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Executives

Stephen Hemsley - President & CEO, UnitedHealth Group

Andy Slavitt - CEO, Ingenix

Gail Boudreaux - President, UnitedHealthcare and EVP, UnitedHealth Group

Mike Mikan - EVP & CFO, UnitedHealth Group

Dan Schumacher - CFO, UnitedHealthcare

Tom Paul - CEO, UnitedHealthcare Medicare Solutions

Dave Wichmann - EVP, UnitedHealth Group & President, UnitedHealth Group Operations

Dawn Owens - CEO, OptumHealth

Analysts

Christine Arnold - Cowen

Sheryl Skolnick - CRT

Kevin Fischbeck - Bank of America

Scott Fidel - Deutsche Bank

Peter Costa - Wells Fargo

Carl McDonald - Citigroup

Ana Gupte - Sanford Bernstein

Sarah James - Wedbush

Justin Lake - UBS

Charles Boorady - Credit Suisse

Josh Raskin - Barclays

Tom Carroll - Stifel Nicolaus

Matthew Borsch - Goldman Sachs

Dave Windley - Jefferies & Company

Joe France - Gleacher & Company

Doug Simpson - Morgan Stanley

UnitedHealth Group Inc. (UNH) Q3 2010 Earnings Call October 19, 2010 8:45 AM ET

Operator

Good morning. I will be your conference facilitator today. At this time, I would like to welcome everyone to the UnitedHealth Group third 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 contains forward-looking statements under US Federal Securities Laws that 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 October 19, 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.

Stephen Hemsley

Good morning and thank you for joining us this morning. Today, we will review our third quarter and share some reflections about the business environment heading into 2011.

In the third quarter, we continued the positive theme to fundamental execution, innovation and the momentum from the first half of 2010. This year is shaping up as one of our most well rounded performances based on the breadth of advances and the level of new activities underway across the enterprises. And we believe the underpinnings of the study performance advancement are sustainable. They include ever stronger and more consistent execution in the fundamentals of our businesses, strengthening clinical their operating cost management disciplines, continuing practical innovation efforts market-by-market, broader business diversity and expansion efforts and steady capital discipline. We believe this aspects are differentiating us in the marketplace, it translate into value for our customers and into growth including stronger than expected revenue and earnings this quarter.

And $23.7 billion of third quarter revenues we earned $1.14 per share, third quarter cash flow from operations of $2.9 billion brought year-to-date cash flow $4.8 billion. We expect our full year 2010 revenue will be almost $94 billion. This is an increase of roughly $1 billion from our last update with you and up significantly from the forecast at the end of last year.

Despite the weak US economic environment, we are driving to a full year revenue increase of 8% and once again this quarter four of our businesses each had year-over-year revenue of about 10%. We expect 2010 full year net earnings in the range of $3.85, that’s $3.95 per share lead by this strong revenue growth and a resolute focus on cost management across the enterprise. Let’s break this quarter down along the lines of our distinct, health benefits and health services business groups. Health benefits reported the third quarter revenues of $22 billion, an increase of 8.8% year-over-year. Health benefit earnings from operations advanced to $1.8 billion. We are unifying the branding of our Health benefit businesses using the strong united healthcare brand. As we communicated to you previously and as you can see from this morning’s materials, the branding integration first and foremost is designed to simplify our overall relationships with the people we serve. We want them to know that UnitedHealthcare can meet their changing healthcare needs throughout their lives regardless of which life stage our market segments they may be in.

Importantly our four health benefit businesses continue to focus on and serve their unique markets as sovereign business units. Across these businesses, we are serving one million more people than we served 12 months ago, including growth of 210,000 people this quarter. For the quarter, the strongest growth came from the commercial risk and Medicaid offerings. Year-to-date the growth leaders are Medicaid, Medicare advantage, Part D and fee base commercial.

This broad base advance of one million people in the last year is driven by the diversity of our offerings including innovative, consumer oriented products at lower price points and by our focus on simple, highly responsive service for our customers and for care providers.

Looking at performance by product category, our Medicare Advantage program is leading the market with 270,000 new members this calendar year. Our benefits are very competitive in our distribution channel management; sales execution and member support are strong and consistent. Marketing for 2011 began on October 1st and the initial response in marketplace has been positive. Consistent with our approach in prior years we are emphasizing stable, predictable benefits at affordable prices, and we hope to grow share in Medicare Advantage again in 2011.

Our Part D program has seen a net increase in 2010 of more than one half million seniors served, including those who buy their Medicare drug coverage through MATD products.

We continue to position the nations leading individual Part D plans, the AARP MedicareRx preferred plan for growth in 2011. Due to regulatory limits on the number of basic Part D plan offerings permitted, we have consolidated our Part D saver plan into our preferred plan in 2011.

As a result we expect a reduction in the number of subsidized and other saver plan participants in 2011. But we expect a decrease in standalone plan will be largely offset by new growth for 2011.

Our Medicaid business continues to grow strongly increasing 335,000 people this year. There is a steady pipeline of state program procurements across our current product categories between now and 2014, when reform driven growth should expand the Medicaid market.

We intend to be active in those intervening years as we have been for the last several years. This includes selectively responding to proposals in the growing age, blind and disabled private Medicaid market where we can apply our deep experience in directly caring for this population.

In commercial benefits, we again grew our risk based business this quarter with an increase of 95,000 people, bringing our growth to 190,000 people over the past six months despite continued pressure in the employment market. Key to this success is responsive and simpler service, intensive cost stewardship for customers and our focus on innovative local market product that provide affordable health coverage all of which combine to improve retention. The commercial market renewal rates agreement in the Northeast with Health Net as well work for both us and Health Net. And we are encouraged by the next opportunity we have from a similar arrangement with Principal Financial Group. Overall, we feel positive about the expanding opportunities in Health Net and its market going forward.

Turning to the Health Service business groups we believe the service market phase is critical for the long term performance and cost of the American health system overall. If the service market itself is still formative at this early stage. Our company is working in partnership with others who are part of this broad healthcare constituency, focus on helping improve healthcare as a system. Making it more modern, connected, informed, transparent and simpler. Our health service businesses are in line with this strategy offering enabling technology, an array of scalable resources and practical tools and capabilities in information, analytics, consumer engagement, compliance and risk management. We are focused on doing our part that help find more complete solution to the challenges the overall healthcare system is facing over the next ten years or more.

These include basic connectivity and interoperability, deeper coordination of care centered around the physician and patient relationship, informed consumer engagement and the broad application of evidence-based medical care by primary and specialist physicians. The common theme is helping to enable higher levels of care system performance, working locally to help this nation’s system improve outcomes, costs and patient satisfaction and optimal resource use.

Our health service businesses continued their growth this quarter with combined revenues of $6.2 billion, an increase of 14.1% year-over-year. Combined earnings from operations of $352 million again paced ahead of our original 2011 outlook. We are investing for continued growth including absorbing about $75 million this year in new market start up and development costs in health services.

In this past quarter we strengthened our Ingenix business through the acquisition of several leading companies in the respective market spaces enhancing our capabilities in connectivity, informed clinical workflow and revenue cycle and clinical protocol compliance. Ingenix third quarter revenues increased by $111 million or 23.1% year-over-year lead by growth in serving the government and care provider market.

Operating earnings increased 9.4% year-over-year and 16.7% from the second quarter overcoming pressure in the clinical research market, in cost of startup and development activities. The estimated revenue backlog for Ingenix increased by $1 billion or 48% year-over-year to $3.2 billion with about $2.5 billion of that expected to be realized by the end of 2011.

Year-to-date total contract value on new sales increased more then 20% year-over-year for each of the customer segment of care providers, payers, government and pharma. OptumHealth grew revenue 3.8% year-over-year led by public sector contract awards and third party market growth which has been the pattern for the past couple of years. Expansion in the integrated care market and growth in financial services have contributed to OptumHealth’s top line performance. OptumHealth’s operating margin and earnings from operations of $143 million exceeded our original expectation, due to better growth, better operating cost performance and more moderate health system utilization overall.

Due to new market startup and development cost, costs related to the implementation of mental health parity legislation and an overall decline in the commercial risk base membership served by OptumHealth customers. Earnings from operations decreased sequentially in year-over-year as we had expected.

Prescription solutions continue to grow at the top line with the 17% year-over-year revenue increase in the quarter with normal PBM margin levels in contrast with the higher margins earned in 2009. Overall, our health services revenues and earnings continued to perform ahead of our original 2010 forecast.

UnitedHealth Group’s consolidated result reflects a strong underlying performance of both the health benefit and health services business. Third quarter revenues of $23.7 billion increased 9.1% year-over-year, driven by strong organic growth in the virtually all of our businesses. Acquisitions contributed less than 1.5% of this total.

Medical cost in quality performance remained strong. Our clinical and care engagement work continue to advance and is producing positive results for customers. 2010 will likely be the fourth consecutive year of flat to down hospital inpatient usage per member in our commercial business.

Clinical program success has also characterized our senior business this year. Performance improvements in hospital inpatients and readmission management, ancillary services such as radiology, and payment accuracy to build an improved medical cost position as we enter 2011 as we had hoped. This will help counter the continuing weight pressures across the Medicare market.

Our pharmaceutical management program continued to outperform market norms in the commercial and senior businesses. Our drug trends are consistently favorable to the market led by the combination of aligned purchasing, science-based formulary management and market leadership in the effective use of generic alternatives.

The third quarter consolidated the medical care ratio of 80.1% reflects the combination of these efforts. It also includes $230 million in favorable reserve development as compared to $190 million in last year’s third quarter.

We expect consumer usage of the health system to rebound in coming quarters, resuming its upward growth pattern from the recent moderation in utilization growth. We will work to manage medical cost trends through affordable network relationships, pay for performance reimbursement programs for the care providers and targeted clinical initiatives around improving quality affordability. The health benefit businesses will set rates and benefits in light of these likely forward trends.

Our consolidated third quarter operating cost ratio of 15% was higher than we expected. We increased our commitment to new business development and to a national corporate reputation effort called Health in Numbers which hopefully many of you have seen, and we funded increases in employee headcount and compensation expenses included, including those related to acquisitions to growing mix of higher margin fee based health services businesses, increases its operating cost metric on a consolidated basis as well. Collectively these added approximately 60 basis points to this quarter as compared to the second quarter of 2010.

On the policy front, last week our Center for Health Reform and modernization published a new report detailing practical options for reducing the US budget deficit by $3.5 trillion over the next 25 years. This report documents, analyzes and applies data from actual scaled experiences. This research suggest that significant savings can be achieved through further Medicare and Medicaid modernization including bringing many of the programs already deployed for large self-insured employers for many years to Medicare fee-for-service. The research also discusses extending to all dual-eligible Medicaid and Medicare beneficiary, many of the care management and coordination techniques we have pioneered in these markets.

These proposals could all now be tested and deployed at scale using the demonstration, piloting and commissioning authority available to CMS under current law. We share this report with policymakers in Washington and our hoping that the Federal Deficit Commission will encourage the use of some of these ideas.

And lastly in December through our UnitedHealth Foundation, we will issue the 21st annual edition of our community Call To Action through our America’s Health Rankings.

Looking forward, we plan to provide our 2011 financial outlook when we have the information needed to offer a responsible and informed view. We would typically offer their initial look in this market update but the significant pending provisions related to the patient protection and Affordable Care Act does not make that possible at this time.

Our early perspectives on the 2011 environment take into account a number of pressure points. They include continued high unemployment with no significant recovery in sight, tight state and city budgets that are already starting to force government job layoffs, state budget pressures also cloud the near-term state Medicaid reimbursement environment given the scheduled phase down of a portion of federal assistance for the state by June of 2011, pressures related to ongoing implementation of the Affordable Care Act and mental health parity legislation. There’s further decrease in federal Medicare rates in 2011. This is comparatively less dramatic than the reduction in 2010 but nonetheless, the negative item to be addressed.

The sales season for Medicare Advantage products as you all know has been meaningfully shortened and the low interest rate environment continues to affect the earnings contribution from cash and investment.

Health plans would have increasing expenses to prepare for compliance with federally mandated regulations including ICD-10 coding and HIPAA 5010 standards to name a few of the larger ones. And within our company our 2010 results have been benefited for meaningful prior period development.

We recognize there would be an unfavorable earnings impact for minimum medical care ratio regulations for our commercial business in 2011 but we must await guidance from the Department of Health and Human Services to quantify that impact. Given this external environment and its uncertainty combined with our performance trends, our tone as we enter 2011 is appropriately measured. We anticipate some level of year-over-year reduction in our operating earnings and net earnings per share next year as compared to strong 2010 results, but we simply can’t quantify the extent until regulations are released and could be thoroughly analyzed and quantified at the individual market level.

We are committed to making 2011 performance as strong as possible and at this distance we expect to build a clear path net earnings per share growth in 2012. We are positive about what the future holds, we’re committed to working constructively to make health reform a reality and helping states make practical implementation plan for the new reform measures. We are motivated by the large market opportunities before us and we are optimistic and confident that we will emerge in coming years as a market leader and a high performance growth company.

We are interested in your question this morning, we will hold one question per person so we can speak with as many of you as possible in the limited time we have available. We will have an opportunity to discuss our strategy and our evolving businesses in greater detail at our Investor Day which will be in New York on Tuesday November 30.

I’ll now turn this call back to the moderator for question and Thank you.

Question-and-answer session

Operator

(Operator Instructions) Your first question comes from the line of Christine Arnold with Cowen.

Christine Arnold - Cowen

Hey there, could you talk about some of your acquisitions and the strategy behind those recent acquisition. I think you spend about $2 billion and if there is anyway you can quantify how much revenue and earnings you acquire that also would be great. Thank you

Stephen Hemsley

Andy Slavitt addressed that more specifically, but those acquisitions would play to some of the themes that I commented in the prepared comments around advancing an agenda of contributing to the improvement in maturity of the overall health system and really plays to themes that we think have been long standing areas of strength and confidence, using information, using enabling technology and using care management, along things of connectivity for one instance around compliance and another but basically to those common themes that we’ve actually been talking about for several years. Andy?

Andy Slavitt

So we began to look at several years ago at how information and analytic could be brought into the care setting in order to make technology more useful to caregivers and help improve decision making in cost and quality outcomes. So we began that journey a couple of years ago when we acquired and subsequently developed in Ingenix CareTracker to become one of the first cloud computing base, electronic health records and practice management systems. So this summer based on some of the important trends that Steve just mentioned the need for better connectivity, better compliance and better clinical outcomes to support health reform.

We made a couple of important acquisitions that further that strategy. We’ve been extending our strategy so that in the issue to the primary care we can now provide electronic medical record and operating software in high QD areas of the hospital. As Steve mentioned we’ve become a more significant provider of connectivity. We are in a strong position to provide full interoperability to the healthcare system needs and one other area that we are extending our solution offering is into compliance.

Our view is that essentially, all the pages of health reforms will end up boiling down to a number of compliance rules that health system will either adopt. So we are building large information libraries and experts to help get that done real time. In each of these cases you see as extending our strategy to marry information and analytics with the point of care where the business process.

Finally I’d just add that none of this would be possible if we weren’t privileged to be a trusted source for data security and privacy that we are. More entities, states, federal, government agencies, health systems and payers are trusting us to manage their information than anyone.

So all of this capability I believe ends up at the heart of helping healthcare communities deliver on their promise for higher quality and more accountability, and we expect that to be a significant contributor to our strong revenue and earnings growth in 2011.

Stephen Hemsley

In terms of size, these transactions were not that large and they came in over the quarter, so there’s really no significant impact to the quarter and we likely get into greater detail with respect to the individual properties perhaps at the investor day. So really just not significant to the quarter at all.

Operator

You next question comes from the line of Sheryl Skolnick with CRT.

Sheryl Skolnick - CRT

Good morning gentlemen and thank you very much for taking my question, and a lovely job across the board. I’m curious about some of your commentary about the strategic initiatives in this health services business, in particular you talked about market-by-market solutions, I think I understood you to say something that, correct if I’m wrong here but that the nature in relationships with providers of the actual structure of the healthcare delivery system are things that you’re actually looking at, and might we perhaps see United step outside of its historic diversified business activities and move more directly into directly affecting healthcare decision making, spending, provider relationships through contracting or outright acquisitions.

Stephen Hemsley

Well that is a mouthful of a question, but it’s very astute to pick on the niche issue of market-by-market. Obviously, healthcare is local and how its approach does vary meaningfully on a market-by-market basis. This is really an area we have actually been in for some time, our care management initiatives have increasingly more integrated into the delivery community broadly. We have had initiatives like Evercare for many years which are clearly direct care initiatives and areas that we work with in recent years in terms of southwest medical clinics and so forth.

So we think in picking up some of the themes that Andy mentioned that we can be helpful and contribute to making care more effective on an integrated fashion enabling it with technology using information more effectively and continue to move in that direction. So, I think that that has been consistent with what we’ve talked about in the past and it will be, it will play out differently market-by-market because of the circumstances of each of those markets.

So I don’t know what I could tell you beyond that. We continue to see if we can be helpful across the broad system and in some instances that takes us into deeper relationships in the primary and specialty areas and we’ll continue to probe that. We find it to be productive.

Operator

Your next question comes from the line of Kevin Fischbeck with Bank of America.

Kevin Fischbeck - Bank of America

I appreciate the commentary about some of the headwinds facing you in 2011. I guess is there anything that you highlight on this side of the equation, anything that you look forward as a real opportunity into next year?

Stephen Hemsley

Yes, I think the momentum that we have across our business, the performance so I could ask Gail Boudreaux talk a little bit about how the market is responding in terms of our commercial offerings and so forth. I think those are very positive signs and actually if you take a look across all of our businesses, the total expanse of it, I don’t think we’ve ever had a year that really had performance across as many levels as we have had at this enterprise and our service continues to strengthen, our response to the market continues to strengthen and our efforts around innovation and so forth are really just picking up. So I’ll ask Gail to talk a little bit about the commercial marketplace, but I think all of those things play into positives for 2011 going forward.

Gail Boudreaux

Thanks Steve, good morning Kevin. In terms of the commercial marketplace I think we feel as Steve mentioned in his opening comments positive about the momentum that we’re building. A few things as we think about what’s going to be required from employers and what’s resonating in the marketplace today. The first is really focused on total cost management. As we look at the growth that we saw over the last two quarters particularly in the risk business, those are really based on affordable consumer products and we are seeing nice uptick in each of our markets around there. Many of our markets are growing about two thirds, so we see that as a opportunity right now and then employers really three things again there that focus on affordability, the second focus on consumer engagement. Many of the tools that we’re putting into the marketplace around transparency and has ability for employers to help employees with healthier lives, improve their health and wellness have had a nice resonance in the market. And the last is around consumer engagement. You see that many of the tools that often put out in the marketplace and again that’s contributing to our growth on the fee based large employers as well. So as we think of now, the opportunities to manage cost, that’s where the momentum is coming from and our opportunity to do that in our local markets where we repositioned ourselves over the last couple of years.

Kevin Fischbeck - Bank of America

Okay and if I could just maybe follow up on that cost question there, I guess we’re kind of expecting an increase in MLR as the year went on and we saw it down sequentially. Can you give us some thoughts about what’s happening there? Is that a change in benefit design? Is it that consumers are not responding the way we would have thought, maybe the deductibles are still maybe too high and maybe we won’t see a snapback in volumes the second half of the year.

Stephen Hemsley

Maybe you could reframe that, I am not sure I was keeping up with that.

Kevin Fischbeck - Bank of America

Sure, I guess we’ve been thinking that given the change of benefit design the last couple of years that we would be seeing low MLR in the beginning of the year and would increase as the year went on and in Q3, we didn’t really see the sequential increase we might have expected. Are we reaching a point where a change of benefit design has been so great that people or the economy is just so weak that people are looking at this deductible as just maybe so high that they really won’t use the healthcare system the way that we thought they would and maybe, I am really kind of wondering whether we’re facing a situation where…

Stephen Hemsley

I don’t think so. I actually think people are more engaged, our data would suggest people are more engaged with the healthcare, more informed consumers. The consumer designs are increasingly begun, enable them to use the healthcare system in a more intelligent informed way. So I think those things are factors. If you are really talking about the totality of how trend is played out through the course of the year, there is just several major factors that have played into that. The economy could clearly be one of them and we are also not clear that that is sustainable at all.

Mike Mikan

I would separate the issue between the deductible that you mentioned and that Steve commented on from the sequential medical loss ratio. As we’ve seen the year play out, we’ve seen continued moderation of utilization and continued favorable development that have contributed to a lower loss ratio and we are seeing that really across all the businesses and so I wouldn’t try to connect the deductible whereof per se to the reported BCR. We are going to see and we have seen increased utilization albeit on a lower baseline this year as the deductibles start to wear off. So I’d make sure you are not connecting the two per se.

Gail Boudreaux

The only thing to answer your question specifically about deductibles. We have not seen acceleration in deductible year-over-year. It’s been increasing about 10% a year. So in total that isn’t accelerating this year relative to the economy.

Operator

Your next question comes from the line of Scott Fidel with Deutsche Bank.

Scott Fidel - Deutsche Bank

The market consolidation and just interested if you see a lot more opportunities in the future to do more of these types of assumption arrangements that you’ve now done with Principal and Health Net. Just whether you think that’s going to reduce the need that you’ll see in the future to have to actually do more acquisitions, commercial targets where you actually have to acquire the equity and hence that will just have an opportunity to structure these assumption arrangements.

Stephen Hemsley

I think the only comment we could offer to that is that we have said that we think the market will increasingly become more rigorous, and individual companies will make decisions about what level they want to participate, what markets they want to participate in. And I think as an enterprise we have such diversity and resources to bring that I think we can become a good solution to those kinds of situations. And we’ll pursue them where they are. But I don’t know if that will become a trend, but I do believe that the market will continue to consolidate and they will come at it in different ways. But I think there will also continue to be very traditional acquisitions in the future as well.

Scott Fidel - Deutsche Bank

You see more interest yet from other multi-line carriers in terms of potentially exiting the market, similar to what we just thought principal.

Stephen Hemsley

Could I see that?

Scott Fidel - Deutsche Bank

You will see it again at this point.

Stephen Hemsley

I can’t say that we are seeing any particular trends. I think these are more individual situations and individual decisions will be the way I’ll respond.

Operator

Your next question comes from the line of Peter Costa with Wells Fargo.

Peter Costa - Wells Fargo

I’m trying to get a handle on commercial cost trend for next year. Can you quantify how much commercials or consumer utilization you expect to rebound next year? You talked about a rebounding but can you say how much? And then can you quantify the effect of COBRA membership declines this quarter and next year on MR. And lastly, do you think there is any ability for the lawsuit against the Michigan Blue to help your pricing with hospitals or does it perhaps hurt your pricing with hospitals if you have similar type contracts?

Stephen Hemsley

Perhaps as multifaceted a question as I have ever heard. Dan do you want to talk about trend.

Dan Schumacher

Thanks Peter. With respect to the commercial trend, you look into 2011 we do expect our trend to increase and it’s really on a combination of a couple of factors. Certainly we do expect more normal utilization. And in 2011 we also expect the impact of the coverage expansions from federal reform as well as mental health parity to push up our trend in 2011. In terms of quantifying at this point, we will look to expand on that in our Investor Day conversation.

On the COBRA front, our enrollment has stayed pretty stable. It still represents about 2 to 2.5% of our full interim enrollment base. So, as you think about the costs, I would characterize those as relatively stable and no material change in the quarter.

Peter Costa - Wells Fargo

And what about the Michigan Blue? Do you expect to see any impact from that lawsuit against some?

Dan Schumacher

I don’t know if we can really comment on another carrier situation like that Peter, so.

Peter Costa - Wells Fargo

Well, more the way the fear of more litigation like that spreading from Michigan to other states.

Dan Schumacher

I don’t know if you have reaction to that Gail.

Gail Boudreaux

Obviously we support a competitive market place with hospitals and providers and quite frankly we think that that’s important and we are very focused actually on working with facilities around paid-for-performance or trying to change the game that way, but we very much think a competitive market place is important.

Operator

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

Carl McDonald - Citigroup

I want to understand how your pricing business for 2011 that’s most impacted by reform. So, are you just assuming a normal situation and not thinking of reform until the final regulation has come out. At which point you will make a change or have you done something preemptive and also what do you think from competitors along the same lines?

Gail Boudreaux

Few things, one, I think we’ve touched about it the last several calls, our pricing discipline has stayed pretty consistent around our forward deal costs. Included in that obviously is the pressure relative to the reform provision, mental health parity, we do think as we’ve talked about that we are going to see an increase in utilization from the lower levels that we experienced today. So we are building that into our forward deal pricing. In terms of the competitive marketplace, it remains a very competitor marketplace particularly in the lower end, it’s been rational. We’ve seen some actions in particular market segments in states, but that has not been a trend. So from this point I think it’s been pretty consistent what we talked about in the last quarter.

Carl McDonald - Citigroup

Maybe I can rephrase, if you’ve got the product and its in a geography where you know you are going to pay a giant rebate next year, is your strategy to cut the price to try to make the product more attractive to consumers or do you intend to sort of maintain pricing where it is and just pay the rebate out once the run off finishes.

Gail Boudreaux

I think again, we’re always balancing what we think the right cost structure is by product, by market segment and volumes, so our fundamental discipline on that hasn’t changed at all. And remember we are in many markets today where we have minimum MLR requirement and we have been very successful in managing those markets. So our strategy has stayed very consistent to what we think the right cost structure approach is for the marketplace and balance both growth and profits.

Operator

Your next question comes from the line of Ana Gupte with Sanford Bernstein

Ana Gupte - Sanford Bernstein

The question is about your SG&A uptick and could you give us any color on how that impacts your goal of the billion plus in savings and over what time period that is? And then the second question is related to that more on the selling side of it. You and your competition seemed to have alerted brokers on a reduction in commissions, are you still likely to follow through on that for 2011 and is that varying by segment in commercial?

Stephen Hemsley

Those are two parts I would offer that many other factors that influenced our SG&A costs in the third quarter and will influence them in the fourth quarter relate to specific programs that we’ve initiated, investments we’re taking, and some of the timing of when we put resources in place which we think is thoughtful. I don’t think it affects our underlying cost and productivity initiatives at all but I will have Dave Wichmann speak to that and then Gail will answer the next question.

Dave Wichmann

Just to reiterate for those on the call. We plan to reduce our cost structure by about $1 billion over the course of five years, as we laid out in our last Investor Conference, and we expected to pace that at about $200 million per year over the timeframe. Those reductions come from four principal areas improving our quality which I think you’ve seen not only in terms of our cost structure but also reputationally for the company. We are driving higher automation. Those are consistent with Working Paper 2 if you can draw yourself back to July of last year where we released that all around EBI exchange and driving a higher level of automation.

Subsidiary is really around advancing our integrations which we are very far along today as well as driving a much more simpler modern processing environment. And the last is really around improving our procurement enforcing, but right now we plan, we are on track to meet or see these commitments for 2010, and we got a nice pipeline for 2011 as well so we are very confident in our ability to achieve the estimates that we put forward for you in the Investor Conference.

Stephen Hemsley

Thanks. Gail?

Gail Boudreaux

On the commission side, we’ve been particularly focused on the individual market and as we noted on the last call we had notified our brokers that depending on what happens in the marketplace we wanted to retain our flexibility there. We still don’t know the ultimate rules and regulation around that so we’re going to make our final determination once that becomes clear based on how that market is dealt with whether there stays in a state level et cetera. So at this stage, we have not made our final determination there.

Ana Gupte - Sanford Bernstein

Just a quick follow-up, what is the likely magnitude of that reduction as you could see in individual?

Gail Boudreaux

I mean again at this stage until we know what the final rules are, I think we’re going to remain flexible because that could change based on how that rolls out end markets.

Operator

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

Sarah James - Wedbush

My question is on the Medicare market. Being 19 days into the special election period for a private fee-for-service, what kind of movement are you seeing on that book. And then second, if you could just give us a little bit of color and impact you see on the market from the Humana, Wal-Mart low cost options how is it impacting the market dynamics?

Tom Paul

This is Tom Paul, Sarah. I say its two set of business [comp log]. Our first comment on this special election period that’s resulting fundamental disruption in the marketplace. We will give you more details about our growth expectations at the investor conference at the end of November but at this time we are seeing positive outcomes from our product introductions and our distribution in end marketing efforts in regard to the migration of individuals out of private fee-for-service rather disrupted market into our network-based plans. And so at this point it’s in very positive in the growth perspective. Your second question again was…

Sarah James - Wedbush

It was surrounding the impact on the market dynamics from the Humana, Wal-Mart low cost pricing strategy?

Tom Paul

Yeah, I mean ultimately what I probably do is first focus on the competitive positioning of our own products and then how we see that as essentially impacted by the Humana Wal-Mart offering. As Peter said, we consolidated two of our basic plans, the saver plan and the preferred plan and ultimately we add consolidation where it did disrupt our saver lives made our preferred plan much more competitive. So we on average dropped our premium in that plan, which is the bulk of our membership by $5 per month. And as well as we’re able to retain a national no deductible plan, it should be the only national product without a deductible.

And our consumer experience and our consumer surveys would tell us that that is a very important feature that we were able to retain this year. And again we are the only national plan that will do that in 2011.

We do think that again any time that there is a low cost plan that comes out into the marketplace that will cause consumers to explore and look, but again that plan will have a full $310 deductible in it. And as a result, we do expect that we’ll be able to retain and continue to grow that product.

Operator

Your next question comes from the line of Justin Lake with UBS.

Justin Lake - UBS

First question just on the year 2001 outlook and the discussion of down operating income and EPS. Clearly, you’ve discussed a little bit of certainly a number, the headwinds, some of the positive factors you might be able to put in place like commission cuts. I’m just wondering on those positive factors, whether its cost cutting or commission reductions are you building in a full-year impact or whatever you expect to do there, or would that benefit phase in over time and potentially help fuel the 2012 earnings growth that you talked about?

Dave Wichmann

First of all we really didn’t give an outlook, we kind of offered basic themes that we are looking at as we look at 2011. Obviously, we work on a number of things in our business, and we really look out into the future. So a number of our initiatives just like Dave Wichmann’s commentary around operating cost for example, a multi-year initiative. The initiatives around the competitiveness of our Medicare advantage offerings and so forth are four and five year kinds of initiatives. So they all have running impacts and so forth.

And so there will be some run into 2011 that will be positive. But what I expect will also be accelerating throughout 2011, so I think it will be a mix of those types of things. It is not like in 2011 we’ll begin to initiate a whole series of actions. We have been pretty much working on these things for some time.

I don’t know if that answers your question, but that’s the best way I could frame a response.

Justin Lake - UBS

Sure that’s helpful and you talked about the outlook for 2011. Did I miss hear you saying that you expect some reduction in operating earnings and EPS?

Stephen Hemsley

No, no, no, no. You clearly heard that, but basically that’s very much a response to expectation to what will happen with respect to care ratio of regulations and things like that.

Justin Lake - UBS

Got it, and is that regardless of how the federal taxes end up, whether they are in or out of the equation you expect that number?

Stephen Hemsley

I am not going to get into the details of that. When those regulations clarify we will really address this as fully comprehensively. Okay.

Operator

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

Charles Boorady - Credit Suisse

Steve you talked about a few different related items today, the state budget outlook, the phasing out of FMAP and also the white paper that you put out last week with opportunist improved quality care and lower cost through better management of the dual eligibles. I wonder if you could just actually connect those three dots for us and give us the mosaic of what you think the opportunity set is for United in the state based and especially the dual populations and how should we think about the opportunity for top line growth from states moving more lives into managed care potentially offset by margin pressure as a result of state budget shortfalls. Are you trying to paint that positive story for us of growth or highlight a risk of margin contraction in that business in other words?

Stephen Hemsley

Well as the reality of the marketplace is, Charles it’s a little bit of both and that is, it really is a robust marketplace states, art, challenge. They have seen the merits of progresses managed care approaches to these markets and so we think the opportunities there are strong. There are, like others there are countervailing pressures and state budget environment and the rate environment that creates is one of those countervailing pressures but that is actually is existent for years. We have operated very effectively through those. I think they increasingly see the value of these programs. So all we’re really suggesting is perhaps nothing that is all that more dramatic than we have in the past and there is always pressure in the rate process that at state as they try to make their budget. We’ve just point out that the budget environment across the country is understandably perhaps as tight as it’s ever been.

Jack do you have anything to add to that?

Jack Larsen

I would. Hi, Charles. May be I take on the expectations of growth and Medicaid marketplace and ask Simon to speak to the working paper comments on the benefit and the suggestions we’ve made around duals, perhaps how to address those. I think as Steve pointed out, the level of procurement activity that’s in the marketplace that are able, confirmed and rumored is, is really unprecedented, it is across all product types and all geographies, it includes membership that is currently under managed care and really exciting part is additional population that have been previously in the Fee-For-Service relationship we believe will also be opened up to managed care participation.

As Steve said we are going to participate in those RFPs that we have done in the past and really our strategy there is to participate where we can be successful given the kinds of assets that we have and can build, but also certainly keeping an eye on how Medicaid expansion will play out, out of 2014. With respect to state budgets, it’s not news that state budgets have been tight, we’ve worked in that environment for the past several years.

I think we had given some guidance about low single digit types of rate increases, so that’s about where we ended up for the current year. And I know we’ll have more to say on this but we are likely to be looking at base rates at about that level or perhaps just a bit lower next year and I think where we excel as a company is certainly working in that very tight base rate environment but also being successful in getting some of the additional amounts available on top for quality purposes and performance-based incentives. So I guess the punch line there is we expect to grow, we think we understand how to work in a fairly tight rate environment and, as you can tell from Steve, we are quite bullish on that.

Stephen Hemsley

And I would say that’s pretty much true across the board. While we are very good at suggesting what the headwinds are, we are pretty positive about our business and I think we’ve been successful over the years working through those kind of things and continuing to grow and we don’t change that view at all.

Operator

Your next question comes from the line of Josh Raskin with Barclays.

Josh Raskin - Barclays

A question just around the outlook and I guess the inability to provide an outlook. It’s sounds like that’s based on your view that the MLR requirements need to be set. So I guess, I’m just curious as to is there an expectation then there we are going to see a meaningful deviation from what the NAIC has sort of provided at this point. Or is it just simply let’s wait until it’s signed before we get to opine on the impact.

Stephen Hemsley

Josh I think it’s simply the latter, I mean the reality is, is that those significant matters that are pending, they are clearly played directly to our business and we’d actually think it would not be responsible to offer guidance right now with something like pending. It does not reflect a view one way or the other about how we expect those to be considered and determined. It really just reflects the fact that they are still out there and we don’t think it’s responsible to give guidance while they are pending. There will there be a period where we have to really understand them, analyze them and really assess them in a market-by-market basis, so it will take a little bit of time before we can really give what we think is a thoughtful response.

Josh Raskin - Barclays

Is it fair to say that excluding the MLR minimums for 2011, you would feel differently about that operating earnings and EPS trend that you talked about for 2011?

Stephen Hemsley

I would just say I guess if we intended to give guidance today, we would have done it. But what we try to offer is some theme and I would tell you we are very positive about our business, but there are some items that are out there that are significant, they are pending and we are merely suggesting that as a responsible enterprise we’ll formulate an outlook on 2011 when we have the information to do it and really no more drama to it than that.

Operator

Your next question comes from the line of Tom Carroll with Stifel.

Tom Carroll - Stifel Nicolaus

A lot of commentary today on utilization. I want to just pick at that a little more. As we go into flu season again could you maybe give us some sense of how you are approaching flu season this year, anything different than prior years given our unusual data point from last year? Thank you.

Stephen Hemsley

Yeah, I would say there isn’t anything that is unusual. Flu is not a predictable kind of event. You can’t predict it. To the extent of it, you can’t predict the timing of it. It is the pretty regular factor on the landscape but you really just don’t know when and to what extent it will affect you. So, I don’t think we changed our view of that at all and we don’t actually incorporate anything that is specific about a flu one way or the other as we develop these outlooks on a trend. There are so many other factors that are part of it. Anything else there? I think that would be our response.

Operator

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

Matthew Borsch - Goldman Sachs

Yes and understanding this maybe gets a little bit into next year, but it’s really not an earnings. Can you comment at all in terms of how you think you are doing with national accounts and are you still seeing accounts not moving as much as in prior years or has that started to change?

Dave Wichmann

I think this one we can respond to Gail.

Gail Boudreaux

It’s been an active season in National Accounts, but your question around the theme of the trend is absolutely consistent which is incumbency. Over the last several years more than half of the accounts that went out to the market this year stayed with their current carrier.

What I wish however is in terms of our positive momentum, of those accounts that are moving we have done very well. In fact that these comments at the beginning of the session, that are, I think our strong service, our value proposition in the market, we are doing very well on those accounts, and they’re winning a majority of those accounts that are moving. So we think that’s a positive piece of momentum for us in the marketplace. And then secondarily we had less of our accounts out to the market this year and are retaining more of those. So those are both I think data points that are important from our momentum and what we’ve been able to accomplish in the National Account marketplace.

Matthew Borsch - Goldman Sachs

You are not prepared to put a number around it at this point?

Gail Boudreaux

We are still in the midst of the season, so we’ll give more guidance at Investor Day.

Operator

Your next question comes from the line of Dave Windley with Jefferies & Company.

Dave Windley - Jefferies & Company

I was wondering if you were giving any consideration to, I’ll use the word collapsing legal structure within the states to deal with the by-entity, by-state calculation in the MLR?

Stephen Hemsley

No, we are not going to get into that level of discussion with respect to specifics. It is going to vary state by state, so I just don’t think we’re prepared to answer it at that level. Dave, I appreciate the question and it’s insightful, but I don’t think we are going to respond.

Operator

Your next question comes from the line of Joe France with Gleacher & Company.

Joe France - Gleacher & Company

You recently announced that your stop loss policy starting October 1st will include an unlimited and lifetime bid as a standard provision, is this still though eyeing to in larger self-insured market or is it just an add-on to existing policies.

Dawn Owens

I, Dawn Owens with OptumHealth; we have an external Stop Loss business that we underwrite on behalf of self-insured employers and TPAs, and to match the provisions required under health reform with respect to on limited lifetime maximums and so forth. We matched our policies to correspond to those realities of benefit designs and provisions.

Operator

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

Doug Simpson - Morgan Stanley

Hi, thanks for taking my question. Steve could you just, it’s obviously a couple of years out but could you talk about how you are thinking about sort of the Fortune 1000 community and what they may wind up doing with benefits coverage. I mean can we look at sort of what happened from the ‘70s to today on the pension side and going from a defined benefit to defined contribution model, and is that a reasonable half to look at for the large employers? Could we see them letting go of coverage and pushing people on to the exchange? What are you hearing from the larger accounts post reform passage?

Stephen Hemsley

I would just react to this that’s kind of the highest level there it is. Obviously there are very smart companies. They are looking at all of their options and doing appropriate analysis. That doesn’t mean that they are inclined to take any action, and there is also no uniform pattern in their trends out there. They see some of these things to be a little bit of a long way off relative to some of their initiatives and our reaction is that they believe that the reform will shape itself not necessarily in its final form at this point in time.

And so they are withholding judgment, and I would also offer that these are responsible companies with significant sense of responsibility about their employees that their benefits are an important element of their relationships with their employees. And so they are being very measured and very thoughtful about how they consider that relationship. And that’s why I think it is many years off. And I would say that many of them will be very circumspect with respect to what steps they take. So if anything that would move, would move I think in a very measured way, very slow.

We thank you very much for your participation today. We know that there is an appetite around visibility on 2011 and we hope that at the Investor Conference we’ll be in a position to respond to that more effectively and we expect to see all of you in a few weeks. Thank you for your attention today. Thank you.

Operator

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

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