable developments, we did not see that level of increase, you can surmise that a portion is related to the economy could be so, but we do anticipate that developments -- that utilizations will increase.
In 2009, we had a fair amount of favorable developments in the last two quarters. We don’t forecast favorable developments, so if you just take the natural progression of our loss ratio throughout the year including the up-tick in the fourth quarter, you would get to our revised estimate of 83.5% plus or minus 50 basis points for 2010.
Christine Arnold - Cowen & Co.
But how did the -- if we were to restate 2009, commercial loss ratio with this positive development in ’09, where was the commercial loss ratio on ’09?
It would still be within the range that we did plus or minus 50 basis points, it would have trued up favorably. But I would not draw the conclusion that all the development was on the commercial side, I would say was evenly mixed with the benefits businesses.
Christine Arnold - Cowen & Co.
So if it’s 84% reported in ’09, I can take 50 basis points off that and say it was no better than 83 trued up in ’09?
Christine, I would say that it would stay within that, I don’t have the exact number, it’s 84 plus or minus 50 basis points.
So, let we move to the next question, that was three prom counting. So next question please.
Your next question comes from Tom Carroll - Stifel Nicolaus.
Tom Carroll - Stifel Nicolaus
United continues to have a very strong balance sheet and as you’re reporting this quarter, debt ratio is down, cash (inaudible) $1.9 billion, you raised your cash flow projections a bit. I’m just looking, has there been any change or maybe evolution in your thinking in terms of how you expect to deploy cash over the next few years, and in particular, I’m interested in your discussion, your thoughts on a larger shareholder dividend?
May be I will comment on that. We have, I think, over the last couple of years, I have been just thinking in terms of how well the balance sheet has been managed and kind of the financial affairs. The cash flows are strong, it does not change our view of how we would deploy that capital. We still see our priorities being whenever we can find opportunities deployed for growth and strategic expansion of our business model that is our primary focus. It also includes the continued investment in kind of the continuous improvement of our existing businesses and I think that that’s been manifest in a number of the performance gains over the last couple of years, we continue on that path and then a view that we should be both buying shares as well as having a dividend and we have signaled in the past that we were pursuing and evaluating, strengthening our dividend levels and that we were looking for the reform period to pass along those lines. So we are moving down and progressing on that and that a stronger dividend has been in our sites for the last two years.
Your next question comes from John Rex - JPMorgan.
John Rex - JPMorgan
I understand kind of the vagaries of the [red drying] process. One thing I just wanted to focusing back kind of where the first question was and maybe if you can help to [levels] that a little bit and thinking about on, if you look at our loss ratio in individual book, if you look in our loss ratio in the small group book, if one were to strip commissions out of the revenue line, so as it’s reported, on average kind of for those two books. What would be the basis point impact in the report in MRC? And then just kind of the second part of that is, are you building in flexibility for ’11, given you writing business that extends into ’11 right now? Are you building in any flexibility to impact how you pay commissions and the commission levels depending on how well this comes out?
So the flexibility part, I guess, the first part you’re going to have to receive…
John Rex - JPMorgan
Okay, if you just stripped commissions out.
John Rex - JPMorgan
In those book, so it’s commission are one of the big reasons that loss ratios appear low in an individual book for example, and if you were just to strip commissions out of the line, pick it up, pull it out of there completely, so say you’re paying $10 on commission and a $100 (Inaudible) business, you strip it out, here is your new MCR. So what I’m trying to get is, a sense for your book of business, because I kept the individual book, if I took the small Group book, strip commissions out of the revenue line.
I would have to say that on this one, this is going to take some calculus and I don’t really think that we should be kind of doing that in the venue so. We’ll be available throughout the day for questions, because I can…
John Rex - JPMorgan
I guess we’ll make (inaudible) just, is it fair to say that I mean, that is obviously several hundred basis points of impact here reported MCR, and I was just trying to get your sense of the range.
Well, I’m not sure we can answer to that and I’m confused by the commissions and the MCR.
John Rex - JPMorgan
Commissions are embedded in your revenue line, right? So it deflates, the fact that in your revenue line deflates the MCR.
John Rex - JPMorgan
So, if were to pull commissions out, your MCR goes up.
So that even more intensifies my first response and that is, you are asking a very complicated question that we really don’t want to [speculate] on that. So we’ll answer that for you through the close of the day, if you would call back.
John Rex - JPMorgan
Okay that’s fine. And then just, how about flexibility on the 11 commission levels depending on how do this falls out?
I think Gail had answered that, that’s basically our relationships with the distribution channels that have been and have been for years flexible and variable, the fact that how those operate. So I think we have a wide range of options available to us as we work with the distribution channels, but also that it is important that it is a factor in the health care landscape and has to be recognized.
John Rex - JPMorgan
But I guess my point was could you writing business right now that goes into ‘11, could you still affect that business that you have already written that goes into ’11 at this point or would that have to come later?
In some instances, yes; I mean, as we said, we do have a variety of relationships across our different distribution channels and we’re in the process of having those discussion with now and effecting the overall impact. But again, there is a lot in this space, so I know as I said before, and I do want to reiterate that this product is a complicated product and we do believe that the distribution channels are going to be important now and in the post reform environment. So it does really based on the different relations we have.
Your next question comes from Kevin Fischbeck - Bank of America Merrill Lynch.
Kevin Fischbeck - Bank of America Merrill Lynch
I had some question about the guidance, because it looks to me like when you take into account the upside in the quarter, just offsetting a little bit by the higher taxes in the quarter, it looks like you are basically leaving the rest of the year guidance unchanged even though it seems like the cost trends were a little bit better and then we saw it in Q1 and revenue just coming in better then you thought, so if you give any color there on the outlook for the rest of the year?
I’ll try to put it in the perspective, I appreciate the fact that we have -- I think we had a very solid first quarter and that the business are performing at very strong consistent levels and our normal trends are tracking some what above our initial expectation. But I think if you recall from our investor conference and our call in January, there are meaningful headwinds in 2010, that really not disappeared, but just the first quarter and the first quarter was affected by strong reserve developments.
So we think our performance outlook for 2010, which has been meaningfully advanced is really a pretty fair reflection and trying to strike an appropriate balance recognizing that we still have a very troubled economic environment, employment levels are roughly 10%, 16% if you really get to the true level of unemployment we’re still seen a high levels of attrition. The 2010 Medicare rates were quite a challenge to address and we have to address them over the course of the year there are state budgets across the Medicaid landscape that are under pressure.
As we mentioned earlier the Part D drug pricing changes have occurred and as you mentioned the tax was so - there are number of things to be considered have to recognize it for the first quarter and we think our new guidance range is a pretty fair representation of kind of where we are in the year, we might hope to do better if in fact the employment outlook were to change, but I think where we’ve set guidance is a pretty measured spot.
Your next question comes from Justin Lake - UBS.
Justin Lake - UBS
Just a follow-up first quickly on the commercial side, you took down and lowered guidance by about 50 basis points consolidated, but I didn’t see anything on the commercial MLR, do you have a spot number there or should we think about it’s more of a consolidated?
We did take down the commercial MLR from -- we were at 83.3% plus or minus 50 basis points on Investor Day and we took 83.5% plus or minus 50 basis points.
Justin Lake - UBS
Okay. Just wanted to confirm that, so essentially you’re saying that the other businesses such as Medicare Advantage, Medicaid are doing better than commercial even though commercial was down 400 basis points or so year-over-year, is that a way to read this?
Justin, can you clarify, you’re talking about full-year outlook?
Justin Lake - UBS
I don’t think there is a 400 basis points for full-year outlook, so that’s…
Justin Lake - UBS
No I am sorry, I’m just talking about the commercial market MLR, I mean this year versus last year, I guess that was actually about 250 basis points better year-over-year. So I guess I am really just trying to think about the Medicare margin expectations, it seems like it was a little bit better than what you expected, it is actually running better than commercial?
The question has the commercial outlook has improved by 30 basis points, and the consolidated outlook has improved by --
Exactly. Well, I wouldn’t say that it’s running better than commercial so to speak. So, I don’t know exactly, where we’re getting that data Justin, but I could spend sometime afterwards trying to understand your analytics around that. I would say that we are seeing as evidence by the favorable development that we size. I mentioned across all the Health Benefits business and the performance that where we went through the focus on the initiatives for the Medicare, the senior business.
We are performing few or better than our expectations. So you are seeing improved performance across the Health Benefits and Steve laid all that out in the sprit. So, if I would have jump in Justin, I’d say that yes, you’re seeing improvement basically all the benefits and I know you have been appendant to kind of our dialogue over the last several quarters increasingly.
We are looking at our businesses from a benefits point of view and health services point of view and on the benefit side, we have been taking that in very positive and measured steps to further integrate and harmonize our businesses across all the benefits landscape, and so that they all benefiting from better and more effective clinical care management, they all benefiting from consistence operating cost, experience.
Our integration efforts have been moving forward on a quarter-by-quarter basis, very nice progressing move there, which reflected itself and really positive result with respect to the constituents we reserve customers care providers etc. Strengthening our reputation market response and absolutely improving our experience with respect to medical cost management, which is arguably one of the core responsibilities we have, but it is across all those and we look at it as the more uniform business.
Justin, if you’re just doing the math on it, why the full year consolidated medical care ratio is lower than the full year UnitedHealthcare medical care ratio and if you’re attributing that to government business, I would only note as I’d seeing the financial models out there appropriately. So, we have services businesses that impact that as well and then need to make sure you take that in a consideration.
Justin Lake - UBS
I guess my point is just the commercials improving by 30 bips, the overall improving by 50 commercial staff, that means the overall, the ex-commercials out of something like 75% to 100%. So I’m just trying to figure out where the other businesses are doing much better. Is it Medicare Advantage? Is it Part D? Is it just across the Board?
It’s across the Board.
That’s what we’ve said, including Medicaid.
Justin Lake - UBS
Of course, and then just a quick follow-up on the commission side?
That would be about the fourth question, if I (inaudible) it, go ahead.
Justin Lake - UBS
The commission on individual and small group, I know they vary. Can you just tell us, what an average commission structure looks like for individual and small group right now?
Justin, I’d say one is that, I thing it various widely. It does change in terms of the United States market as far from homogenous. It various market-by-market and I also think it's pretty comparatively sensitive. So I prefer not to respond to that.
Your next question comes from Doug Simpson - Morgan Stanley
Doug Simpson - Morgan Stanley
Steve, if we look out over the next three to five years, obviously it challenging fiscal backdrop for the U.S. We’ve got this continued cost shift onto the employers. With reform implementation moving forward, how do you see the relationship between payers and providers evolving and just because if you could maybe tough on potential move from a product standpoint to maybe more network based offering to bring them cost, but also should we be looking for payer provider partnerships or alliances, just how do you see that evolving, again looking at a couple years?
I would say, comeback to some things that we have struck in this conversation before and that is the fundamental issues underneath, reform or if that had not been reform remain the same, there is pension allowance, fair in appropriate access across the U.S. population, there is significant cost pressure that would as to the market dynamics in those cost pressures vary. As I’ve said earlier, not a homogenous market it’s more than our [compelling world of length].
Health markets in this country, they do very significantly, but those pressures are real and I think you’re going to see the payers and care providers work more closely together in different kinds of than using agreement to be able to respond to their needs to the marketplace more effectively and to get out more appropriate, more efficient use of our overall resources to reserve more people in the country and so you’re seen and have been seeing efforts being made in more modern kind of capitation arrangements.
We’re seeing efforts made in medical home initiatives. We are seeing efforts made in pilots around much tighter, more intergraded kind of relationships and networks you’re seeing, networks variations going on in terms of the breadth of the broad networks, and narrow networks, and variable networks etc. So I think you’re seeing all of the above as the off search for kind of a solution that increasingly those are happening more and more together in a more collaborative context, and I might ask Gail, who receives it everyday, if she could respond to it.
In addition to Steve just outlined, I think the basic theme is, we’re are going to continue to see affordable consumer (inaudible) product and throughout driving out of the few things, we have a number of things in the market already, when we talk about position or hospital partnership, we’ve already talked about patients in a medical home, we have practiced for world, our positions were we’re paying for qualities versus just volume and I think that’s going to be a significant thing going forward.
We’re working on gain sharing arrangements through their special as to try to drive appropriate behavior around certain lines in specialty like cardiac. So there are number things in terms of the contracting methodologies in addition to work at optimist during in integrating the clinical and network care, which is also really important part of what we are doing.
The last thing that I’d ask, just significant transparency, we think that transparency will become a very important piece and we’re working very hard to make sure that consumers have access to the right information to make the right decisions about their care. So, those would be the emerging theme.
I think it’s a great question. I think it also plays itself out, when I think about federally qualified health centers in the Medicaid business, etc., and we - maybe you have a prospective [offer].
I think that one of the things that’s very important here is that the delivery system in our company has one thing in common, and that’s the focus for the patient. The patient is where we intersect together and they increasingly now whatever happens from this going forward and intensifies the positive opportunities for that relationship.
I would also add to Gail comment that we are also increasingly now in the delivery systems focused on signs and the ability to take signs and translate it into better quality. So much of what’s Steve emphasis in his opening remarks were our capabilities to reach people and also to engage delivery systems based on signs and recommendation.
If we have any hope to be able to prevent disease and to be able to just treat it cost effectively and ultimately in our investments and opportunity to have the data, the analytics, the information that people necessary to engage not only the consumer, but also the delivery system in an integrated way. So for us those things that we’ve been sounding of the fundamentals being going forward and ultimately those are themes of collaboration and co-operations, not a function.
Your next question comes from Carl McDonnell - Oppenheimer.
Carl McDonald - Oppenheimer
I think just a little pretty sensitive time politically for the industry, I mean reformers task, but as you’ve pointed out the administration, there’s a lot of desecration in terms of allow large implement. So how concerns that this earnings report the higher guidance into combination is going to reignite some of the negative sense I guess against the Group and result in some tougher implementation to the new regulations?
I think first and foremost, do you have to reflect what the business is actually performing. So I think we have a responsibility on that level and have to meet that responsibility. So I also think that if you take a look at the performance of our business it is driven more by organic revenue growth and membership growth and market responses to think that we offered, the innovations that we advanced etc. Those are the same kinds of things we think this administration also as it appetite for and trying to advance and modernist the health system.
Our interests are actually quite align on those levels and we had said for sometime that we are going to dedicate ourselves to be at enabler of modernizing and reforming the health systems, so that it works better and more effectively for all Americans and do it as the best we can and we have a very fluctuate diversified, I think model that serves across the market and I think that they want capable organizations, we’re trying to advance that agenda and we’re going to be committed to that.
So that’s the way we had work with them over the course of the last year, that’s were we will continue to focus our efforts and work with them and I think our interests are more align and then they are separate and I also say that our results are what they are and that’s what we have to report.
Your next question comes from Ana Gupte - Sanford C. Bernstein.
Ana Gupte - Sanford C. Bernstein
My questions on the near and long term outlook from Medicare advantage, the first part of it is for 2010 relative to 2009, as you’ve implemented your premiums and by downs. Can you give us a sense of what do you expect to margin compression to be, once you taken to account the loss ratio on any G&A improvement?
Secondly, is there anything you’re learning from the short term experience now that you have all the detail on quartiles and quality benefits and so on for what the sustainable margin proposition would be? And then finally, I had a question on relative positioning if you will for the various products in the senior market, you have got - I may have believe you and AARP perhaps have introduced this new Medsup offering and then if you could comments on those Humana, CIGNA alliance in the [employee market]?
Well, we are just about to have added time with that question. I know we will try. So Ana, we will try, so [Larry], would you (inaudible), Ana you might have to (inaudible) so might have to help me with some of those questions. But I’ll start and then we would kind of get into it. Last time when we signed out at about the - what we call the largest single rate cutting (inaudible) history, we started putting together a group of initiatives to help us maintain our 2010 operating earnings.
At the December Investor Conference we talked about forward (inaudible) as a focus. We talked about benefit designs, growth, local cost managements, and our strategy of cost deduction. During AEP and the first quarter of the year, we have executed extremely well according to that plan. The result would be up where we are with that guidance versus our new membership.
We also put together a lot of cost cutting programs and really initiatives that we instituted or implemented in the first quarter and at this point in time most of those programs are on target, they are on target, but we won’t see the full benefit of those until the last six months of the year. So if were to make a comment on 2010 in our performance, we would say that we’re still extremely confident in where we’re going to be.
Second question, I might not get these in order, but let’s talk about the Humana, CIGNA partnership. We obviously have been operating and currently with the partnership very similar to that for a few years here and that’s how we line up our group (inaudible) business with our commercial side. So Gail will drill on that stuff, we have our own competitive way of going after that and we won’t comment on some of our strategy because a lot of things go into that, but it was an interesting future moves (inaudible).
As far as - I think, you asked a question about product mix and what we think in terms of we’re well performance for 2010, so let me build in a couple ways. If you looked at our metrics in terms of claims, utilization, unit cost, really the metrics that we look at in terms of how the business is running, we would tell you that they are all in line with our expectation.
In terms of member mix and product mix, member mix is very broad based and the product mix today is favorable over last year and 72% of our new members are network-based products versus private-fee-for-service. And as far as the Medsup coming, I mean obviously we work very closely with AARP on all products and we have a common goal of trying to offer a variety of products to the same population. So we believe that post reform that Medsup and supplemental programs that are going to be very, very much and beyond and leave it by the seniors, should I get everything.
Ana Gupte - Sanford C. Bernstein
I guess overall, only just need a final sort of wrap up, should we take it that Med advantage is one piece of your senior business, but you’re positioning yourself in multiple products and possibly multiple channels and customer bases too. Just sort of how to rounded out senior business (inaudible).
Absolutely, if you look at post reform, one of our main goals is outperform fee-for-service as Stephen stated, and part of that processes is looking at adjacencies of products that should put alongside within your market segment.
So, with that we’ll just wrap it up by saying our first quarter results did exceed expectations in membership growth and revenue and cash flows and earnings. We’ve seen organic membership growth in Medicare offerings, in Medicaid, in self-funded deployers, I know we are seeing meaningfully smaller declines in fully insured offerings.
We’re seeing increasing demand for our products and services across our Health Service business and we‘re consistently managing medical costs across our benefit businesses and operating costs across our entire enterprise. I would point out that healthcare reform is really just in the beginning stages, it is only a beginning, it will present challenges and will present significant opportunities that we are preparing to meet both at exceptional levels. So thank you very much this morning.
Ladies and gentlemen, this does conclude today's conference call. Thank you all for participating. . You may now disconnect.
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