Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Unitedhealth Group (NYSE:UNH)

Q4 2011 Earnings Call

January 19, 2012 8:45 am ET

Executives

Dirk McMahon -

John S. Penshorn - Senior Vice President

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

Stephen J. Hemsley - Chief Executive Officer and Executive Director

Dawn M. Owens - Chief Executive Officer

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

Dan Schumacher -

Jack Larsen -

Analysts

Carl R. McDonald - Citigroup Inc, Research Division

Charles Andrew Boorady - Crédit Suisse AG, Research Division

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Doug Simpson - Morgan Stanley, Research Division

Justin Lake - UBS Investment Bank, Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

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

Joshua R. Raskin - Barclays Capital, Research Division

Sarah James - Wedbush Securities Inc., Research Division

John F. Rex - JP Morgan Chase & Co, Research Division

Operator

Good morning. I will be your conference facilitator today. Welcome to the UnitedHealth Group Fourth Quarter and Full Year 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

Here is some important introductory information. This call contains forward-looking statements under U.S. Federal Security (sic) [Securities Laws]. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we filed with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings.

This call will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amount is available on the financial reports and SEC filings section of the company's Investors page at www.unitedhealthgroup.com.

Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated January 19, 2012, which may be accessed from the Investors page of the company's website.

I would now like to turn the conference over to the President and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley.

Stephen J. Hemsley

Good morning, and thank you for joining us as we wrap up 2011 and discuss the potential we see to better serve our customers and markets in 2012. We're committed to continuing to elevate our performance this year as we outlined in our Investor Conference just about a month ago.

2011 was a strong year across a wide range of performance factors. Continued focus on fundamental execution improved service and value for our customers. Financial performance was driven by revenue growth across all of our businesses, including from new business relationships and strong retention of our established clients. Relentless cost management and continued business simplification were prevailing themes in 2011, and innovation and development activities for new markets advanced steadily throughout the year, as we strengthened key capabilities to respond to emerging growth opportunities.

For many years now, we have focused on the combination of fundamental execution and practical innovation to yield value and performance from our assets for the benefit of those we serve. We concentrate our efforts on 2 market-facing business platforms: UnitedHealthcare for health benefits and Optum for health services. Both leverage our common competencies. This enterprise-wide focuses enabled us to steadily advance year after year, compounding our gains over time. Today, UnitedHealth Group is more capable and considerably more nimble than just 5 years ago. This enables us to better respond to the pace of change required to lead in serving the core needs of the healthcare market. Our commitment remains for this enterprise to adapt and grow at a market-leading pace and deliver consistently superior performance to customers.

We will begin with some 2011 highlights and then turn to a more detailed review of UnitedHealthcare and Optum's recent progress and growth. UnitedHealth Group earned $4.73 per share in 2011, an improvement of 15% year-over-year. Cash flows from operations of $7 billion were once again more than 1.3x full year net earnings. Revenues approached $102 billion, up nearly $8 billion from 2010. Full year revenues grew 8%, with revenues growing 7% at UnitedHealthcare and increasing by 21% for the Optum businesses.

The 2011 operating margin of 8.3% was stronger than when -- than we are -- we originally expected and close to the level achieved in 2010. Our 2011 operating cost ratio increased 10 basis points to 15.3% due to an overall increase in regulatory readiness and compliance costs and to the rapidly growing level of fee-based and service revenues.

Fourth quarter adjusted operating cash flows of $2 billion brought full year cash flows from operations to $7 billion, an increase of $700 million or 11% over 2010. Total dividends paid increased 45% year-over-year in 2011. And we repurchased $3 billion in shares, $500 million more than the upper end of our plan for the year.

We completed a fourth quarter debt offering at the lowest net interest rates in the history of our company. And we ended the year with a ratio of debt to debt plus equity of 29%, a 1-percentage point reduction from 2010. At year end, we held a strong available cash position of $1.6 billion.

Let's review how these results were driven by our complimentary business platforms.

UnitedHealthcare's growth performance has been distinctive in the marketplace. Over the past 2 years, we have grown to serve 2.6 million more people, with at least 6-figure advances in individuals served in every product category over that time. Fee-based commercial actually saw a 7-figure growth. Fourth quarter 2011 growth was well balanced, with increases of 70,000 people served for Employer & Individual, 40,000 people for UnitedHealthcare Community & State, 65,000 people for UnitedHealthcare Medicare & Retirement and 25,000 people in stand-alone Part D.

For full year 2011, the Employer & Individual business grew by nearly 1.1 million people, with gains in risk-based products of 145,000 people and fee-based offerings of 915,000. 2011 was the best UnitedHealthcare commercial growth performance in a decade. Our results reflect our emphasis on newer, more affordable products, consumer-friendly innovation and stronger local market relationships and engagement with the people we serve.

Consumer engagement is central to our health benefits value proposition because improving patients' decisions, whether related to lifestyle or access to care, is critical to their total health. One effective tool for engaging consumers is aligning financial incentives with healthy actions. Our UnitedHealth Personal Rewards products offer consumers incentives, such as a reduction in their premiums for completing biometric screening, participating in education programs when needed and demonstrating compliance with care programs.

Since its introduction in 2010, both new and existing customers had -- have embraced the distinctive benefit offering. And we now serve nearly 1 million people in Personal Rewards incentive designs. This has been one of the most successful commercial product launches in the history of UnitedHealthcare.

Another key component to consumer engagement comes from the power of consumer information. The emerging intersection of consumer health information and enabling technology makes it possible for people to more easily take greater control of their health. Last week, UnitedHealthcare and Optum exhibited at the Consumer Electronics Show in Las Vegas. They demonstrated nearly a dozen innovations ranging from fitness gaming, to $45 Telehealth doctor appointments, to a new portfolio of health applications for mobile phones and tablets, to a highly personalized treatment cost estimator. These are innovations that empower consumers with better, more accessible information and help them improve their health and well-being.

2012 is off to a solid start in Employer & Individual, with fee-based growth tracking favorable to plan and risk-based performance on plan. As we discussed at the Investor Conference, we project risk-based membership to decrease in January, followed by improvements over the balance of the year. The majority of the January 2012 decrease is due to the loss of 1 public sector client and 2 public sector funding conversions to our fee-based products. Client retention appears stronger this January than last year for both risk-based and fee-based products.

In Medicare & Retirement, Medicare Advantage finished the year with growth of 25,000 seniors in the fourth quarter, bringing the full year increase to 170,000. Our net new January Medicare Advantage growth will position us to achieve the 250,000 to 300,000 2012 growth we targeted at our Investor Conference outlook prior to the pending Excel Health acquisition. Excel Health is moving through the regulatory approval process and should close on schedule in the first half of 2012.

In Part D stand-alone, we added another 25,000 members in the fourth quarter to close with growth of 325,000 in 2011. As you know, the low-income market benchmark priced below our bids for 2012. We estimate that we enter January down approximately 625,000 people on a net basis. We believe we will grow from this level over the balance of the year in the open retail market, which provides more favorable returns. Due to the slow start, year-end 2012 membership for Part D may be lower than our initial expectations from November.

Medicare Supplement continued to deliver consistent and dependable growth performance, which we expect to repeat in 2012. Supplemental products provide an important balance of offering, serving the needs of seniors both individuals and groups.

In Community & State, our Medicaid business grew by 40,000 people in the fourth quarter, bringing full year growth to 205,000 through a combination of new business awards, program expansions and market share growth. We expect 2012 growth above 2011 strong results, as more of our nation's Medicaid population move into coordinated care programs and the eligibility for Medicaid begins to expand in 2014.

In that vein, we were honored to learn earlier this week that we qualified as a successful bidder for the State of Washington's managed Medicaid expansion. Longer term, the intersection of Medicaid and Medicare for so-called dual eligible members is gaining greater attention from policymakers.

The combination of Excel Health with our organization's existing depth in -- of experience and serving the needs of dual eligibles further strengthens our capabilities in this area and positions us well to help meet the growing demands of this market segment.

Our full year consolidated medical care ratio of 80.8% increased 20 basis points from last year, with the fourth quarter increasing 10 basis points year-over-year. Reserve development was not significantly different between years. In the full year, UnitedHealthcare medical care ratio of 80.9% was 30 basis points better than our estimate at our Investor Conference. Overall, the rate of increase in use of the medical delivery system remains moderate across our benefits businesses. By far, unit costs continue to be the most significant trend driver, particularly in inpatient settings.

As we previously reported to you, we generally saw evidence of increasing utilization in the second half of 2011, especially as compared to the third and fourth quarters of 2010, when utilization trends were essentially flat. This was most prominent in outpatient and physician office settings. We expect higher utilization trends to continue steadily throughout 2012.

To summarize UnitedHealthcare, diversified top line growth continues to be the central story for our health benefits businesses. UnitedHealthcare earnings from operations of $7.2 billion increased 7% year-over-year, driven by revenue growth of 7% and productivity gains in operations, partially offset by the impact of new premium rebate obligations.

Optum, our health services business platform, produced strong growth in 2011, with revenues up 21% to $28.7 billion. Total earnings were just over $1.25 billion, fourth quarter earnings from operations were $279 million, with operating earnings at each business unit slightly outperforming our most recent expectations.

To touch briefly on each of Optum's businesses, OptumHealth's revenues exceeded $6.7 billion in 2011, a year characterized by gains in capabilities and growth in a wide range of markets. OptumHealth services will become even more valuable to the medical delivery system if care providers increasingly share in the financial responsibility for managing health and healthcare costs for broad groups of their patients.

OptumHealth is expert in 2 key areas for improving both health outcomes and costs: one, consumer engagement and decision making, including selecting the highest-quality venue for care; and two, provider engagement relative to the alignment of benefit design and the consistent use of high-quality and resource-sufficient evidence-based care practices.

OptumHealth delivered services to 2 million more unique individuals in the past year. OptumHealth now serves approximately 60 million people. This includes 700,000 patients through its collaborative care medical delivery network, more than 40% of these patients have a pair other than UnitedHealthcare, illustrating both the reach and neutrality of this business.

OptumHealth Financial Services continued -- continues to grow. It added another 260,000 consumer accounts and increased customer assets under management by $350 million or 31% in 2011.

OptumHealth's earnings from operations of $423 million decreased year-over-year, as we fully expected when we realigned this business at the beginning of 2011. From that re-based starting point, OptumHealth has exceeded our performance expectations to full year operating margin of 6.3% also met expectations, and we fully expect to steadily improve this performance as it grows, more fully integrates and matures.

OptumInsight's revenues of $2.7 billion increased 14% year-over-year. OptumInsight had strong sales performance in 2011 and enters 2012 with significant momentum across the business. Adjusting for the divestiture of the clinical trials business, OptumInsight sales bookings grew 27%. And contract revenue backlog increased a similar 26% on a comparable basis to $4 billion.

The number of clients willing to recommend OptumInsight doubled over the past year. We provided compliant services to more than 600 new hospital customers, and we are in discussions with dozens of organizations about services related to their formation of accountable care disciplines.

OptumInsight's earnings from operations increased 34% on an adjusted basis to $381 million. The full year operating margin of 14.3% improved significantly, and we expect strong margin and earnings gains for 2012 as well.

OptumRx grew revenues by 15% to $19.3 billion in 2011. This revenue growth was driven by an increase of 2 million people served and the growing mix of higher-revenue specialty pharmaceuticals. OptumRx earnings from operations of $457 million decreased 14% in 2011 due in part to investments to support future growth. This included technology to support its expanding services to the UnitedHealthcare commercial business, as well as its related implementation of a new, more flexible mail processing system.

For the overall Optum platform, we outperformed in 2011 due to strong sales growth, contributions from new businesses and more consistent, disciplined operating performance; in a word, execution.

We expect 2012 to be a stronger performance year, as well as a building year, with accelerating performance in 2013 and 2014. This period will be defined by organic growth, driven by increasing customer demand for our technology and services offerings, operating margin advances and the benefits of our in-sourcing the remaining portion of UnitedHealthcare's commercial PBM services.

What we hope you are sensing is that UnitedHealthcare and Optum are distinct yet powerfully complimentary business platforms. UnitedHealthcare brings scale and market innovation pressure to Optum while leveraging Optum's distinctive capabilities. We share common relationships enterprise-wide, from regulators to care providers, the government and other benefit sponsors in pharma, both as customer and as supplier. The work we do across both of these platforms can serve to deepen the value delivered and the quality of those relationships.

This breath of engagement is critical to our distinctive market presence, our brands and our strengthening reputation. No one on the services side of healthcare has established comparable market scope and presence.

Through the capabilities of UnitedHealthcare and Optum, we have emerged as the market leader in the essential confidence of care management, operating in more venues than others and with better integrated data, technology and outcomes.

Our technology is emerging as a distinct enabler in operating advantage. Optum will take responsibility for externally marketing our enterprise technology in 2012, as we look to further externalize the cloud-based assets we've been developing. When taken in concert with our mobile health applications and the operation of roughly 2,500 dedicated healthcare Internet portals, you can begin to appreciate the scope and potential we bring to clients and the market overall.

That technology is fed by distinctive data and analytical applications and skills. UnitedHealthcare is one of the most prolific health data producers in the country. Optum is expert at translating data into information that can be used to analyze costs and performance, compare clinical effectiveness, execute predictive modeling and provide decision-making information to consumers, care providers, other payers and the government.

Our cultural embrace of innovation as a discipline engages both UnitedHealthcare and Optum. UnitedHealthcare ideas help drive the innovation dynamic to which Optum must respond. UnitedHealthcare is an ideal market platform that executes well, quickly feeds back change to further innovate, a uniquely efficient and innovative [ph] real market dynamic.

No one in health benefits can offer Optum the scale that UnitedHealthcare does. In turn, UnitedHealthcare's growth of 2.6 million people over the past 2 years is both a product of Optum's distinctive services and a top line driver for Optum's results as well. And we make these capabilities and scale advantages available to others, not just for products branded UnitedHealthcare. Today we serve thousands of parties across the health system.

In the end, this complimentary alignment from health benefits to health services allows us to deploy capital and grow across a wider range of critical healthcare markets in virtually every geography and within a range of regulatory structures from heavily to lightly regulated businesses.

In summary, 2011 was a positive year for our businesses across many dimensions. But 2011 ended 3 weeks ago. For 2012, we are rededicating ourselves to fundamental execution. For us, that starts with serving others, a commitment to service excellence, managing healthcare costs, disciplined operating cost management, practical and productive innovation, developing and rotating leaders to strengthen our business platforms and the executives themselves, deepening external relationships and building new relationships and new business for 2013. These are the basic disciplines of our businesses. They have served us well, and we expect to continue to bore you with them.

At this early stage, we continue to take an appropriately cautious posture on 2012 financial performance. Our fourth quarter results were above our expectations, but they do not alter our view of 2012. Initial growth results are basically in line with the plan we communicated at our November Investor Conference. We continue to plan to invest a total of nearly $400 million to the income statement for a form readiness and compliance and preparations to in-source PBM services.

We expect steadily increasing medical system utilization over the course of the year. Commercial premium and government program reimbursements will continue to be under pressure in health benefits. And we have no assumption of reserve development. And if it were to occur in the commercial segment, it would be fully subject to rebate calculations.

We expect 2012 to challenge us to be at our best to achieve this plan, which targets net earnings per share in the range of $4.55 to $4.75 per share, with $6 billion to $6.4 billion in cash flows. You should be aware that first quarter presents a challenging year-over-year earnings comparison. Our plans include a sequentially lower first quarter than we've reported today for fourth quarter 2011. But as always, we are committed to delivering our best performance.

One of our investors recently observed that at the current rate, UnitedHealth Group's business will produce cash flows from operations over the next 5 years, totaling roughly 60% of our market cap. We intend to grow and to produce more than that, and we will continue to be thoughtful stewards of shareholder capital.

If we accomplish the goals we set out at Investor Day, we believe the company will become an even more valuable enterprise to our owners and our society. We are 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 turn this call back now to the moderator for your questions. And again, we thank you for joining us today.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Matthew Borsch with Goldman Sachs.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

I wanted to just ask about the moving parts in the quarter on medical trend. And in particular, the -- it looks like the -- that you had a significantly favorable variance on the public sector side, if we infer that correctly. Can you talk to that and how much was Medicare versus -- sorry, MA versus Medicaid versus PDP?

Stephen J. Hemsley

Yes, Matt, as you can appreciate, we addressed more this on a broad basis for UnitedHealthcare but maybe, Dan, you want to respond to that?

Dan Schumacher

Good morning, Matt. This is Dan again. So first, in terms of the quarter, we are obviously very pleased with the performance, and I guess I would probably talk to it in terms of the medical loss ratio. Our loss ratio across UnitedHealthcare was up, but it was better than our expectation that we laid out at Investor Day. As you look at the commercial business, we saw an increase in our loss ratio, and that was largely due to less favorable development on a year-over-year basis plus also the incorporation of premium rebates under reform. And I think it's important to remember on the commercial side in particular, we had very low comparison periods in 2010, in the third and fourth quarter in particular. On the government side of the business, we saw a reduction in our loss ratio year-over-year, and that reduction was largely due to more favorable development on a year-over-year basis.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Got it. And on the commercial trend, did that still come in at about 5.5% for 2011? And can you just give us the reference point for what it was for 2010?

Dan Schumacher

Our -- from a trend perspective, it came in generally where we had expected, at around 5.5%, and it was lower in 2010.

Operator

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

Charles Andrew Boorady - Crédit Suisse AG, Research Division

I'd love to get your view out of the big picture question that wasn't addressed very much by the Street generally or your investor, and this is on bundled payments for Medicare. It seems like there's been a tremendous amount of interest by the industry, and I'm just wondering how we should think about the impact to UnitedHealth Group of the adoption of bundled payments by Medicare. For example, in the Optum products that you sell that enable bundled payments and any pickup in demand you're seeing, but also what it means for your Medicare Advantage and potentially, your commercial business if providers do embrace bundled payments for Medicare.

Stephen J. Hemsley

Yes. So I think we think about this broadly in the category of kind of changing our approach to payments. So it's performance-based. It is basically any of the variations that we see that are different than a -- let's say, a fee-for-service approach, and we approach it and have been for some time in UnitedHealthcare in terms of how we have been driving performance-based relationships and contracts. And as you know over the last, probably the better part of 2 years, beginning to work with the delivery community in terms of enabling them to begin to ready themselves and engage in a way that they can effectively use these kind of payment methodologies in the conduct of their own business. But I'll start with Gail with respect to the UnitedHealthcare side, and then I might ask somebody from Optum to respond to how we're working on the delivery side.

Gail K. Boudreaux

Good morning, Charles. It's Gail Boudreaux. I think Steve hit it. As we think about bundled payments or all ways we're going to compensate physicians in the future and delivery systems, we're looking at a broad spectrum. And today, we have everything from fee-for-service to full capitation. We're experimenting with different bundled payments already in both our commercial and our Medicare business, and I think it's right now a bit early for us to comment on the full adoption of that, but we think it's going to -- 2 things are going to be really important. One, clinical integration in addition to the payment methodology is going to drive our performance in terms of bringing overall cost and quality. And at this stage, getting the bundles right, I think, is really important in aligning those bundles appropriately to the right incentives and our clinical programs. So those would be the 2 things, but we have a number of pilots in place already around bundles and it's a bit early, but encouraging.

Charles Andrew Boorady - Crédit Suisse AG, Research Division

The CBO suggested a 10% savings on a certain cardio-related procedure for bundled payments. Can you share any experience you've had with what percent savings you might expect on a unit cost from the adoption of bundles?

Gail K. Boudreaux

Charles, I think -- well, that was a very specific test run, and I think it's a bit early for us to be declaring savings. We think in cardiac and oncology, we're seeing some interesting results around oncology bundles. In particular, we rolled out a payment methodology there last year. Again, fairly early, but I don't know that we'd yet declare on what we think the total savings would be because it's not just about the bundles. I think it's about the integration to care, the incentives and the plan design. There's a whole number of other factors that come into play, and we see that both in our commercial business, as well as our Medicare Advantage business.

Stephen J. Hemsley

And I would expect that's going to run a wide range across the spectrum of service lines. So how about on the Optum side?

Larry C. Renfro

Charles, this is Larry Renfro. In general, I'd agree with everything that both Gail and Steve said. And we're, as you know, pursuing this in our delivery system. I might ask Dawn Owens to comment on this one more specifically.

Dawn M. Owens

Sure. If you think about the role that we've had with respect to bundled payments, there've really been 2 areas. One, in our specialty network solutions where there are categories of clinical care that are high cost, high variation and where we work with the care provider community already today to create bundled payments for those services, transplant is a really nice example of that, where it's a lot less about the unit cost but more about the total cost of care, alignment to quality, to protocols and so forth, where we deliver strong returns for patients and the system overall. Obviously, it's also a really important piece of the work we're doing in partnership with the delivery system in our Collaborative Care business, where we're taking total cost and total quality responsibility for the patient populations that we're serving. That's in Medicare, but also in commercial models as well. And so learning which models and which markets work most effectively in a skill set, there are a lot of factors and dynamics that come into play to create a successful model on that front.

Stephen J. Hemsley

I might just add by saying, broadly, what we see the benefit of a variety of different alternative payment approaches to the marketplace, and if we recognize that it is a widely ranging marketplace, as a result, these approaches are going to vary significantly. But over the course of time, we're committed to changing the way healthcare is paid. We do believe these approaches will be a better -- will produce better outcomes, better use of resources and will be better for healthcare, and we're going to be committed to doing our part along those lines.

Operator

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

Joshua R. Raskin - Barclays Capital, Research Division

Just getting back to the MLR differences, I think we calculated them, what you call noncommercial all other, and acknowledged there's a lot in there. We had those up somewhere around 50 basis points for the first 3 quarters and then down almost 110 basis points. And that translates into almost $200 million of sort of change in cost. And I think Dan said earlier that, that was mostly due to changes in favorable development. So should we assume that the change in the noncommercial business was driven by a $200 million swing in development? And then any color on whether that was Medicare Advantage or Medicaid or even Med Sup or Part D would be helpful.

Stephen J. Hemsley

I think Dan is going to kind of be restating what he said before, but I also don't think we're going to get into specific math in this kind of environment.

Dan Schumacher

Sure. Josh, it's Dan. We saw favorable development in all 3 of our UnitedHealthcare businesses in the fourth quarter and on the full year. In the fourth quarter of this year, it was more weighted towards our government programs. And in the fourth quarter of last year, it was more weighted towards our commercial businesses, and that's what I'd say with respect to kind of where it's falling along the business continuum inside UnitedHealthcare.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. Maybe I can ask a different question, and I'm sorry. Can you talk a little about hospital unit pricing and contracting and any changes? A couple of your peers last quarter stated that they were seeing some change in of those trends. I'm just curious if you are seeing any differences in the actual unit cost on the hospital side.

Dan Schumacher

Josh, it's Dan again. On the unit cost side, it continues to be the most significant driver of our trend. So it's an area of intense pressure and intense focus for us as a business, and I would say that's been relatively consistent. And underneath that, the inpatient setting is the most pronounced.

Joshua R. Raskin - Barclays Capital, Research Division

But no change?

Dan Schumacher

No fundamental change. It continues to be a pressure point for us.

Operator

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

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

Just in looking over your fully insured commercial enrollment for the last few years and then also taking into account the prepared remarks on your enrollment this year, do you think that the economy is having less of an impact on employer health benefit decisions than say a couple of years ago? So maybe said differently, as the economy -- is it perhaps improving and employers are not being as restrictive on their health benefit plans as perhaps they were back then?

Gail K. Boudreaux

So in terms of the economy, I don't think that the economy per se has had an impact on the restrictiveness of employers in their offering of benefits. What we are seeing, though, is employers are very focused around value-based benefit design, things that encourage health and wellness, trying to get real value out of the plans that they put in place. So we've seen significant interest in the narrow-network value-based offerings that we put in the market. As we look at our growth, particularly in the fully insured side, that's where we've seen a pretty significant uptick. Consumer-based health plans have done very well in this marketplace. Plans that have more consumer responsibility and transparency are selling really well. And I think employers want to see consumers engaged in health and getting value for it, as well as the money that they put in. So that's really the -- probably the bigger shift than employers fundamentally changing their perspective based on the economy.

Operator

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

John F. Rex - JP Morgan Chase & Co, Research Division

Just turning to Optum unit here. So back at Investor Day, you talked about a doubling of the ROC, I think, and from that unit over the next 5 years, so I think between now and 2015. And also kind of I think you've kind of repositioned that breaking it down into 8 different markets, and what I wanted to get is kind of a flavor, what you think about that growth trajectory. So I took those 8 markets that you were looking at, at Investor Day. Can you spike out -- so if I take it down the market segment and instead of kind of the way it's configured right now, can you spike out the 2 or 3 that would be the biggest contributors to that doubling?

Stephen J. Hemsley

Larry, you want to comment?

Larry C. Renfro

John, it's Larry. I'm going to start and then I'm going to have John in trends [ph], kind of pick this up and maybe go a little bit broader than the question that you asked. If you look at what we're trying to do from now until 2015, there's kind of 2 key areas of focus: one would be our fundamental execution; and second would be strengthening of our -- what I'd call strengthening and deepening our overall leadership team. And it will kind of all play to those 8 markets that I will let John get into in a second. But if you bear with me a minute, I think it's worth talking about this. If you look at the key indicators for us and what I think you ought to look at us in accomplishing over the next few years to 2015, there's really 4 areas you might look at as indicators: one would be organic growth, of which we had double-digit growth in 2011; two would be our development of health IT; three would be the development of clinical services; and four would be our PBM in-sourcing. So we believe we're in the right markets, and they are large and they're growing, and we believe that we are getting great market response. But those 4 key areas that I think from an indication standpoint from now until 2015, you want to pay some attention to. The key to our investments or return from the standpoint of acquisitions, I might take a moment and just give you an example, a model that we're following, and you can kind of take a look at that model and understand where we're kind of going. If you looked at OptumInsight and how we -- in 2009 and 2010, how we were really making significant investments and building out that platform. In 2011, we didn't do any acquisitions on purpose. We focused on integrating, and we focused on growth. The results from doing that, the top line growth is double digit, our margin has gone up 2% from 12% to 14%, and we expect that to continue from 2012 and beyond, so both the continued margin growth as well as the top line growth. So if you apply that same model across the OptumHealth and OptumRx, that's kind of the discipline that we're employing to really -- to get to that 2015. So I think you got to look at that model, but you can also look at the 4 areas that we need to focus on in terms of the improved fundamental execution. I don't know, John, do you have any comments?

John S. Penshorn

Got it. I think I'd just build on that, Larry. I think, as Larry mentioned, we -- of the 8 markets, we're in the right markets, they're large and they're growing. We're getting good market response for all of them. The key focus areas, as he mentioned, were the organic growth, health information technology, clinical services analytics and the PBM market. So I think we're in the right markets, and we're growing in those markets. And you got 2 effects: one, we're growing the top line and you already see that in the numbers across the board, which is 70% of our numbers year-over-year is actually organic growth, so you have a strong organic growth story. And then as we get to scale, you'll see the second piece, which is our margins expanding and I think you're going to see that in our different [ph] businesses, and I think Larry highlighted the story in OptumInsight, which is growing from 12% to 14% and we're expecting that to advance next year and get integrated to our long term guidance, which we've stated at Investor Day and continuing.

Operator

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

Sarah James - Wedbush Securities Inc., Research Division

I had a question on OptumRx. Specifically, I wanted to see if there was any update on the response that you've been getting from employers, any feedback they've been providing or any update on RFPs that you are looking at this year. And then going back to the prepared comments on revenue growth driven by higher-revenue specialty pharmaceuticals, if you could just speak to the size of the growth opportunity that you see there for the mid- and long term.

Stephen J. Hemsley

I think we will broadly -- we don't -- we won't comment on customers or specifics along those lines, never have. But beyond that, I think we can respond more broadly, Dirk?

Dirk McMahon

Yes. So I think we have good relationships with consultants in the national account space. We're going to leverage those to continue to gain access to sales. We have a really good -- we're building our administrative platform and infrastructure. We think that'll improve our future competitiveness. We're working hard on our value proposition, which we talked about at Investor Day. It's all about improving total cost and quality by optimizing across medical and pharmacy. And we grew it out that last year.

Stephen J. Hemsley

2 million, right?

Dirk McMahon

We grew, yes, to 2.1 million members and 767,000 of those were external.

Stephen J. Hemsley

And then I think the response in terms of the marketplace is that there is an appetite for a new, more innovative competitor in that marketplace, and I think we're in the mix on all the RFP activity, right?

Dirk McMahon

Yes, we're definitely in the mix.

Sarah James - Wedbush Securities Inc., Research Division

Okay. And just on the specialty pharmaceutical growth opportunity for the mid and long term?

Dirk McMahon

Well, look, we -- I've read a bunch of stuff and we looked at some of the projections. We're -- probably 40% of the drug spend by 2014 across medical specialty, across medical and pharmacy benefits would be specialty drugs. We think we're well positioned for that market, specifically in the area of our clinical programs and our ability to handle and monitor the use of those drugs. So I think we're very well positioned to participate in the growth of the specialty market.

Stephen J. Hemsley

And we do all our own specialty. Larry, do you want to comment?

Larry C. Renfro

I just wanted to make an additional comment on what Dirk said earlier. When we began the year this year, we decided to put an announcement out of the Optum leadership team. And in putting that announcement out, one of the areas that -- and people that we wanted to bring over and to strengthen and deepen the organization was a person by name of Mike Matteo. Mike is the head of UHC's National Accounts, or he was the head of UHC's National Accounts prior to this move. He's moving into Optum to be the Chief Growth Officer. And Mike's background, he has tremendous relationships, both internally and externally. He's been experienced in business growth, business expansion, as well as executive sales leadership. And Mike is going to be working with OptumRx and Dirk's team to really put together a robust sales plan, and I just wanted to comment on Mike so that you would get his name. I don't know, Gail, if you have any thoughts on Mike?

Gail K. Boudreaux

No, thanks, Larry. I'd just add that we had a tremendous growth trajectory in our National Accounts business and I think Mike, from our perspective, brings that skill to the pharmacy business, and we think it will be a great addition to Larry's team. And we have a very strong bench, so it's a good move.

Operator

Next question comes from the line of Christine Arnold with Cowen.

Christine Arnold - Cowen and Company, LLC, Research Division

You talked about provider stewards and bundling in the narrow network products. A couple of questions there. Could you tell us how much of your membership on the commercial side is in these narrow network products and kind of your expectations there? And could you also put some meat on the bones in terms of your ability to steer volume to more efficient providers, so say X percent of our hospitals are considered high performance and they get Y percent of our volume or the same kind of metric on the doctor's side?

Stephen J. Hemsley

I think we can respond to that. Gail?

Gail K. Boudreaux

Christine, let me take it in a few parts because I see a couple of different questions embedded in there. First in terms of the value-based products, less -- roughly 15%, a little bit less of our membership right now is in value-based type products, and that is an area that continues to grow, as I mentioned at the beginning of my comment. In terms of the -- I think your second question related to steerage to high-performing hospitals and physicians. Let me sort of step you back. We've had a premium designation in place for a number of years, and we originally began to introduce that to the marketplace in terms of just cost and quality and information and transparency. Over the last several years, we've began to build that into our basic design of our networks, whereas before it was -- it is still available to everyone, but we've also now embedded it in our networks. So that's part of that 15% members that come through that, but everyone has access to those premium designated physicians. In terms of our pay per performance on the hospital side, that's an area that's growing. And I think what I shared with you at Investor Day was that we are taking our premium increases and putting those into -- or rather our rate increases, and putting those into pay per performance. So that's how facilities earn a base rate and then they earn their incentive based on a very specific set of outcomes that we work with them on based on the facility but on a universe of probably 10 standard areas; for example, reduction of readmission rates, improvement in overall quality scores, things of that nature. From that perspective, the percentage there is roughly about 12% to 15% of spend would go through that model.

Christine Arnold - Cowen and Company, LLC, Research Division

If you think about how much these narrow network membership and the steerage is going to change, and presumably you're steering to the lower-cost, higher-quality and more-efficient providers and that lowers overall trend. If you think about all these factors together, is your hospital pricing in 2012 -- ignoring utilization because it's always a question what's going to happen there, but is your hospital pricing decelerating in 2012 relative to 2011? And what did it do in '11 versus '10?

Gail K. Boudreaux

Well, I think Dan addressed that when he talked about trends. There's still a significant pressure on unit cost at the hospital level. And year-over-year, that's one of the most significant issues in our trends, so that's one of the reasons we're trying to shift the overall distribution of unit cost to more pay per performance. But in 2011 and '12, when you look at the details of our trend buildup, unit cost at the inpatient hospital side is still significant.

Christine Arnold - Cowen and Company, LLC, Research Division

So you expect the unit cost to increase on the hospital side and that drives the increase in 2012 medical trends?

Gail K. Boudreaux

We expect it to be stable year-over-year in terms of the percentage increase.

Stephen J. Hemsley

I'd just comment one thing about the term steerage. I think it's important to recognize that the products that are really moving in the marketplace today are enabled. And one of the reasons I think they're getting traction is because they're enabled by much better information, they're enabled by much better, more personalized technology. And as a result, the consumers are actually in a position of making an assessment, being able to make a choice, so the -- it is less steerage. It is more about providing information, aligning incentives, and that works on both the consumer side and care providers side to make the marketplace more efficient. So I think that's -- that is why you're seeing that kind of performance across those products. You get great outcomes, you get high-quality access, and you get the opportunity to get in more control of your health and manage the economics because of the tools and the designs that are now in the marketplace. And I think that's fundamentally different than what I would call the historic notion of steerage.

Gail K. Boudreaux

The one thing that I'd add to this comment, as you know, we launched the treatment cost estimator tool. We showed that -- I think we shared that tool in Investor Day. It is now available to our members, and it does provide much greater transparency for consumers to take control of that decision and have a real understanding of cost and quality among providers and plans. And I think that is having a big impact in the market as well.

Operator

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

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

I can see the commercial MLR in the fourth quarter was better than you thought it would be back in November based on your full year guidance, but I’d still like to explore the 190-basis-point increase year-over-year. If you could kind of comment on how much of that is tied to sort of medical trend versus pricing as opposed to how much is due to PPD last year. You said that there was more in the commercial side a year ago. And then how much is due to rebates this year? And also -- and perhaps most importantly from my perspective, how much is due to the sort of increase seasonality of the business from higher deductible health plans? And how will that change in 2012?

Stephen J. Hemsley

Touched them all, so, Dan, go through it.

Dan Schumacher

Peter, how about this, I'll rank them for you in terms of contribution to increase year-over-year. The first is stable to favorable development, so the change in that on a year-over-year basis. The second is the introduction of the premium rebates and then the balance is that relativity between yield and trend.

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

And what about seasonality in terms of the change from more people in higher deductible plans? That changes the seasonality of your costs from Q1 to Q4.

Dan Schumacher

Seasonality was pretty stable on a year-over-year basis. The challenge is you don't see it because the baseline was so low in 2010 when you compare it.

Operator

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

Justin Lake - UBS Investment Bank, Research Division

I wanted to follow up on the questions around Optum and that expectation of return on invested capital nearly doubling over the next 3 years. Just from a timing perspective, first, do you expect that to be fairly ratable between 2012 and 2015, or do you expect that to be more heavily weighted early on versus later or vice versa?

Stephen J. Hemsley

I'll have Larry answer this, but I -- because it will tie into the elements of what he had just said, but my expectation is that it's -- it is going to be a steady acceleration, where we'll continue -- I mean the framework, and I think you should bear in mind, and I think the OptumInsight is a good example of it, is that we're building these businesses. And as we build them, they'd become more integrated, more mature, the expectation for margin expansion is established, the cost of building these becomes less and the profitability reveals itself. Larry?

Larry C. Renfro

Yes. I think I'm going to go back, and I'll probably be doing this many times over the next few quarters to those 4 elements. I think if we focus on or if you are looking at this from an organic growth standpoint, what we're doing in the developing of health IT and clinical services, as well as the program with our in-sourcing at the PBM, I think those are very strong elements for you to pay attention to. I think in addition to that, just so you know, that we're operating off of a 5-year plan. And so when we're walking through this, obviously there are changes that you have to make based on changes in the market. But I think we believe that we have a very strong start to 2012. We'll see a solid performance, but we'll be able to measure that. And then I would also go back to what we talk about with OptumInsight because that answers the questions around acquisitions. It's a model that we're going to have a strong, strong discipline around in terms of making sure that we have selected capabilities that we're looking at, and we kind of have a strategy of bill partner or invest, and we're going to have a strong, strong discipline around that. So I do believe this will give you line of sight into some of the things that we're doing. And we'll be developing this and talking about it over the next quarters.

Stephen J. Hemsley

And I think it's kind of important to recognize that I think this is principally around execution. We're in the right markets. The businesses are well positioned in those markets. We brought additional resources to bear, and this really is a function of execution, really, over the next couple of years, right?

Larry C. Renfro

Right.

Justin Lake - UBS Investment Bank, Research Division

And just a quick follow-up on M&A, as you mentioned, the -- when I look over the last couple of years, you spent, if I include Excel Health, probably in the neighborhood of $5 billion or nearly 10% of your market cap on acquisitions. And there hasn't been a ton of visibility in terms of the levels of accretion or expected performance from an earnings benefit perspective. Is there any way you can help us flush that out given the significance there in terms of what that's going to add up from an earnings perspective over the next couple of years?

Stephen J. Hemsley

Justin, I don't know how to respond to that because we'd have to basically -- is begin the process of almost reviewing acquisition by acquisition with you. So I think we'll try to do that as we discuss these results. I would say that I think Excel will be more on the benefits side than it will be on the services side. But I think maybe the best way to do that would be to maybe discuss our kind of return on invested capital in more depth with you in the future settings. But we're really not prepared to discuss it today. I do think that the acquisitions that have been made have been very prominent in terms of the growth of the Optum businesses, and I would say that we're very pleased with all of the acquisitions that we made and I'll just leave it at that.

Operator

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

Carl R. McDonald - Citigroup Inc, Research Division

In the commercial business after you allocate for favorable development, can you talk about how the trend changed over the course of the year relative to the 5.5% trend for the full year? So basically what I'm trying to get at is as we exit 2011, are you at that 5.5% trend now, or do you think you're closer to the 6%, 6.5% trend that you're assuming for next -- for 2012?

Dan Schumacher

Carl, it's Dan Schumacher. The trend in the commercial business increased progressively through the quarters of the year, and it was more pronounced in the third and fourth quarters in particular because of that slow baseline in 2010. In terms of where we're operating at today, 5.5% is reasonable.

Stephen J. Hemsley

I think we perhaps only have time for maybe one question or so. So the next, please.

Operator

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

Doug Simpson - Morgan Stanley, Research Division

Steve, could you just talk a little bit about the duals, how you guys are thinking about that in terms of timing and potential investment around that and maybe just remind us sort of the states that most interest you and the ability to scale the capabilities you all have into those different markets, talking about the cave footprint, the steps, that kind of thing.

Stephen J. Hemsley

Sure. I would suggest I'll have Gail, and then I think Dan will probably run through a couple of our other parties here today. I would suggest that this is not new for us. This is an area we have been focusing on for some time, even dating back to the Evercare business, the INSPIRIS business, et cetera. And so this has been a market segment that we recognize is in need of management, has significant cost, has significant challenges, so we've been building these capabilities for some time and already have a pretty good base of business. This is really just emerging in a more national profile, particularly from a policy point of view about just what the challenges really are to these businesses. So I think we're really well positioned in Excel Health, gives us a great position in that. In terms of -- you can come at this from 2 directions: the Medicare direction and the Medicaid direction. So we are somewhat indifferent and expected different approaches will be taken at different market. So that's why maybe -- Gail, if you want to pick it up from those 2 sides.

Gail K. Boudreaux

Sure, I think Steve hit the major points. One, as we mentioned at our Investor Conference and in our breakout sessions, we do see it as a major opportunity. We think we're uniquely positioned because we have significant presence in both the Medicaid and Medicare space. We've been at this business for a long time. We have experience in managing clinically complex and long-term care populations, and Excel brings some additional capabilities to us, which I think will be really important. And again, I think experience and the depth of experience that we have really matters in this market. Not a whole lot has changed since we met in New York in terms of the timing of what is happening. We are engaged. I might ask Jack Larsen who leads our Medicaid business to maybe comment a little bit about what we're seeing in this space in particular.

Jack Larsen

Hey, Doug, Jack Larsen. So I think Gail said it right, not much on the surface has changed in terms of having a different point of view on timing. CMS in a number of the 37 states who have submitted letters of intent are collaborating towards CMS's published goal of 1 million individuals and fully integrated programs by January of 2013. I guess still where we're at, we think all these states that have shown interest have interesting aspects where we could perhaps add value. We continue to work with states where we participate in the underlying Medicaid programs and offer dual special needs plans, as well as other states where we don't have but has developed presence and really trying to work with them as they develop their own unique approaches as to how they're going to get after that integrated Medicare and Medicaid cost structure, which is just an extraordinary opportunity I think I shared with you in New York in December. So...

Stephen J. Hemsley

Thank you. I think in terms of time, we are -- we need to close this. So again, we thank you for joining us on the call today. We hope what you heard is that our heads are totally into the game for 2012. We intend to serve people well. We intend to elevate our performance even further this year. And we will keep building and growing our businesses and our capabilities for both benefit and for services. And we look forward to speaking with you again next quarter. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Unitedhealth Group's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts