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Unitedhealth Group (NYSE:UNH)

Q2 2011 Earnings Call

July 19, 2011 8:45 am ET

Executives

Jack Larsen - CFO, Public and Senior Sector Group

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

Jeff Alter - Chief Executive of UnitedHealthcare Employer & Individual Business

John Penshorn - Senior Vice President

Dan Schumacher - CFO, UnitedHealthcare

Larry Renfro - Executive Vice President

Tom Paul - COO

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

Stephen Hemsley - Chief Executive Officer, President and Executive Director

Analysts

Christian Rigg - Susquehanna Financial Group, LLLP

Joshua Raskin - Barclays Capital

Michael Baker - Raymond James & Associates, Inc.

Justin Lake - UBS Investment Bank

Matthew Borsch - Goldman Sachs Group Inc.

Charles Boorady - Crédit Suisse AG

Scott Fidel - Deutsche Bank AG

David Windley - Jefferies & Company, Inc.

Sheryl Skolnick - CRT Capital Group LLC

Ana Gupte - Sanford C. Bernstein & Co., Inc.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

John Rex - JP Morgan Chase & Co

Doug Simpson - Morgan Stanley

Christine Arnold - Cowen and Company, LLC

Kevin Fischbeck - BofA Merrill Lynch

Operator

Good morning. I will be your conference facilitator today. At this time, I would like to welcome everyone to the UnitedHealth Group Second Quarter 2011 Earnings Conference Call. [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 are some important introductory information. 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 file 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 in the earnings release we issued this morning and in our Form 8-K dated July 19, 2011, which may be 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 to review second quarter results. Across this company, we continue to focus on fundamental execution. For us, this means consistently serving customers and other stakeholders with excellent and with practical solutions-focused innovation. Improving fundamental execution is far from glamorous, it's blocking and tackling that take years to accomplish in incremental steps and its never really fully finished.

Today, market and customer satisfaction and other reputational measures for both our UnitedHealthcare and Optum businesses are at strong levels. In many instances, market-leading, based on credible independent sources. While we are grateful for any and all market-based recognitions, we also know we are not yet where we want or need to be.

Society is looking for innovative organizations that could be trusted to provide consistent, reliable and modern approaches to solving the challenges of healthcare, whether that means constructive approach to participating in health benefit or information exchanges, developing ACOs or providing innovative consumer-centric benefit offering. In any context, we understand a positive reputation will become increasingly valuable, our commitments to practical innovation, deeper relationships with the people we serve and strong follow-through on our brand and reputational promises are strengthening our businesses. The work required to accomplish this brought growth and market share gains to the first half of 2011.

Second quarter revenues again exceeded $25 billion, increasing $2 billion or 8.5% year-over-year. Growth was led by service revenues, which increased 17% from last year's second quarter, driven by growth in Health Services products and strong and consistent gains in fee offering in the health benefit businesses.

Operating margins of 8.3% were stable year-over-year, improving 10 basis points despite the impact of health reform, including significant cost for readiness and compliance and the advent of minimum care ratio thresholds.

Overall, revenue growth in higher margin service offerings was offset by investments within the Optum services businesses, as we continue to re-baseline that platform for higher growth and earnings contributions going forward.

In total, second quarter net earnings grew 17% year-over-year to $1.16 per share. These earnings were supported by strong cash flows from operations of $1.2 billion.

UnitedHealthcare's 3 businesses added more than 180,000 people, using its medical benefit products in the second quarter. It grew in every major product category, despite the fact that the benefits marketplace typically has fewer new business opportunities in the second quarter.

In the first half of 2011, the number of people UnitedHealthcare serves with medical benefits grew by 1.2 million, on top of nearly 1 million people added over the course of 2010. This 6-quarter addition of 2.2 million more people, almost entirely through organic means, places this among the strongest growth periods for our company.

Growth was led by the employer and individual business, which grew by 100,000 people in the quarter and contributed nicely to the nearly 900,000 person increase in the past 6 months, a growth of 1.1 million people year-over-year. Customer retention rates improved in 2011, in both the fully-insured and self-funded offering. We performed well in national account open enrollments this past January, when employees who have multiple health plans available to them, chose UnitedHealthcare more often this year.

Based on first half 2011 results, we're increasing our full year outlook for fee-based commercial growth by 100,000 people to a range of 650,000 to 750,000 people for the year. Both UnitedHealthcare Community & State and the UnitedHealthcare Medicare & Retirement have had strong growth as well. These businesses increased by 80,000 people this quarter, and 315,000 people in the past 6 months, plus another 250,000 people in stand-alone Part D plan in the past 6 months.

We grew by 20,000 people in Medicare Advantage products this quarter, and have added 115,000 people through the first half of the year. Even after absorbing the first quarter decrease of 225,000 people from market and product exits and programs that were not sufficiently funded or were fully discontinued by federal regulation.

Our Medicaid business grew by 40,000 people in the quarter, and is tracking for the sizable year-over-year increase of 225,000 people in 2011, despite state's heightening eligibility criteria in the wake of decreases in federal matching dollars for their programs.

Overall medical cost trends through the first half of 2011 remain moderated, in part due to lower growth in consumption across the system, and in part because our effective, targeted efforts demands the total cost to health benefits. Though it is important to note that unit cost increases continue to be significant, in fact, the single most important cost driver, we expect a return toward somewhat more normal utilization trends in the second half of this year and into 2012.

Our second half 2011 outlook factors in more challenging year-over-year comparisons in both utilization and reserve development. Our consolidated care ratio of 81.4% decreased 10 basis points from last year's second quarter, as the commercial medical care ratio decreased 120 basis points year-over-year.

Second quarter 2011 reflects $180 million in overall reserve development, down from $270 million in the second quarter of 2010.

In summary, diversified growth performance across our health benefits platform, coupled with effective cost management, helped UnitedHealthcare grow earnings from operations by nearly $200 million year-over-year to $1,760,000,000. This came despite a lower level of reserve development than in 2010 second quarter, and the implementation of medical care ratio regulation this year.

We expect pressure on UnitedHealthcare's gross margin percentage in the second half of 2010 and into 2012 due to increasing rate pressure from government customers and more normal overall utilization trends. UnitedHealthcare Community & State is now receiving annual rate adjustments from the majority of its members. Those rate increases are proving to be lower than we had expected and in some situations, even negative.

While states will typically adjust care provider fee schedules to reduce unit costs as well, the low reimbursement rates still impact the medical care ratio. UnitedHealthcare has some long-standing leverage to use in mitigating these overall pressures. These include stronger clinical engagements and medical cost management efforts, disciplined operating expense management, process and technological modernization and related productivity and scale efficiency.

In our Optum businesses, we continued to develop and strengthen our position in areas of rising importance to the health system, largely themed around comprehensive population health management, as well as modernizing and better integrating healthcare delivery and financing.

And as I'm sure you noted earlier this month, Larry Renfro, now leads Optum as Chief Executive Officer. Larry's experiences in healthcare, technology services and financial services across all ranges of business development and scale, will be invaluable as we advance our Optum services platform. Our strategy and direction in Optum remains consistent, and Larry has hit the ground running.

In the second quarter, Optum's total revenues of $7 billion increased 19% year-over-year, bringing first half 2011 revenues to $13.8 billion, up 20%. Second quarter revenues increased 12% at OptumRx, 24% at OptumInsight and 46% at OptumHealth. OptumRx increased revenues by growing the number of customers served by 1.8 million people year-over-year, including more than 850,000 from new external business. OptumRx revenue growth also reflects a greater mix in specialty drugs, which carry much higher revenue per script. OptumInsight, had a strong sales quarter, with momentum in serving both payer and provider markets.

Many of the growth drivers emerge from the market changes created by health legislation. They include customer needs in the areas of advanced computer-assisted coding, ACO development, quality SAR rating and compliance-related services. OptumInsight's sales bookings growth of 106%, and backlog increased to 60% year-over-year in the second quarter, further improved revenue visibility and confidence.

OptumHealth second quarter revenue performance was driven by strong and diverse growth. This includes growth in services for payers and expansion of Clinical Care Services. Optum's earnings from operations were just slightly stronger than we expected, increasing $4 million year-over-year in the quarter. These results continue to reflect 2011 efforts to align and re-baseline these businesses, and position them for further earnings growth. OptumInsight, provided strong earnings again this quarter, with year-over-year growth in operating earnings of 45%. OptumInsight expanded its operating margin by nearly 2 percentage points, through improvements in mix of product lines and customers.

OptumRx earnings decreased by $16 million year-over-year and OptumHealth's earnings decreased $7 million. However, OptumHealth's performance was better than expected due to a combination of results from a performance-based contracts and the earnings contribution from stronger-than-expected top line performance. OptumHealth earnings are expected to step down from here to a lower level for the second half of the year, consistent with the re-baselining and reinvestment themes set forth in our previous 2011 full year outlook for the business.

In total, the Optum results show increasing business momentum that is indicative of the traction our capabilities are gaining in the market across care providers, payers, including the government, employers and other participants in the healthcare system.

As we look to 2012 and beyond, our businesses broadly addressed the expanding needs of the health system, from healthcare coverage to services that improve the overall health of population, to services that modernize and integrate across the system. As a single company with 2 independently-managed business platforms we draw on core competencies in data, technology and clinical expertise. We are uniquely positioned to help resolve vital issues such as care quality, affordability, access, the effective application of health data and information, connectivity, better consumer and care provider decision making at the point-of-care, incentives for a better performing health system and healthier lifestyles, in compliance with evidence-based medical treatment. We take a total systems view of the health economy and pursue solutions through all logical channels, with the goal of improving the way the system performs for people, and how effectively people use that system.

UnitedHealthcare serves benefit customers and Optum serves the broader health marketplace, including care providers and payers. UnitedHealthcare provides tremendous scale, size and market diversity that cannot be found elsewhere. And in turn, allows Optum to quickly pilot, perfect, scale up and more rapidly commercialize new offerings across a broad client base and population.

For example, in post-acute care delivery, OptumHealth arranges for nurses and nurse practitioners to support Primary Care physician in serving the needs of chronically-ill patients with complex medical conditions. OptumHealth's post-acute care services are deployed nationally but more important, by more than 20 health plan customers including UnitedHealthcare.

In Maricopa County, there is a competitive set of hospital systems and primary care resources, as well as specialized physician practices. UnitedHealthcare has significant Medicare Advantage business in this market and asked OptumHealth to develop a delegated care model that will improve quality and cost for its Medicare members. OptumHealth responded with the Lifeprint Clinic, the Lifeprint contracted care network, which includes over 500 primary care physicians in more than 200 physician practices.

UnitedHealthcare's membership and community presence, coupled with Optum's data, technology and care delivery experience, were all critical to the launch of this model this past January. But more significant, Lifeprint overall market goal is to serve the broad Maricopa County population, to populations with other health plans in that market.

Across the state, the Tucson Medical Center was looking to reconsider its infrastructure and processes, so it can deliver more effective services to its community. They selected Optum to help them build a market-based accountable care structure, our resources will serve the Tucson Medical Center, benefit UnitedHealthcare customers through UnitedHealthcare's participation in that market, and become available to other health clients in that market. This arrangement will help make healthcare more sustainable across the Tucson Community.

Each of these examples draws on our experience in coordinating clinical resources and services, our leading technology and access to actionable data and information. Together, they illustrate our comprehensive health system strategy, with our capabilities leveraged for the benefit of all the constituencies in the health system: Patients, physicians, hospitals, employers and other payers, including government payers.

While we expect UnitedHealthcare to perform as the leader in the payer community, the multi-payer nature of the system means that our health systems solutions from Optum, are much broader than the need of UnitedHealthcare alone.

Looking into the future, we believe the healthcare market will evolve from fee-for-service to fee-for-value or pay-for-performance in a multitude of way, shapes and forms. To do that, modern benefits designs and related services will become more connected and integrated. They will ultimately flow more closely together from the consumers, providers, payers and systems perspective. Our 2 platforms are ideally positioned to help lead the way.

Now returning to financial and operating performance. Today, we are increasing our outlook for full-year 2011 financial results based on continued momentum and solid performance in the first half of the year. We expect revenue growth of more than 7% year-over-year, which brings revenues to $101 billion in 2011. With the higher revenue outlook, solid margins in the first half of the year and a projected 2 percentage point reduction in tax rate from the second half of 2011, we estimate full year earnings in a range of $4.15 to $4.25 per share. We project cash flows from operations of more than $6 billion.

This view reflects our caution about gross margin in the second half of 2011, but also includes our estimate of our pro rata share of the policyholder claims, of the potentially insolvent Penn Treaty, a long-term care insurance concern, with which we have no affiliation. While we forecast these expenses in the fourth quarter, we of course, have no ability to control the court's timing or process.

In conclusion, we're delivering solid fundamental execution for our customers, both within each of our business platforms and on a cross-platform basis. We are gaining market share. We continue to invest in practical innovation and distinctive branding. From our shareholders perspective, the results of these efforts is strong and sustainable revenue growth, solid margins and consistent cash flows. At the same time, we're fulfilling our broader mission to both help people live healthier lives, and make the healthcare system work better for everyone.

We'll offer more discussion and examples at our Annual Investor Conference, which will be held in New York City, on Tuesday, November 29. We also expect to provide color on our expectations for 2012 at that time. We're interested in your questions this morning. As usual, there will be one question per person, so we can speak with as many of you as possible.

I will now turn this call back to our moderator for your questions. And again, thank you for joining us this morning.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Josh Raskin with Barclays.

Joshua Raskin - Barclays Capital

I guess, I just want to talk a little bit, I know you're going to sort of start to stay away, it sounds like you're going to stay away from 2012 guidance. But maybe you could tell us, sort of a 2 quarter -- are there any changes to your long-term expectations? Anything that we should think about in terms of big deviations from your long-term guidance? And then more specifically, I guess, we're getting into the National Accounts selling season and maybe if you can give us a little color as to expectations for 1/1/2012, and maybe relative to how well you did this year?

Stephen Hemsley

Sure. I'll kind of thematically respond to your first question, Josh, and then I'll ask Gail to kind of comment on the National Accounts outlook. I would say there really isn't anything that I would offer as being a radical departure from our approach to our business or our markets. I actually think that the steps we've taken over the course of the last, let's say, more than a year of coming into the focus on fundamental execution, the commitment to innovation, a stronger and more expansive view of our culture, are all elements that are going to continue to mature and grow within our enterprise. We remain very focused and disciplined with respect to our businesses and like the balance we're striking relative to the orientations of local market engagements. And we're positive about 2012 in terms of our outlook. We expect to grow in terms of the number of people we serve, and we expect to grow in terms of the performance, improvements of our performance, serving customers. So I believe there are a lot of approaches that we've taken for 2010 and '11, will apply again in 2012. We'll consider to be a continuing challenging environment from an economic point of view, from a rate pressure point of view in terms of Medicare and Medicaid rates, regulatory pressures that I think you all can appreciate the challenges in the marketplace, and we continue to, I think, approach those challenges and have been successful to date, and expect to continue to be. Gail, you want to comment on national business?

Gail Boudreaux

Sure. This is Gail Boudreaux. As you know, we've had a certain very strong selling season in National Accounts this year, and we are pleased with what's happening as we expect 2012 to also grow. It's still early. We're still in the middle of the process. Got a very strong value proposition as we think about our service results, we're going into this year with really good service results. I think offering clients a very good clinical proposition, as well as our consumer engagement strategies are taking hold. As we look at our current results when we think about 2012, one of the positive signs is that, customer retention has been strong this year, and we expect that to continue, and we expect to continue to expand our footprint in the accounts that we do have. As we look at new business opportunities as has been the case in the past, many of those are staying with their incumbents, although again, a very good time for us, is that we're expanding our footprint. So again, early but a sign of what -- we'll see growth in 2012.

Joshua Raskin - Barclays Capital

And just a follow-up, Steve, just so I make sure I understood. You guys have talked about a low-teens earnings per share growth rate long term. There was nothing in your commentary that made me think that 2012 was different than the long term. Am I reading too much into that?

Stephen Hemsley

No, I think you read it correct, Josh.

Operator

Your next question comes from the line of John Rex with JPMorgan.

John Rex - JP Morgan Chase & Co

Just want to go to more color in what you're seeing in med utilization. I mean, I think your commentary was it's much the same. But I guess what I was looking for, is looking across your different lines, the major lines, commercial Medicare Advantage, Medicaid. Are you seeing any divergence in the utilization patterns from what you've been seeing over the last 6 months, or are those all running similarly?

Stephen Hemsley

I think, Dan Schumacher can respond pretty well on this.

Dan Schumacher

Let me talk about commercial first, and then I'll compare and contrast that to the government businesses. But I think it's important to remind everyone, as Steve made in his prepared remarks, that as we look at our overall cost trend, the unit cost component is by far the greatest driver of our cost increases year in and year out. And we continue to see significant pressure there, and it's an area of intense focus for us. So in terms of the overall cost trend, it's really the unit cost. Stepping into the utilization specifically, in the first half of the year, we did see in the commercial business, an increase in our utilization trend, and that was higher than what we saw in 2010, but still lower than what we have seen historically. And as we look at the second half of the year, our expectations that we're going to see an increase again in that utilization trend, in part due to the lower comparison period in 2010. So as you look at 2010, the most restrained and moderate utilization came in the second half. But then on top of that, we expect consumption levels to increase on a more normal seasonal pattern, as well as the wear-off of our deductible. So as you look at the commercial space, overall, we still expect our trend to be in the 6.5%, plus or minus 50 range that we guided to last quarter, although we would expect to be trending towards the lower-end of that range. As you compare that to the government businesses, similarly in those businesses in the first half of the year, we did see an increase in the utilization trend over 2010. And it was actually a little bit higher than what we saw in the commercial business. But again, as you look across UnitedHealthcare, it was lower than historical patterns.

John Rex - JP Morgan Chase & Co

Okay. And just your utilization overall, you've comment before, you're -- at least on the bed day component, you're still running flat to slightly down on that, is that correct?

Dan Schumacher

Yes, that's fair. If you think about the components around utilization, I would suggest that the places where we've seen more increases, really, in the outpatient and physician settings, and our in-patient has remained relatively restrained.

Operator

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

Scott Fidel - Deutsche Bank AG

I'm wondering if you can provide an initial assessment on the exchange regulations that were recently released by CMS, and now after having a chance to review those regs, how you're viewing the overall market opportunity for the exchanges?

Stephen Hemsley

Yes. Maybe I'll start out, just by setting some guidelines. Given the fact that they've just come out and there is a comment period, we're not going to comment at very specific levels with respect to the -- those regs. We will kind of offer kind of a restatement of the things that we're looking for, that I think would be important as those -- that original guidance is ultimately formed into regulations. And, Gail, you want to take that up?

Gail Boudreaux

Sure, Scott. As Steve said, we've been very engaged, constructively engaged in both the state and the federal level in providing input around the exchanges, and we are planning to provide comment as part of this process, as part of the proposal we're making. I think you know, that there are also more regulation still to come out, so we're sort of in the middle of that process. What's important though, in terms of the guidelines as we think about the development of the exchanges, is one that they should -- we think they should be set up in a manner that recognizes healthcare is local, and provides states with some significant flexibility in how to structure them based on the market dynamics. We also think that it's important that they provide opportunity in the market, so that there's competition, choice and innovation that's incented as part of the design. And finally, I think having a level playing field, that's a critical part of the exchange. We said this a few times, that we see opportunity in the exchanges, but the level playing field component's important as the states begin to adapt their rules around exchanges.

Scott Fidel - Deutsche Bank AG

And are the risk adjustment proposals that they've laid out, do you think those will be sufficient? And do you think a reasonable way to think about this is that they're essentially leveraging some of the structures that they've used in Part D in Medicare Advantage? Or do you see differences in the approach around risk adjustment, and with some of the risk corridors they're proposing?

Gail Boudreaux

In terms of the risk adjustment, clearly, they're looking at how they structure that in the Medicare space. We -- there's a lot of opportunities to look at that across the commercial space as well, and we would want to ensure that they're fair and actually sound practices, so also providing guidance on that. Again, we're in the process of comments, and we'll be providing comments in that as well.

Operator

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

Justin Lake - UBS Investment Bank

My question is on the OptumHealth business. And obviously, you've talked about making a fair amount of investments here that have depressed margins a bit. But at last year's Investor Day, you've laid out a case for margin improvement over time, and getting back to target margins would be significantly accretive to earnings. I'm just curious if you can give us an update there, in terms of we're now 6 to 9 months past that, you've made these investments. Just in terms of how you see that performance kind of trending over the next couple of years and when do you expect to get to those target margins you kind of laid out at the Investor Day?

Stephen Hemsley

Sure. Again, I'll kind of, layout kind of overall themes, and then ask the team to pick it up. But if you stand back and look at Optum, we are committed to advancing that as a more integrated platform at the beginning of this year. We've taken steps such as the divestiture of the CRO. We have realigned portions of our business between UnitedHealthcare and Optum, and made adjustments accordingly for that. And we've said that we would be making investments, not only in new businesses that we think have value, but also in strengthening the performance of the businesses that we have. And I think those things have gone exceptionally well. The emergence of this platform, I think is very positive, and we are very positive about the margin performance. We said this was going to be a baseline year, and we're going to execute to that. We think we'll be -- through the majority of it this year, there'll be some activity that will, particularly with respect to OptumRx that will pull into next year. But, John, do you want to pick that up?

John Penshorn

Sure. It's John Penshorn. I just want to respond, add on to what Steve has said. I think we've seen very good market response to our business platforms, we've seen very good growth. As Steve mentioned, we continue investing in our platform, that investment is affecting our short-term operating margin. As we've said in the Investor Day, 2011 is a baseline year. We expect strong operating earnings in 2012, with operating margin expansion. And we're very comfortable with our long-term operating outlook that we set for our 2 businesses.

Justin Lake - UBS Investment Bank

And what's the definition of longer-term? And also, if you could just throw us any commentary you might have on the PBM and the make-whole relationships specifically? I know people would be interested in?

Stephen Hemsley

Okay. Well, that's a slightly different subject, but I'll respond. We expect, obviously, see comp improvements in 2012, and we expect to build from there. So we meant 2011 to be a baseline year, and I think you'll see 2012 will prove that out. In terms of the PBM, our positioning there has really not changed. OptumRx continues to serve us very well. All of our government programs, our specialty pharma and increasingly external commercial customers, and Medco also continues to serve us well. And as we've said consistently, we are assessing our options and our opportunities, knowing that we can serve our customers, as well as our shareholders well, really in either direction. And we are really addressing the nature of that Medco relationship. That really won't occur until later this year. And the contract doesn't expire until January of 2013. So really, our position with respect to our PBM is unchanged.

Operator

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

Kevin Fischbeck - BofA Merrill Lynch

I wanted to ask you about rebates. You've commented a couple of times about gross margin compression in the second half on higher trend and government rate pressure. But I guess I didn't hear anything about rebates, how those impact numbers, seasonality, how should we think about that? And then also, any color on how rebates are impacting your thoughts about pricing, or how about your competitors are thinking about repricing their books, any indication there?

Stephen Hemsley

Dan, go on.

Dan Schumacher

Sure. Kevin, let me take the seasonality fees, and how we think about rebates. At the end of the day, our rebates are based on a full year earnings outlook, and then it's staged in by quarter, based on the percentage of revenue that falls into each quarter. So it's essentially, pretty close to linear. So there's no seasonal impact on our results related to our rebate determination. In terms of pricing, I might turn that to Jeff Alter to talk about what we're seeing in the market.

Jeff Alter

Thanks, Kevin. This is Jeff Alter. We're not seeing a lot of widespread evidence of people making pricing adjustments due to their rebate. There are pockets here and there of fully insured pricing that, I'll say, are a little more competitive than other years, which could be competitors adjusting to their loss ratio. And if it is, we believe it will be pretty short-lived in duration. As we've said before, there's a lot of investments ahead, ICD-10 and other regulatory compliance. So we believe that our competitors are taking a rational approach to their reserves and to their pricing. And we continue to remain disciplined in our pricing, pricing to our trend.

Kevin Fischbeck - BofA Merrill Lynch

Okay, just to clarify, when you talk about the gross margin compression, it sounds like on the commercial side, it's more normal return to utilization than real pricing pressure. But on the government side, there's some -- there's equal trend and pricing pressures, is that the way to think about it?

Jeff Alter

Yes, that's fair.

Operator

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

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

Just a bit more clarification on the 2012 pricing comments. I guess, how should we think about 2012 premium pricing, given the prolonged lower utilization that we've been seeing here over the last several quarters? In particular, do you expect more, I guess what I would call, coordinated pushbacks from states on commercial premium increases into next year?

Stephen Hemsley

Gail?

Gail Boudreaux

This is Gail Boudreaux. I think to get sort of round-off conversation we're having on our pricing. Our approach, our fundamental approach and discipline in pricing hasn't changed, and so we are always pricing to what we believe our forward view of costs are. So just taking a sort of walk through the components, we start with what we believe is the forward dealer trend is, adjust for products change in geography, as well as market segment. And then we essentially, take a look at using our local market knowledge, the medical loss ratio of threshold, where we believe that prices should be. In terms of your second part of your question around the state, what we're seeing at the states, really vary by state to state. And I think what's fundamentally important is we build up our rates based on a actuarially sound process, and that's how we file our rates. And when we go to the states to talk about those rates, making sure that it's based on that process, as well as the forward view of cost, is what's important. And that's the discussion that we've been having with the states as part of this process now.

Operator

Your next question comes from the line of Christine Arnold with Cowen and Company.

Christine Arnold - Cowen and Company, LLC

A couple of questions. You're recognizing that this is a year of investment spending and your long-term target has been 20 to 40 basis point of SG&A improvement. Is it reasonable to think that we start to see that next year? And then is it possible to put parameters around kind of what you're thinking on the commercial MLR? I think you were saying 82, plus or minus 50 basis points last quarter, is that still reasonable?

Stephen Hemsley

Well, maybe I'll have Dave respond to the cost question, and Dan to the care ratio.

David Wichmann

It's Dave. What you're seeing in our numbers, Christine, is a significant, a pretty significant shift in the mix of our business towards the services business, as well as self-funded. And that mix shift is what's contributing to the increase in the operating cost ratio in the period. And in fact, if you look at the benefits business independently, you'd find that there's a 50-basis point reduction in the operating cost ratio for that business. And that has largely contributed to by virtue of the things that we've been discussing in the past, which is the significant improvements that we've made and the quality of our service, which I believe is reflected both internally with much lower defect rates on our claims, much higher satisfaction levels on our calls. But also now and I think validated through several sources over the course of the last 30 days or so, externally. So all of that, I think is contributing to that. We've also seen significant increases in our levels of automation. We've been very focused on advancing EDI and auto-adjudication as examples, although more broadly working to try to automate all of our business processes more effectively. Also, as I believe you recognize, we've done a lot work on our integration activities and we decommissioned several of our adjudication engines. And I believe we've lined this out before but Mamzies, [ph] 2 of PacifiCare's, several instances of Fassett, [ph] and many other adjudication engines. So we've made great progress with respect to that. And then we've also, really advanced our efforts around sourcing and procurement broadly, and have been realizing the benefits of our substantial scale over time. And I believe those are all manifested in the realizations of a very significant run rate benefits. We believe they're under the $300 million to $400 million range recognized in 2011. And then what you're seeing though is the offset of the kind of the dilutive effect, if you will, of the mix shift towards a fee-based business and the higher a percentage of our business that's with Optum.

Christine Arnold - Cowen and Company, LLC

Right. And then just specifically, to Optum, it feels like this is a big investment year, and we've also got some good growth, it's hard to see x acquisitions, kind of what's going on, and exactly how much you're investing there. Is it safe to say that it's kind of peak investment year? I mean, you said, re-basing with respect to some of those investment spendings. So we can expect improvement on to that SG&A load into next year?

David Wichmann

Christine, I think that's right. With the exception of the OptumRx business, that business is going to continue to take some investment into next year as we really get, bring the scale and the attributes to it that we're really looking forward, so that they can actually be a more integrated and kind of more robust platform serving that marketplace. So while there'll be some in that, I think the majority of our investments in the Optum business, the rest of them will be -- will pretty much run their course in 2011.

Christine Arnold - Cowen and Company, LLC

Great. And on the commercial MLR?

David Wichmann

Commercial MLR, our expectation is similar to what we're seeing on a trend side. We would expect our loss ratio to be in that 82%, plus or minus 50 basis points but trending towards the lower end of that range.

Operator

Your next question comes from the line of Chris Rigg with Susquehanna.

Christian Rigg - Susquehanna Financial Group, LLLP

Just following back up on some of your comments in the Medicaid business, clearly there was a more cautious tone there. I guess I'm just trying to get a sense for, without utilization sort of staying below the trend that you're expecting, would we -- are you guys anticipating sort of margin compression on an operating basis over the second half of the year? Or you think you can still squeeze out some increases even in a more difficult rate environment?

Stephen Hemsley

Jack, you want to react to that?

Jack Larsen

Sure. Chris, Jack Larsen. I guess, just maybe to put a finer point on what we have seen in our second and third quarter rate negotiations, and then how it will affect our second half performance. I think the pressure we have all been talking about now for multiple quarters, we really saw in most of our rate discussions, about 2/3 of our member months have some type of a rate negotiation associated with it, sort of late Q2 and into Q3. And as Steve said in his opening remarks, we expect about a 1% average annual 2011 rate increase, which is slightly lower than what we had been guiding to last quarter. But I think the important point is, the more recent negotiations have been for second half of calendar and first half of calendar 2012, have really been flat to negative. So we are going to see margin compression at the gross margin line, probably even in spite of the lower utilization environment that we're seeing ourselves in. To your question about whether we can, I think you said, eke something out, I think we've done a pretty good job in the meantime, making sure we are crisp on our clinical management protocols, as well as our operating costs. So -- and actually, in spite of the rate environment, I'm quite pleased with our operating performance for the balance of the year.

Operator

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

Charles Boorady - Crédit Suisse AG

First question, just since most state fiscal years end in June, I'm wondering what you're seeing in terms of expected rate increases in your Medicaid book, and what you're building in for second half rates?

Stephen Hemsley

Yes, I thought we had addressed that in the comments. But, Jack, you want to just pick that again?

Jack Larsen

Sure. For second half rates, for state fiscal years 2011, '12, what we're seeing is, we're about 2/3 of our member months, flat to -- mostly flat and in some cases, slightly negative.

Charles Boorady - Crédit Suisse AG

I got it. I apologize, if I missed that in your prepared remarks. And then the other thing, maybe you said this too, and I missed it exactly in response to John Rex's question. But basically, it was, if you look excluding the flu at adjusted bed day -- in-patient bed days per thousand, were they up, down or flat, for commercial Medicare, Medicaid?

Jack Larsen

Flat to slightly down.

Charles Boorady - Crédit Suisse AG

In all 3?

Jack Larsen

Yes.

Charles Boorady - Crédit Suisse AG

Okay, great. And you're assuming they're going to come back up towards the back half of the year, in your guidance, if I understood your prepared remarks?

Jack Larsen

We're expecting overall utilization to go up, most notably in the outpatient and physician categories and to a lesser extent in in-patient.

Stephen Hemsley

Which is where it's been consistently. We do expect it to recover. And to recover in the area that has been the strongest to date, which has been outpatient and physician.

Jack Larsen

Right. In-patient as we've mentioned over time, we're seeing the results of our clinical agenda continue to take hold there, in those areas, where we're able to observe outside of economic impacts or broader macro impacts, where we're making a difference. The admission rates as an example, and there are other examples underneath that, that are a key area of focus for us inside our business.

Stephen Hemsley

I know that everyone focuses on the utilization, but the unit cost pressures are really the elements that are driving cost.

Charles Boorady - Crédit Suisse AG

Yes, and you've had some successes there, in terms of unit costs. I guess, in that regard, do you see a rebound in terms of cost shift, as providers are concerned about Medicare, Medicaid cuts to them? Or have you been able to preserve some leverage against higher unit cost increases than what you've been seeing?

Stephen Hemsley

I wouldn't say that there's necessarily any profound change in the environment from that perspective. Gail, do you have a view on that?

Gail Boudreaux

The only thing I'd add to it, I don't think the cost shift for Medicare and Medicaid is anything new. And clearly, the hospitals are under significant pressure. We have, I think obviously, been negotiating to find the best economic value, but the unit cost pressure is intense. The area that we've been very much focused on in collaboration with Optum partners is trying to move more to pay-for-performance and alignment of incentives, across both the hospital agenda, as well as with physicians and in our clinical agenda as well. So I think that is really where we think we have to go to. As Steve said in his opening remarks, we have to get away from straight pay-for-fee and unit cost increases to actual pay-for-value, and to more risk-sharing environment.

Operator

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

Matthew Borsch - Goldman Sachs Group Inc.

One more on the utilization front, you didn't mention pharmacy, and I'm just curious, did you see any uplift in pharmacy trend in the second quarter?

Dan Schumacher

Matt, it's Dan. We did see a very modest increase on the pharmacy side. Again, I would go back to pointing out, as a category, the outpatient and physician settings. Overall, for pharmacy, we're still expecting a trend in that mid- to lower-single digit.

Matthew Borsch - Goldman Sachs Group Inc.

Got it. And on a separate topic, can you comment on the Medicaid RFP environment? In terms of the recently concluded Kentucky Medicaid contract awards and also, those that are still outstanding, do the request for proposal, the way they're set up and the competition seemed to set reasonable parameters on the business opportunity for you guys?

Stephen Hemsley

Jack?

Jack Larsen

Matt, Jack Larsen. So let me make a general comment on the RFP environment. I think there's, certainly, there's lots of opportunities in the space, the numbers that we have seen $140 million to $60 billion on the growth side. To your question about whether they provide a, I guess, a competitive opportunity for us, the answer is that, I think, yes. With respect to Kentucky specifically, that was a state that was relatively new to manage Medicaid across all its regions. The components of the proposal allowed respondents to provide both an operating cost proposal, as well as a medical cost proposal. I think from our point of view, we've submitted a very strong proposal to the commonwealth. We essentially bid their ask and quality and access parameters. And we think we put a pricing that was competitive and really, consistent with providing them a sustainable program going into the future. I think they were looking for a 3-year commitment. So I guess while we're disappointed in not being awarded a contract in Kentucky, I think it was a successful a procurement for them. There are other RFPs that are lining up there, like you were awaiting announcements on both Texas and Louisiana, and we expect those here in the next few weeks. And they represent significant opportunities for us in both of those states.

Stephen Hemsley

I think to your broader question, it's not a homogenous market. It's a state-by-state market. So every state will take kind of its own view with this, and conduct its own process. So it's really hard to really establish any generalizations with respect to that. It really will be a state-by-state proposition, very driven by the situational circumstances of the state at that time. We're very dedicated to the space. We have been in this space for many, many years. It is clear the states are looking for Managed Care solutions, as really their best and most sustainable long-term outlet. And wherever the states really have established a posture of kind of working with organizations like us to really achieve those long-term goals, we're going to be active. But it really is a state-by-state proposition.

Operator

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

Ana Gupte - Sanford C. Bernstein & Co., Inc.

The first question is about the debt ceiling and the deficit reduction. One of the proposals was to introduce a deductible into Medicare supplements? And given you're leading both in Med Advantage and Med Supp, do you have any market research data that seniors might move preferentially to MA? And how does that net out across your book of business?

Stephen Hemsley

We had thought there might be questions about the deficit coming into this. And what we concluded is that we're going to stay out of that area of conversation. They have enough parties participating in that without any commentary from us. So we're really -- we're not going to comment on elements that are coming out of that, because they're just, at this point in time, a series of proposals. And I think it would be kind of out of line for us to comment on things that are really just kind of coming from the media about what is being presented. So we're not really interested in complicating that situation further.

Ana Gupte - Sanford C. Bernstein & Co., Inc.

Okay. So let me ask another question, then. You talked about risk-sharing in capitation. Are you at liberty to comment on there was a bundling proposal in addition to the ACO proposal for Medicare? And then in light of the CareMore acquisition by WellPoint, and then Highmark buying up or getting into West Penn Allegheny, has that changed your viewpoint on more backward integration into primary care clinics or even hospitals?

Stephen Hemsley

Dawn, you want to comment?

Dawn Owens

Sure. If you think about it, in Steve's opening comments, he talked about the benefit of the 2 business platforms of UnitedHealth Group. And the size and scale of UnitedHealthcare benefit business in support of that Optum agenda. In OptumHealth, we are focused on that care delivery community in combination with the broader Optum agenda, and we see great opportunity to partner with the system as they prepare for the changes in requirements of payers from the government health plans and so forth. They need better technology to connect the system, they need better intelligence to manage patient care on a population health basis, and there is a desire for alignment. And we're participating in that in many different forms and fashion. And consistent with these comments, that participation not only benefits UnitedHealthcare, but serves the broader healthcare community with other payers participating in it and so forth. This activity is not new to us, certainly with SMA and Evercare, a long legacy of activity in this area. And you see activity in the marketplace. And while I would say, albeit different than the approach we're taking, certainly, activities around involvement with the care delivery system.

Stephen Hemsley

So I think it's not surprising to see that others are going to be taking off as well, different approaches and to pursue that. I would offer that I think it will vary market by market because the healthcare environment in each market is different then as result, kind of where they are, kind of an evolutionary point of view. What the supply demand dynamics are in that marketplace, what the history of protocols in a marketplace vary. So I think it will be dictated largely by local market dynamics, as people pursue different approaches to these more -- the broad theme of more integrated care efforts. I would offer that going as far as going totally to the hospital is maybe understandable in that marketplace. But I wouldn't think that it would be something that you would see a lot of.

Ana Gupte - Sanford C. Bernstein & Co., Inc.

If I could just ask one follow-up on the Optum, you have $500 million year-over-year in revenue increase, so does that already include some of the inorganic deals you've done? And what can we expect for the back half of the year? Some of the transactions still closing? Are you going to do anything more?

Stephen Hemsley

I think it reflects the acquisitions that have been made and obviously -- whether we are, whether we pursue other investments and whether we're successful with respect to other investments is really to come. But I think -- Dave, you want to respond to that?

David Wichmann

Sure. The first 2 quarters of this year, you can probably see that we've done several small deals, I think 2 of them are probably more significant than the others in both Logistics Health, as well as WellMed. But most of all, we're doing our capability plug-ins, line extensions and the Optum business to date. And as Steve also indicated, we're not going to comment on the kind of our forward view of M&A activity. We do continue to look for opportunities to do capability acquisitions and line extensions, predominantly in the Optum business. But we also seek opportunities to take advantage of our substantive scale, and then also opportunities to improve our presence in markets in the benefits business as well. So hopefully, that responds to your question.

Operator

Your next question comes from the line of Sheryl Skolnick with CRT Capital Group.

Sheryl Skolnick - CRT Capital Group LLC

To follow up on some of the provider questions. First of all, it's lovely to see a faster than expected, the integration of Optum's capabilities to UnitedHealthcare for the benefit of the entire business. So I think that, I guess, to answer the question of how do you invest in Optum and still grow profits? But I'm curious about your provider relationships and, Steve, I've asked you this question before and I'm still stuck on the question, which is, United and hospitals in particular have very, very challenging perhaps natural adversarial relationships. I don't and I see the improvements in client physician, and this more friendly approach to the physician. But how do you achieve this end goal of building this crucially important integrated system that fundamentally changes the way we get our healthcare paid for, et cetera, and manage it without addressing the issue of this highly adversarial provider relationship with the hospitals?

Stephen Hemsley

Yes. I think, Gail may have some things to offer on this but I'll frame some of it. Well, your terms in terms of highly adversarial, there are understandable interests across the spectrum of healthcare, but if you really stand back and look at what a more optimal healthcare environment would be, there will be -- it would be one that is a much more inclusive paradigm in terms of including the interest of all the participants in the healthcare marketplace, the fact that we need hospitals, specialists, more primary care. We need them to be all more effective, we need to use those resources more effectively, if we are ever going to have a more sustainable health environment, better outcomes and more sustainable cost structure. So if there isn't a broader, more inclusive view of engagement, including bringing capabilities that I think we have to offer around the use of technology, the use of information, the use of care resources, and bring them into those venues. That's where I think you'll find the opportunities to kind of change the healthcare environment from a system's point of view. And I believe that there is an opening way of thinking about that, and that's why I think you're seeing response in the marketplace and the engagement that we are having with hospitals that are far from adversarial in their relationships. Gail?

Gail Boudreaux

Sheryl, a couple of things to your point around our relationship with both physicians and hospitals. Over the last couple of years, we've made a significant investment in really turning around that relationship. I just want to point out to a couple of things, because we are seeing the impact of that in our satisfaction results, and we're also seeing it in the recent AMA survey that came out that showed that we have not only process improvements but they also think the improvements in the relationships with them. A couple of other things on the physician side, we invested in a physician advocate, so that we could work more effectively with them and the local community. We on-shored our calls, so that we could have a much more responsive service model for physicians. On the hospital side, we actually instituted a hospital advisory council lead by Michael Boyle, and our head of contracting. That's been incredibly productive. We're working on 6 to 12 accountable care pilots, part of our goal on sharing risk and also working closely with the delivery system to ensure that we have a different partnership relationship, and I think we recognize that. And so that's been a very significant investment. And then on the back end, we deployed a team of Six Sigma experts actually working in the hospitals to help them improve their processes. I guess I'd sum it up on that, at healthcare side, as we recognize that, that's a critical partnership, and as we move from just paying for fee-for-service, and negotiating unit cost rate, you've got to ultimately find a way to partner on shared risk. And that's the philosophy change, as well as an approach change within UnitedHealthcare. And clearly, in Optum's businesses and OptumInsight, they work directly with the delivery system. We often partner with them, when it makes sense to the delivery system. So I think there's both an attitude change within UnitedHealthcare, as well as a very specific program and investment going in improving that relationship.

Stephen Hemsley

Sheryl, I think an interesting live example is the Tucson Medical Center. And that will be, Andy, if you can comment on that?

Andrew Slavitt

This is Andy Slavitt. I think, picking up on what Gail said, the tone in the market has changed, I think and has evolved over the last year, in particular. Providers are asking us much more frequently questions about, how do I manage risk? How do I manage to help the population? How do I use data better? How do I partner with my payors? How do I use technology? And I think you're seeing a natural point where both providers and payers are really seeking to work more collaboratively together. As Steve pointed out, the partnership we've built in Tucson, both with the hospital, Tucson Medical Center, as well as the independent physician is a great example. They really want to change the way they get rewarded for taking care of patients. And they know they need both set of tools that can be provided from Optum, as well as the expertise on the risk side, and the attraction of members that can come from UnitedHealthcare. So I think that is not just a one-off. I think that is thematic of what we're seeing across the marketplace.

Sheryl Skolnick - CRT Capital Group LLC

I was hoping that you would say all of that because that was a key component of the strategy that I believe did need that philosophical change and it's nice to see it happening sooner than expected. So thank you very much for that insight.

Operator

Your next question comes from the line of Michael Baker with Raymond James.

Michael Baker - Raymond James & Associates, Inc.

I was wondering if you could update us on the Medicare side of the business, as it relates to timing of the RADV audit results? Any sense of dynamics around that would be helpful?

Stephen Hemsley

Tom?

Tom Paul

Sure. This is Tom Paul. We're continuing our dialogue with CMS around this topic. As you may know, they received a volume of responses from the industry and at large in regard to the proposed change in the audit methodology. And we understand they're still working on their response to that volume. As of this time, we're really unaware of the timing associated with their next release around the audit methodology.

Operator

Your next question comes from the line of David Windley with Jefferies.

David Windley - Jefferies & Company, Inc.

So, Steve, I understand that you're very much affirming the strategy in Optum on the heels of leadership change in Optum. I wondered if there's any change in the application or execution of that strategy? And perhaps, as a corollary to that, any, say, reacceleration in acquisition plans there? Things along those lines. But again, the base question, is there any change on the underlying application on the strategy in Optum with the leadership change?

Stephen Hemsley

I think the baseline, like the direction that the business is going, I think a great progress has been made particularly, let's say, in the last 9 months or so, in terms of establishing that platform, making it a more integrated, stronger operational platform, and one that we're building on. So I'm reaffirming that. I think that Larry will bring exceptional dimensions with respect to building that platform. And in terms of the operating discipline, his experiences across broad spectrum of the elements that Optum is using, as well as you can appreciate, Optum has businesses that are pretty mature and at scale level, other businesses that more in the earlier stages of that. So there is really a diversity of the businesses across that platform. And that diversity needs to be attended to. And I think Larry's background and experience just plays splendidly into that environment. And we're going to continue to build and we're going to continue to invest in that platform. There's no change in terms of that direction, whatsoever.

David Windley - Jefferies & Company, Inc.

And if I could ask a quick follow-up. On the evolution of your capabilities in clinical and Optum, are you looking at ways and emphasizing ways to move from more population health management to individual management techniques? And is that important as you move toward an exchange environment, an individual environment?

Stephen Hemsley

Actually, in many ways, they're one and the same. To be able to manage large population, so what you have to do is to be able to manage individuals, and do it efficiently in an enormous scale, on what levels of intimacy that are relevant. So to me, they're one capability begets the outcome of the other. Dawn, do you have anything else to add?

Dawn Owens

No. I would echo what Steve said, we have invested heavily in consumer base platforms that allow us understand consumer, consumer segments, understand both their clinical needs and their behavioral needs, what motivates them to change. And we're deploying those capabilities in many different ways in partnership with many different constituents within healthcare, from payers to employers to now most recently, in partnership with the delivery system, as we've spoken about some of these other activities that we have been engaged in across Optum. So we do see those 2 things coming together hand-in-hand. It's the benefit of serving 60 million consumers, and something we'll continue to cultivate and advance within this platform.

Stephen Hemsley

If I get back to the first part of your question, Larry's here, and maybe it would be interesting to hear a few things from him.

Larry Renfro

So David, maybe I can tell you this, it's been a whirlwind 2 weeks of running around and talking to various folks. But the senior management team at Optum is a very, very outstanding team. And as a result, we've been able to hit the ground running. I don't think we're going to miss a beat on this. We looked at the strategy. The strategy is very, very solid, and we don't plan on making any change to that strategy. So the end result of a couple of weeks here is that the strategy is sound, and we're moving forward.

Operator

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

Doug Simpson - Morgan Stanley

Most of my question have been asked, but if you could just sort of put all the discussions together and maybe in thinking about EPS seasonality in the back half of the year. Last 2 years, Q3 has been north of Q4, is that roughly the seasonality we should be looking for? And then just secondly, maybe comments on Medicaid utilization. I guess just having the experience of the last 2 years, and seeing how trend has moderated across the different pair of classes, would just be curious on how you think about the commercial side? Obviously, you've got the cost share dynamic, which one could assume in this economy, would maybe keep people or cause them to be a little more prudent in their purchasing of health care. But just curious, your view of what's driving a similar downtrend in the Medicaid, and to a lesser extent, the Medicare side?

Stephen Hemsley

Dave, is going to address seasonality and then Jack will take on Medicaid.

David Wichmann

Doug, I think our seasonality patterns remain intact in terms of deductible wear-offs and things that are specific to our business, and frankly, specific to the industry. So you'll see things like the operating cost lift in the fourth quarter, our open enrollments efforts on Medicare, and our staffing of nurses and things of that nature in order to get to effective 1/1 date. When you compare the second half of 2011 to the second half of 2010 though, there are some differences that are -- I think are unique to this year, in particular. And I just wanted to point them out, as kind of a backdrop to that, I just want to reiterate that it's been a very strong enrollment year. And so you're going to see that growth effect come through in the back half of the year. And as Steve indicated, that's one of the reasons why we've lifted our guidance from $4.15 to $4.25 per share, despite the significant headwinds of Healthcare Reform. And as you may recall, that number compares favorably, or that range compares favorably to the $4.10 we recorded for all of fiscal 2010. And through the back half of 2011 as compared to 2010, the net EPS performance, if you are to look at it, is almost entirely explained by the favorable development we experienced in the last half of 2010. It's quite extensive versus the absence of future developments in our 2011 guidance. As you know, we don't -- we think we do our best estimate of our claim reserves, and we don't forecast any future development whether it will be positive or negative. The other thing I just wanted to note, however, is that we -- as Dan indicated, we experienced unexpected flat utilization in the back half of 2010, and that's compared to our current forecast of a more normal utilization trends in the back half of 2011. And then also affecting the comparisons will be the minimum MLR rebate requirements for 2011, where no such requirement was there for 2010. But if our guidance is achieved, we will see that in the end, that we'll be -- we'll have significantly offset -- or offset those significant headwinds through a broad-based growth, margin expansion diversification of our business, as well as our capital management.

Stephen Hemsley

Great. And, Jack?

Jack Larsen

Sure. This is Jack Larsen. Just to answer your questions specifically on in-year seasonality with respect to Medicaid, there really aren't any demonstrable inter-seasonal patterns of utilization for Medicaid. But you know more generally, what we're thinking about the broad trends of the boost consumption in Medicaid. I guess I would call out, perhaps, 2 specific things. One, what we have seen is an overall reduction in birth rates and keep in mind, that about -- on our population of about 3.5 million members or so, about 2 million are children and a large majority are mothers. So birth rates go down, we see lower in-patients visits, lower bed days of course, and reduced levels of consumption. But I think even more generally, it's our point of view that the overall economic factors that affect people generally. Whether they're in a commercial population or for Medicaid affect utilization. Things like being able to get off work. Things like transportation. All of those things we think are general contributors to the reduced levels of consumption [indiscernible].

Stephen Hemsley

So thanks. I think we have to conclude this call. I think we have actually more than exceeded our time. Again, we'd like to thank you for joining us. And kind of remember that, as our 2 businesses, UnitedHealthcare at Optum work together, that we are really making some, I think, real meaningful in-roads in terms of advancing performance within the health system, delivering solid fundamental execution, gaining market share and producing consistent strong financial results. We thank you for your attention, and we'll close the call. Thanks

Operator

Thank you for participating in today's conference call. You may now disconnect.

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